2 From U.S. Win Nobel in Economics

Two Americans, Alvin Roth and Lloyd Shapley, were awarded the Nobel Memorial Prize in Economic Science on Monday for their work on market design and matching theory, which relate to how people and companies find and select one another in everything from marriage to school choice to jobs to organ donations. Their work primarily applies to markets that do not have prices, or at least have strict constraints on prices. The laureates’ breakthroughs involve figuring out how to properly assign people and things to stable matches when prices are not available to help buyers and sellers pair up. Mr. Roth, 60, has put these theories to practical use, in his work on a program that matches new doctors to hospitals and more recently for project matching kidney donors. Public school systems in New York, Boston, Chicago, Denver use an algorithm based on his work to help assign students to schools. A professor at Harvard, he recently accepted a new position at Stanford. “Al has spent the last 30 years trying to make economics more like an engineering discipline,” said Parag Pathak, an economics professor at M.I.T. who has worked on school-matching systems with Roth. “The idea is to try to diagnose why the resource allocation systems are not working and how they can be engineered to produce something better.” Shapley, 89, a  mathematician long associated with game theory, is a professor emeritus at the University of California, Los Angeles. He made some of the earliest theoretical contributions to research on market design and matching, in 1950s and 1960s. In a paper with David Gale in 1962, Mr. Shapley explained how individuals could be paired together in a stable match even when they disagreed about what the qualities made the right match. Paper focused on designing an ideal, perfectly stable marriage market: having mates find one another in a fair way, so no one who is already married would want (and be able) to break off and pair up with someone else who is already married. In the 1980s, Mr. Roth applied this work to matches for medical residency programs and eventually school choice. He was interested in how to keep matches fair, how to keep sophisticated players from manipulating the system to their advantage. In older matching systems, a student would apply to his first-choice school, which was often popular. If student did not get in, then the application would be sent on to student’s second choice. But if that was also popular choice, then that school’s program would have already filled up by the time his application was even considered, and the process would repeat itself with his third-choice school and so on. Even if the students were qualified to get into one of their top schools, they could be shut out because they did not rank their preferences strategically. This created an incentive to try to game the system by listing a less popular school as their first choice because that way they would at least have a chance of getting in somewhere. Mr. Roth designed a system in which students had an incentive to tell truth about where they wanted to go. A centralized office could then assign them to a school best suited for them, based both on their own preferences and the preferences of schools they were applying to. The school systems he helped create use a “deferred acceptance algorithm,” which was developed by Mr. Shapley’s theoretical work (…..)

Link: http://www.nytimes.com/2012/10/16/business/economy/alvin-roth-and-lloyd-shapley-win-nobel-in-economic-science.html


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7 Responses to 2 From U.S. Win Nobel in Economics

  1. Professor Uziel Nogueira says: I want to play the role of “agent provocateur” on the choices of Nobel Prize in Economic Science. Rewarding candidates for work done 30-40 years ago is loading the dice against non Anglo Saxon economists. In the 20th century, Anglo Saxon economists, particularly Americans, dominated the Nobel Prize for two interrelated reasons. First, US universities had the best economic research departments in the world; sort of a NBA of economics. Second, the US economy was one of the best managed and successful economies in the world. Ergo, the result of policy oriented research done by the academic world. In 2012, the US profit maximization business model has lost its vigor and robustness. The 2008 Wall Street debacle and the ensuing economic crises is proof of that. None of the hundreds of American Nobel Prize winners in economics had a saying BEFORE the worst financial catastrophe hit the US economy.

    Perhaps, is time for the Nobel Prize committee to review its process of selection, Instead of giving the Prize to work done 40 years ago, what about given the Prize to RELEVANT work done in the last 10 years? I am sure the playing field will be leveled to economists and economies that are successful in this century.


  2. (…..) Why is this related to inequality? Because the burden of this decline will fall on the bulk of the population. The continuing prosperity of the wealthiest, on the other hand, will be magnified. Using detailed income data compiled by Emmanuel Saez, a Berkeley economist, Gordon calculated that from 1993 to 2008, the average growth in real household income was 1.3 percent per year. But for the bottom 99 percent, growth was only 0.75, a gap of 0.55 percent per year. The top one percent of the income distribution captured fully 52% of the income gains during that 15-year period.

