Are superstar cricketers like landlords?

Rajeev makes an interesting observation about India's high-paid superstar cricketers and the role of happenstance and good-luck in contributing to their fortunes,

Since the 1980s, the best cricket players in India have been growing ever richer. However, that they earn a hundred times what their predecessors used to earn doesn't mean that they are a hundred times as good at the game. They have grown richer mainly because Indians now watch television. In some other countries, the benefits have gone to Football players, while in other countries, Basketball players have gained. These beneficiaries may be great athletes, and they "deserve" their incomes in the sense that this is what others willingly pay them in the marketplace. They are like landlords who have seen the value of their properties explode because someone else built a highway or a railway station nearby.

I am in complete agreement on the role of luck in these cricketers fortunes, especially in relation to players from other sport like Hockey. But the analogy with landed rentier-class enjoying the windfall value appreciation from infrastructure and commercial development in the neighbourhood is debatable.

For one, unlike unproductive landlords, these cricketers are talented, hard-working, and productive and deserve to be rewarded. However, even if the market agrees, it is questionable as to whether they "deserve" their current extraodrinary incomes. Critics are right in asking whether their incomes are disproportionate to their abilities and productivity, especially when considered in relation to their peers in other more globally competitive sports.

But this analogy can be extended to many other areas and stands at the heart of the debate about executive compensation itself. Do traders, bankers, and corporate executives "deserve" the fantastic compensation packages they receive? While conceding their abilities and even a substantial premium in their salaries, it is very difficult to justify the size of their remuneration.

Consider this. Two friends, of more or less equal abilities, pass out of engineering college and pursue careers in core engineering and in finance. The former does an MS while his friend does an MBA, both from prestigious universities with equally stiff entry competition. Ten years down the line, the financial specialist earns five (or many) times more than the engineer.

It is too much a stretch to claim that the former has acquired superior skills or is more productive than the latter. The most charitable thing that can be said about his vast riches is that he was lucky to choose the right profession at the right time. And within the profession, he happened to specialize in the right sector and in the right firm. And, we could justly add, in case of financial market executives, that he happened to make the right bets, atleast till date.

Much the same underlying logic can be applied to analyzing the fairness and merits of remuneration in several fields, especially where it is disproportionately higher than the norm in similarly placed occupations. The wage-premium due to good luck is too high to be ignored. In this context, as I have blogged earlier, it may be fair to appropriate some of this disproportionate luck by imposing a higher marginal tax rate on those at the top of the income ladder.

Matt Yglesias too feels that large parts of the economy is becoming more Ricardian with higher resource rents.

Translating teaching to learning

I have an op-ed in Mint today which explores a data-driven, child-centric approach to improving the abysmal student learning levels in our primary schools.

Cost of medical care - pricing failure

The Wonkblog has an excellent interactive graphic that captures the average cost of different types of surgical procedures. Two things stand out. One, United States is a consistent outlier in the high cost of treatment. Two, India stands at the other extreme, offering the cheapest procedures.



Conventional wisdom would have it that the higher cost of medical care in the US is because Americans use more health care services, see doctors more frequently and stay in hospitals longer. However, as Ezra Klein highlights by pointing to this 2003 paper by Uwe Reinhardt and Co, the reality opposite on all these counts. The real reason for the higher cost of medical care in the US, as the graphic makes amply clear, is due to higher prices.

The higher prices in the US health care market is yet another illustration of the failure of price signals in ensuring economic and allocative efficiency. In the United States, outside of the government run Medicaid and Medicare, prices are negotiated in a free-market between insurers and service providers. As Uwe Reinhardt has shown here and here, providers largely charge what they can get away with, often offering different prices to different insurers, and an even higher price to the uninsured.



Prof Reinhardt writes,

On average, the prices for health care goods and services negotiated by private health insurers in the United States tend to higher — about double or more — than prices for identical services and goods in other countries of the Organization of Economic Cooperation and Development. It is in good part so because insurers do not seem to have sufficient market power, especially vis à vis hospitals, to resist very rapid price increases.The varying degrees of market power among private insurers in the United States have led to pervasive price discrimination among payers, with prices for identical goods or services varying among payers by factors as high as 10.

In contrast, health care prices in the other countries is regulated, with the result that prices are considerably lower. Ezra Klein writes,

Other countries negotiate very aggressively with the providers and set rates that are much lower than we do... They do this in one of two ways. In countries such as Canada and Britain, prices are set by the government. In others, such as Germany and Japan, they’re set by providers and insurers sitting in a room and coming to an agreement, with the government stepping in to set prices if they fail.

