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Economic Policy Challenges: Microeconomics and Regulation

01/27/2011 3:45 PM Kresge
Nancy L. Rose, PhD '85, Charles P. Kindleberger Professor of Applied Economics, MIT; Dennis W. Carlton, SM '74 PhD '75, Katherine Dusak Miller Professor of Economics,; Booth School of Business, University of Chicago; Richard Schmalensee, '65 PhD '70, Howard W. Johnson Professor of Economics and Management, MIT; Hal Varian, '69, Chief Economist, Google; Mark McClellan, PhD '93, Leonard D. Schaeffer Chair in Health Policy Studies, Brookings Institution

Description: Given its contributions to policy and practice in such key sectors as healthcare, industrial organization and technological innovation, and energy and the environment, microeconomics may not be getting the kind of respect, or at least attention, it deserves, these panelists suggest.

The field helped "produce a revolution in antitrust thinking" in the U.S., says Dennis Carlton. Since the 1960s, the Department of Justice and the Federal Trade Commission have tapped the talent of dozens of PhD economists, who came up with notions like offering incentives (by way of lower fines and leniency) to those who admit participating in corporate cartels. This "simple idea" led to regulatory policy "with large payoffs," says Carlton. Simulations and modeling help determine whether the government will approve a merger, or step in when corporations become too big. "Emerging hot topics" in antitrust and industrial organization include the use of product bundling; patent law, especially in high tech; control and use of information over the internet; and privacy issues.

Richard Schmalensee calls attention to microeconomics' generally unrecognized impact on energy and environmental regulations. For instance, cost benefit analysis was applied to the process of making federal environmental rules, and is now "a bipartisan thing a part of good government." And much of the country moved away from a traditional model of regulating electric utilities, giving greater scope to competition, after some deep economic thinking about incentives. That's the good news. Schmalensee finds it "frankly amazing" and occasionally infuriating how economic thinking has not been applied to energy and environmental policy: the idea of drilling our way to energy independence; and the pursuit of renewable energy as a way of tackling climate change while side"stepping market mechanisms to achieve environmental goals. Schmalensee says he loves "the sun and the wind, but let's get serious."

"We live in a time of combinatorial innovation," says Hal Varian, where digital age inventors can combine components in novel ways, across great distances, in real time. Even small companies "can be born global," says Varian, becoming in effect "micro multinationals." Varian sees a transformation of business processes, a "nanoeconomics of the firm," where the highly networked, computerized organization "makes life more efficient." There are hundreds of billions in savings when knowledge workers can instantly track information on the web, he says, and host master copies of work "in the cloud" rather than on paper. Another hallmark of the new organization, exemplified by his company Google, is "experimentation and continuous improvement," accomplished by such technologies as search engines and voice recognition software that learn on the go. Varian sees econometrics as particularly useful in modeling new ventures, and believes that the increasing amount of data generated by the private sector could soon prove useful to the federal government, "enabling a better handle on what's going on in the economy."

Economic modeling had a tremendous impact on healthcare reform legislation, and as public debate rages, economic analysis remains essential in determining which policies will prove practicable, says Mark McClellan. Some key questions awaiting evidence and investigation: On the supply side, can changing the way providers get paid (traditionally fee for service) stem rising health care costs? On the demand side, will consumers accept health insurance plans designed around payment tiers intended to reduce use, with greater out of pocket costs for beneficiaries?

An instructive model for setting up a system offering choice and cost efficiencies may be the 2006 Medicare prescription drug benefit, which McClellan himself implemented. Seniors overwhelmingly switched to cheaper generic and preferred drugs offered by their plans. While government subsidized, the program "is currently running 40% below actuarial and CBO projections."

About the Speaker(s): Nancy Lin Rose is also Director of the National Bureau of Economic Research program in Industrial Organization. Rose's research focuses on the empirical analysis of firm behavior and the economics of regulation.

Rose was a faculty member of the MIT Sloan School of Management from 1985"1997, and has been a member of MIT's Department of Economics faculty since 1994. She received the MIT Undergraduate Economics Association Teaching Award in 2000 and 2004.

Rose was a Guggenheim Fellow in 2004"2005, a George and Karen McCown Distinguished Visiting Scholar at the Hoover Institution in 2000" 2001, and fellow at the Center for Advanced Study in Behavioral Sciences in 1993"94. She is the recipient of a Faculty Award for Women Scientists and Engineers from the National Science Foundation as well as faculty fellowships from the John M. Olin Foundation and Alfred P. Sloan Foundation. She has served on the Board of Editors of the American Economic Review and the Journal of Industrial Economics and as associate editor for several journals. Rose has been on the American Economic Association Executive Committee, the Board of the AEA's Committee on the Status of Women in the Economics Profession, and on program committees for the AEA and the Econometric Society annual meetings. She serves as an independent director for CRA International and Sentinel Investments Funds.

Host(s): Office of the President, MIT150 Inventional Wisdom

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