    In supplementary material emailed to The Times, Gordon acknowledged that Globalization will add to U. S. growth in the same sense that economists have always argued that free trade creates more winners than losers. But the losers from globalization are those not only whose jobs are lost to imports and outsourcing, but those whose incomes are beaten down as foreign investment flocks to southern states with lower wages, and as corporations like Caterpillar are successful in extracting concessions on wages and benefits from their employees. And the winners are C.E.O.s of multinational companies like Caterpillar who see their profits and stock prices rise as they build factories abroad, whether or not any jobs are created at home.

    Intellectually, both the Obama and Romney campaigns are undoubtedly aware of the general line of thinking that lies behind Gordon’s analysis, and of related findings in books like “The Great Stagnation” by Tyler Cowen of George Mason University. Cowen argues that innovation has reached a “technological plateau” that rules out a return to the growth of the 20th century. For Obama, the argument that America has run out of string is politically untouchable. In the case of Romney and the Republican Party, something very different appears to be taking place. There are two parallel realizations driving policy thinking on the right. The first is the growing consciousness of the threat to the conservative coalition as its core constituency – white voters, and particularly married white Protestants — decreases as a share of the electorate. Similarly, the conservative political class recognizes that the halcyon days of shared growth, with the United States leading the world economy, may be over. While Gordon projects a future of exacerbating inequality (as an ever-increasing share of declining productivity growth goes to the top), the wealthy are acutely aware that the political threat to their status and comfort would come from rising popular demand for policies of income redistribution. It is for this reason that the Republican Party is determined to protect the Bush tax cuts; to prevent tax hikes; to further cut domestic social spending; and, more broadly, to take a machete to the welfare state. Insofar as Republicans prevail in their twin aims of cutting – or even eliminating – social spending, and maintaining or lowering tax rates, they will have succeeded in obstructing the restoration of social insurance programs in the future.

    Affluent Republicans – the donor and policy base of the conservative movement — are on red alert. They want to protect and enhance their position in a future of diminished resources. What really provokes the ferocity with which the right currently fights for regressive tax and spending policies is a deeply pessimistic vision premised on a future of hard times. This vision has prompted the Republican Party to adopt a preemptive strategy that anticipates the end of growth and the onset of sustained austerity – a strategy to make sure that the size of their slice of the pie doesn’t get smaller as the pie shrinks. This is the underlying and inadequately explored theme of the 2012 election.


  3. Professor Uziel Nogueira says: The assertion that for free “Gordon’s controversial N.B.E.R. paper challenges our belief that innovation and invention will continue to drive sustained expansion in the United States” is highly questionable for reasons mentioned below. The work by Robert Gordon is based on the Russian economist Nikolai Kondratiev’s approach known as the long economic cycle, averaging fifty and ranging from approximately forty to sixty years. The cycles consist of alternating periods between high sectoral growth and periods of relatively slow growth. Unlike the short-term business cycle, the long wave of Kondratiev’s theory is not accepted by current mainstream economics. Thus, some of the harsh comments made by mainstream economists consulted by the author of this column. History has taught us that any research work dealing with long term economic cycles is theoretically and empirically flawed and, more importantly, any conclusion highly speculative.

    Finally, a more practical political economy question. Thousands of economists in US campuses and think tanks — and hundreds of brilliant Nobel Prize winners — did not publish any USEFUL research paper that could prevent the Wall Street debacle of 2008, the worst economic debacle in US modern history. Thus, what practical use can be any economic research about things that may or may be not happen in the next 50 years?