I have blogged earlier highlighting the market failure problems associated with purchasing and pricing health insurance service.

The Great Recession, Stimulus Bill, and the US economy

Brad Plumer points to these two excellent graphics (from the Economic Report of the US President) that maps the impact of fourteen cases of banking/financial crises induced economic recessions from across the world.

1. The average increase in unemployment rate from the peak of the business cycle is 7.7 percentage points for the 14 cases, whereas in the Great Recession during 2007-09, the US economy suffered a 5.1 percentage points rise unemployment rate.



2. The average cumulative decline in real GDP from the business cycle peak for the 14 cases has been 10.2 percentage points and the average duration of recessions has been 6.6 quarters, measured as the number of quarters between the peak and trough of real output. In the Great Recession, the US economy suffered a 5.1 percentage points cumulative drop in real output and it has taken 6 quarters to regain the lost output.



There have been many studies which have examined the impact of the American Recovery and Reinvestment Act 2009 in shortening the recession and keeping unemployment rates from getting higher. This summary of nine economic studies on the stimulus bill reveals that six found a significant positive effect on growth and unemployment, while three found either a small or hard-to-predict effect. The US President's Council of Economic Advisers' most recent assessment of the ARRA found that, as of mid-2011, there would’ve been between 2.2 million and 4.2 million fewer Americans employed if the bill had never passed.

The graphics below, from the CEA report, highlight the impact of ARRA on the post-ARRA GDP and employment creation.




But the recession has surely taken a toll on the US economy. The graphic below shows that the Bush era tax cuts and lost revenues from the economic downturn are the major contributors to America's massive fiscal deficit.

Bicycle usage in Indian cities

The Muncipal Corporations of Vijayawada and Visakhapatnam are promoting bicycle use in an effort to reduce vehicular pollution and traffic congestion. Visakhapatnam has apparently introduced 'no motor vehicle' zones across 20 km of roads and plans to earmark cycling tracks on 100-feet roads to a width of about 8 feet in the central parts of the city. While these are laudable social and communitarian initiatives, its economic, and even environmental, benefits are questionable.

Here are a few observations

1. Bicycle use can reduce pollution and traffic congestion only if they displace other modes of transport in significant numbers. It is inconceivable, given Indian conditions, that car users will switch to bicycles, except maybe in small enclaves. Given the large commute distances involved, motorbike users are also likely to stay on with their vehicles. The sheer volume of road users in the larger Indian cities means that the impact on public transport due to bicycle users may be minimal.

2. While bicycles will certainly take that many people away from public transport (and to that extent reduce the demand for public transport), I am not sure whether it necessarily reduces traffic congestion nor is economically more efficient. For sure bicycles do not suffer from carbon emissions. But they take up more road space than public transport. If you have any doubt see this. Further, since bicycle commuters spend more time on roads than those using public transport over the same distance, the effective road space usage by bicycle users is much larger.

3. It is on grounds of economic efficiency that bicycles fail most glaringly, especially for Indian conditions. Most of the larger Indian cities are pretty expansive compared to the mid-sized European cities where bicycles are popular. Average commute distances are large enough to make bicycling unattractive. Weather is pretty harsh for most part of the year. In the circumstances, commuting to work, as opposed to taking public transport, increases the unproductive time spent on the road and takes its toll on productivity.

4. Earmarked bicycle lanes involve a trade-off on road space. That much road space becomes unavailable for all the other modes of transport. Any such earmarking can be effective only if we are able to displace enough motor vehicles (by making them switch over to bicycles) to make up for the loss in road space to bicycle lanes. However, as the aforementioned arguements suggest, this may not happen. In any case, given that most roads are narrow in our cities, it may not be practical to do such ear-marking in any meaningful scale.

In fact, if all the aforementioned assumptions hold true, then earmarked bicycle lanes would end up worsening traffic congestion. The effective road space usage per commuter will be higher with bicycle users. Average speeds will be reduced and fuel consumption will increase. Contrary to conventional wisdom, vehicular pollution will increase.

5. Bicycle lanes and promotional activities cannot succeed in a piecemeal manner over small road stretches. If the commuter has to travel the major length of his daily commute to work on mixed traffic, the marginal utility of any limited earmarking is likely to be minimal. However, it is possible that there are small stretches or surroundings which enclose both people's homes and their workplaces.

