Tea Party History

With the "Tea Party protests" so popular among some Americans as a way to defy big government, a history lesson from one of my favorite books seems appropriate.

Most believe that the original Boston Tea Party was a protest against taxes on tea. In reality, the Americans weren't drinking that much British tea; local merchants have been boycotting it for five years, relying on smuggled Dutch tea instead. So, the British decided to remove some of the taxes on British tea in an attempt to make it competitive with Dutch tea.

Loyal British merchants would be granted the right to sell this cheap tea, effectively running the American merchants out of business. That's what the tea party was all about and why those merchants threw their competition into the ocean. (Granted, this would grant a monopoly on British tea to Loyalists, but the problem with monopolies is they increase price and restrict outputs which wouldn't be an issue here, given it has to compete with Dutch tea.) The famed party wasn't a protest of tariffs, it was a protest for a lack of tariffs, as bootleggers supported Prohibition and drug dealers benefit from the DEA.

The Tea Party wasn't celebrated in the colonies, either. The systematic destruction of private property highlighted Massachusetts' reputation as a place for warmongers and Benjamin Franklin demanded that the protesters pay full restitution to the owners of the destroyed tea.

As much as I empathize with the concerns of the modern protesters, this probably isn't the thing you want to be referencing to get your point across.

Singles in DC

DC is apparently packed with single men and women, according to the Pew Research Center. With a national average of 52% (men) and 48% (women) married, the District sports a mere 28% (men) and 23% (women) married. The next lowest numbers are 47% (men) for Alaska and 43% (women) for Rhode Island. (These numbers are for the 15 and older crowd.)

One commentator believes this is due to the unique demographics of DC: very high black population (less likely to marry) and very high Democratic population (more likely to marry later). Another points to the 8.2% gay population as the culprit (along with the marry later point). These are certainly factors, but there's a much more obvious reason that I think carries the bulk of the explanation.

Married people tend to want to start families which generally means a bigger home and unless there's also a big raise, that means moving to the suburbs. In most states, moving to the suburbs can but not always means changing your state. But in DC, it always means leaving DC and heading to Maryland or Virgina (or West Virgina). So the states include both the city proper and the suburbs but DC includes only the city proper. Big difference.

The Economics of the Movie Ticket

A couple of days ago, Nicholas Tabarrok noted the strange economics of the film industry at MR. Movie theaters do not charge lower prices for movies that are unpopular. Similarly, highly anticipated movies have the same ticket price as movies that are proven flops. Why is that?

If the movie theater charged different prices for movies, it would need to hire individual ticket takers for multiple theater entrances at the multiplex--one for each theater that's seating at the time (otherwise people would just buy the cheapest ticket). This is a drastic increase in costs both in payment to the employees and to management, who must now organize a complex system of employees.

Instead, the theater simply adjusts how long a movie is being shown. Good movies are shown for a while, bad movies leave the theater quickly (making room for theaters showing the good movie). It's not as direct as individual pricing, but it's much more cost effective.

Information on the Margin

According to a study, New York City's new laws requiring calorie counts on fast food restaurants doesn't appearing to be having any net effect on food purchases. One would think this law would get people to steer clear of fast food, but it's easy to see why, in practice, this doesn't make any bit of difference.

Like smoking, the unhealthiness of fast food is common knowledge. Telling them exactly how many calories are in X, Y, and Z change anything because they're not seen as relevant (ignoring that a high calorie count isn't the same thing as being unhealthy). If you already know a Big Mac is bad for you, knowing it has 576, not 500, calories isn't going to change your decision.

It's too costly to calculate everything down to such fine nuance. Instead, people think in broad categories. Now, if estimated calorie count was off by a factor of 2 or 10, we'd see some real movement. But, on the margin, this information adds virtually nothing. People are good at estimating calories by themselves.

Not All Yale Students Are Hippies

Tanya and I are at some coffee shop in New Haven and I noticed on patron has a quote attributed to John Maynard Keynes on her laptop:

Capitalism is the extraordinary belief that the nastiest of men, for the nastiest of reasons, will somehow work for the benefit of all.