  4. Citigroup’s board said on Tuesday that Vikram S. Pandit had stepped down as chief executive, effective immediately, and would be succeeded by the head of the bank’s European and Middle Eastern division, Michael L. Corbat. His resignation comes after long-simmering tensions with the bank’s board. In particular, the board’s chairman, Michael E. O’Neill, had been increasingly critical of Mr. Pandit’s management, according to several people close to the bank. Mr. Pandit was seen by some board members as not being able to quickly and effectively execute strategy, lurching from crisis to crisis, these people said. There were concerns he lacked the breadth of vision needed to turn the bank around. “He was considered more technically skilled,” one Citi executive said. John P. Havens, the bank’s president and a longtime associate of Mr. Pandit, has also resigned. Some at the bank said on Tuesday that they believed Brian Leach, the bank’s chief risk officer, could depart soon as well, especially because he was extremely close to Mr. Pandit. Inside the bank, the news was greeted with shock. A huge gasp was audible on the trading floor in Manhattan as employees watched the news on monitors showing CNBC, according to several employees. When Mr. Havens’s resignation was reported, some employees on the trading floor jumped up from their chairs. The surprising departures come just a day after the firm reported stronger-than-expected third-quarter earnings. Excluding a number of one-time charges — including a big loss tied to the continued exit from the Smith Barney brokerage — Citigroup earned $3.27 billion, or $1.06 a share. That exceeded analysts’ average estimate of 96 cents a share. “There is nothing better than our third-quarter earnings announcement to demonstrate definitively that we have turned this company around,” Mr. Pandit said in a memo to employees. Yet those results paled in comparison with the earnings announced on Friday by JPMorgan Chase and Wells Fargo. Spurred by exceedingly low interest rates, and the Federal Reserve bond-buying program, there has been a recent resurgence in mortgage lending, bolstering those banks. Yet Citigroup appeared to have been caught flat-footed. In its earnings call on Monday, John Gerspach, the bank’s chief financial officer, intimated that the bank was slow in staffing up to deal with the mortgage activity (…..)


  5. Professor Uziel Nogueira says: The rise and fall of the rulers of the universe. By, by Wall Street. By, by American pie.


  6. VIKRAM PANDIT’S reign as chief executive of Citigroup ended Tuesday after what may have been the roughest five years for any Citi boss. Mr. Pandit took over in 2007 on the eve of an epochal financial crisis, which was triggered in part by over-investment in mortgages by Citi and others. Citi survived only with the help of federal aid, including $45 billion in capital and a U.S. backstop for $301 billion worth of toxic assets. Taxpayers eventually recouped the aid, plus a profit. But perhaps more than any other institution, Citi — the original financial “supermarket” — epitomized the dilemma of “too big to fail.” The crowning irony was the recent suggestion by Sanford Weill — who first expanded Citi’s business to encompass investment banking and other risky activities — that banks “be broken up so that the taxpayer will never be at risk, the depositors won’t be at risk, the leverage of the banks will be something reasonable.” Mr. Weill was jumping aboard a bandwagon already occupied by former Federal Reserve chairman Paul Volcker and members of Congress from both parties. But the idea has not fully taken hold in U.S. policy, despite the Dodd-Frank regulatory reform bill’s provisions bolstering bank capital and pushing federally insured institutions out of proprietary securities trading. As matters now stand, the assets of the six largest U.S. banks equal 62 percent of gross domestic product, compared to 18 percent in 1995. These banks service 56 percent of all mortgages and hold 35 percent of deposits. Given that their deposits are federally insured, it’s small wonder that no one quite believes the specter of “too big to fail” has been banished — and that the giants enjoy cheaper access to market funding as a result. At the second presidential debate, GOP candidate Mitt Romney made that very point. The latest call to shrink the banks came from a particularly influential source. On Oct. 10, Federal Reserve Board Governor Daniel K. Tarullo floated the idea of capping banks’ non-deposit liabilities — borrowings they use to finance themselves — at a certain percentage of GDP. Mr. Tarullo’s suggestion was quickly seconded by James Bullard, the president of the Fed’s St. Louis branch. Sen. Sherrod Brown of Ohio, a Democrat, has proposed a bill that would do something similar, and he has teamed up with Sen. David Vitter (R-La.) to seek higher capital requirements for banks. In short, there is broad support for some form of restriction on the size and complexity of federally insured commercial banks. The problem, of course, is how to translate that seemingly straightforward idea into a workable law. Depending on where you set the cap, Mr. Tarullo’s idea could break up all six of the biggest banks, some of them or none. Critics of the proposal argue that the U.S. economy benefits from having at least a few big players in global finance, which can take advantage of economies of scale and thus provide services efficiently across borders. There is merit to arguments on both sides, but it should be possible to manage the trade-off between whatever benefits large-scale banking produces in the short-run and the risk of future losses to taxpayers if a large, complex institution fails. Recent experience counsels resolving that trade-off in favor of safety.



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