6. There is also the issue of traffic discipline and enforceability of bicycle lanes. In a country where regular motor vehicle lane driving and traffic discipline is the exception than norm, it may be a nightmare to enforce bicycle lanes. Unless there are physical barriers, it may not be possible to even keep motor vehicles out of these lanes. Similar lack of discipline among bicycle users could end up increasing accidents and lowering traffic speeds.

7. Finally, bicycle promotional policies should not be confused with pedestrianization programs. There is a compelling case for making certain areas, especially commercial and shopping centers, in many cities "motor vehicle free zones" for certain time periods daily, atleast during the night. Similar restrictions can be imposed on river and seaside roads so as to improve the quality of leisure environments. Bicycle usage promotion could go hand in hand with such pedestrianization programs. However, such programs are most likely to be predominantly pedestrianization programs where bicycle usage happens to be an incidental benefit.

I strongly believe that urban policy makers should instead spend their scarce energies and resources on improving transport infrastructure and public transport facilities.

The future of urban management - smart cities

The Times has a nice article that chronicles IBM's experiment in Rio di Janeiro to reshape the future of urban management,

City employees in white jumpsuits work quietly in front of a giant wall of screens — a sort of virtual Rio, rendered in real time. Video streams in from subway stations and major intersections. A sophisticated weather program predicts rainfall across the city. A map glows with the locations of car accidents, power failures and other problems.

As the Times article writes, it is increasingly possible to use powerful data analytics software to forecast trends and thereby provide decision-support on various issues of urban management. This is expected to help decision makers anticipate, instead of react, problems and plan accordingly to either avoid them or to atleast minimize the damage (or derive more benefit) from them.

Many metropolitan areas already use data-collection systems like sensors, video cameras and GPS devices. But advances in computing power and data analysis now make it possible for companies like IBM to collate all this data and, using computer algorithms, to identify patterns and trends.

IBM is the master integrator who co-ordinates the functions of all other partners,

Local companies handled construction and telecommunications. Cisco provided network infrastructure and the videoconferencing system that links the operations center to the mayor’s house. The digital screens are from Samsung. IBM coordinated everything... IBM incorporated its hardware, software, analytics and research. It created manuals so that the center’s employees could classify problems into four categories: events, incidents, emergencies and crises. A loud party, for instance, is an event. People beating up each other at a party is an incident. A party that becomes a riot is an emergency. If someone dies in the riot, it’s a crisis. The manuals also lay out step-by-step procedures for how departments should handle pressing situations like floods and rockslides...

IBM also installed a virtual operations platform that acts as a Web-based clearinghouse, integrating information that comes in via phone, radio, e-mail and text message. When city employees log on, they can enter information from, say, an accident scene, or see how many ambulances have been dispatched. They can also analyze historical information to determine, for instance, where car accidents tend to occur. In addition, IBM developed a custom flood forecast system for the city... The project cost Rio about $14 million. If it all works according to plan, it could make Rio a model of data-driven city management.

I have a few cursory observations. Apart from the prohibitive cost, many of these technologies, especially the integration of different systems and the development of data analytics that can serve as effective decision-support, are at the initial stages of its evolution. It is therefore to be expected that it will be sometime before the IBM's Intelligent Operations Center catches on and gets scaled up elsewhere.

However, there are several low-hanging fruits in this eco-system. They are low-hanging not only because they can be implemented with limited investments but also would significantly enhance the effectiveness of urban administration and/or improve the quality of life for citizens.

For example, intelligent traffic management systems, which integrate the feeds from all existing hardware - cameras, signal lights, GPS devices in various vehicles, wireless and other police communication systems etc - can be a powerful force multiplier in traffic management. Mobile phone communication signals can be used to map real-time traffic intensity on various city roads (including short-term traffic trends) and the same can be rendered on mobile phone apps to enable commuters to plan their travel more smartly. Similar applications can crowdsource information about utilities related complaints; achieve energy efficiency in all types of lighting and water and sewerage utility motor pumps; cognitively striking data visualization can enhance decision-support systems available for municipal officials, and so on.

Like any new technology, the breakthroughs will come once citizens and urban administrators realize the effectiveness of these systems and the large impact they make on their lives and activities. Given the high cost and nascent technology options, a few quick-wins are necessary to break open this market.

See this and this from IBM and Cisco respectively.

The Austerity Medicine!

(HT: The Washington Post)