Apparently, this quote isn't from Keynes, but it's a good sentence nonetheless and reminds me of this quote from F.A. Hayek's The Fatal Conceit:

The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.

(It occurs to me this person might think the quote is sarcastic but I hope not. That would ruin my title.)

Incentives to Inquire

Students don't like asking questions. For a while, I thought it was simply because they are shy and need to be enticed out of their shell (I still believe this, but less so now) so I require participation for the grade. An undergraduate friend of mine told me of another reason:

We know the professor only has so much material planned for a lecture. If we get it all done before time is up, they have to let us out early. But whenever anyone asks a question or asks to elaborate, that pushes the time we get to leave, back.

This is a problem. Most students don't understand the first time around or will forget if they don't talk about the subject matter. And there's a lost life lesson in the importance of speaking up. The reality is doubly a problem for my style since I make the lecture notes available online before each class.

It's tempting to solve this issue by just over-booking each lecture, but it makes you look disorganized. It also creates the risk of having material constantly spilling over to the next lecture until you get backed up at the end of the semester and your homework and exam assignments get out of whack.

So my solution I will be trying out in the future is to create one or two five-minute "widgets" at the end of each lecture. Short extensions on the topic we covered, but small enough that if we don't cover them I don't feel a big loss. When the semester begins, I let them know the rules: if we finish before we get the widgets, then I assume they have mastered the nuances of this lecture and we can further their understanding with applications (which will be now be on the exam). If we don't get to them, they won't be tested over them. Therefore, students are incentivized to ask questions, filling in the time by furthering their understanding of the material in order to avoid a larger exam. Since I have the power to veto questions, I can't imagine I'll be bogged down with filler inquiries in an attempt to game the system. I hope there aren't any unintended consequences I haven't thought of.

On Racism and Income In America

During a heated discussion with my girlfriend the other day, I brought up the graph below from a post I saw on Marginal Revolution. It's summary data from an adoption study when primarily Korean children were adopted by American families of various incomes between 1970 and 1980. Now in their 20s and 30s, the graph summarizes their parents income (presumably at the time of adoption, hopefully adjusted for inflation) along the x-axis and the child's average income along the y-axis.


This, I said, is a very interesting study: adopted kids did about the same (on average) regardless of who brought them up. But when they are the natural kids of the parents, they do better on average. Since it's reasonable to say other effects are constant across incomes (such as how parents treat an adopted child), the data suggests that genetics play a critical role in determining income and that the wealthy are not wealthy simply because their parents were. (Note there is still a high level of income mobility in the data: 10K a year parents averaged almost 40K a year kids; 200K a year parents averaged only about 78K a year kids...though the latter point could be argued by wealthier kids opting for jobs with fewer financial awards and more non-pecuniary benefits.)

Tanya didn't agree on a few levels, for one arguing that it suggests low black incomes are low because blacks are stupid. But the study doesn't say that environmental factors don't influence future prospects (though I am admittedly surprised to see how uncorrelated adopted incomes were with their parents) nor was it a perfect study. Since adoption agencies are ethically bound to make sure the couple could provide for the child before adoption, the selection bias would overestimate the success at the lower levels of income.

Tanya was also concerned about effects embedded in the adoption. Since the kids were Korean, they were clearly adopted. Thus, she argues, issues of racism and the stigma of being adopted washed out and overshadowed any advantage wealthier kids had. Sure, this exists, but I'm not convinced these factors are so strong it would wash away all environmental advantages. Yes, the children grew up in the 70s and 80s, where racial tension was likely stronger compared to now, but such tension tends to lean toward the Afro-American and (to a lesser degree) Hispanic populations, not Southeast Asians.

Really, I have don't know how much racism is in America. Most people don't know. Of course, it still exists and minorities will have first hand experience with it. But that doesn't mean it's common. Similarly, most white people I know (myself included), are good people and most scared of a misunderstanding being mistaken for racism. That does not mean most white are not racists. And surveys done on the issue are going to have major credibility issues about the honesty of people's responses. I can say with confidence that black incomes are rising, interracial couples are more common, and companies are very concerned with being thought of as inclusive; at least things seem to be getting better.

The Burden of the Pre-existing Condition

If you were born with Asperger syndrome, should people be forced to date you? Most of you would probably say "no." It's a good answer: why should people be punished for something that isn't their fault? So why do so many believe health insurance companies should be required to accept applicants with pre-existing conditions? (Before you respond with "I don't want to date someone who doesn't want to date me," remember Asperger syndrome severely limits your ability to read social cues; you won't be able to tell they are with you only by force.)

It's not even that insurance companies won't cover pre-existing conditions. It's that they won't cover them at a particular price: a low price. In the end there are those randomly burdened with a condition that's expensive to care for and they don't want to pay for it (at least all of it). But that does not translate into forcing someone else to cover the costs.

And no, insurance companies are not sitting on lots of excess cash. Record profits are not the same thing as high profits (and even if they were, proposing a permanent change based on temporary conditions is very reckless way to make policy). Because they are barely profitable, forcing their costs up with such reforms will force prices up and making it too expensive for someone who could otherwise get it. Now we are forcing our neighbor to carry the burden of our condition. Where's the justice in that?

The Value of Life

Ask most people how much they value their life and they will inevitably say "an infinite amount." That's what my girlfriend told me the other day (generated from a conversation I've forgotten the origins of). "This cannot possibly be true," I said. "You take risks."

Mathematically, here's how it works. The expected cost of any activity under uncertainty is the likelihood of the event times the cost if the event occurred. A fifty percent chance of losing $200 means that the expected cost is $100. For any activity there is a probability you will die, or lose that life you value at an infinite amount. Thus, it's an infinite cost no matter what you multiply it by, no matter how risky the activity is. Since you have to do something to stay alive, you should always choose the least risky activity, no matter how much you might value the alternative because of the costs of that activity are infinite.

That people value their life only because they value what they can do with it doesn't change the math. In life, there are always options. You can watch TV or skydive: both are valuable to you and while the former might be more fun after 8 hours of TV a day, it is still too costly. But people still skydive.

They also show their finite value of their own life in other ways. People speed, jaywalk, ignore check engine lights, confront rude people (who might kill them out of anger), forget to check smoke detectors, travel to foreign countries, and eat unhealthy food. When we change our estimations of how dangerous (or safe) an activity is, we change our behavior. But if we valued our life infinitely, that shouldn't change anything (as the costs would come out the same regardless of the probability of death). Clearly, the costs to risking your life are lower than you might think.

Milk, Cheese, and the Myth of Retail Collusion

This week's Economist told the story of falling wholesale milk prices which are bringing EU farmers to call for lower milk production quotas. Some farmers blame supermarkets for the lower prices, noting that they sell milk at about the same price but buy it from farmers at a significantly reduced price.

Falling consumer demand (especially given the recession) isn't the explanation EU farmers give, and it certainly doesn't seem to explain the inconsistency at the supermarket. But the Economist linked them, though they didn't say how. The short version is: it's all about the cheese.

Cheese demand has fallen a lot, especially within the EU. Unlike milk, people buy a lot less cheese when their incomes fall. But cheese is made from milk and in the wholesale market, all cheese is milk (since cheese-makers are buying it to turn into cheese). In other words, grocers who want milk for milk compete with cheese-makers who want milk for cheese. But people want less cheese so there's less demand for wholesale milk.

Just as more cheese-makers bid up the price of milk (and a growing China bids up the price for gas down the street), fewer cheese-makers means there's downward pressure on prices. Grocers, then, are getting their milk on the cheap. But the market for milk-at-the-store changed very little. So we see grocers getting cheap milk, selling it at about the same price, and it's all thanks to consumer demand, not colluding grocers.