Sunday, April 27, 2008

Worlds Within Worlds

Bill Maher fretted to Jeffery Sachs Friday that if all people of the world consumed like Americans we would need five Earths to supply the resources. Yet a hundred years ago, we could tell a similar story using Europe as a baseline instead of the States. How can I make this claim?

What Maher and Sachs are ignoring (as too many people do) is that if the people of the world used more resources, they would be able to produce more of them. More creativity, more inventions, more ideas, more productivity, more investment, more hands at work, more active minds. The history of the world is replete with scares of shortages and the panics never hold out to the adaptive world of free markets.

Thursday, April 24, 2008

Increasing Returns and Life

A few days ago Arnold Kling applied the law of diminishing returns to everyday life. In other words, he explained how doing the same things get boring and where in our life can we avoid this trap.

According to Kling, people do it an awful lot. They read books by the same author. They stay forever in the same organization. They're hesitant to change jobs. On a personal note, the only fiction my mom seems to read are murder mysteries and I sometimes wonder if she ever gets bored with them or can guess the guilty sooner.

Yet we also have to recognize there are increasing returns. If what you experienced in initial consumption can be carried forth (in part) to future consumption, then the time time you engage in that activity, your change in satisfaction can higher than what it was before. For example, the first time you tell a joke won't be as good as the second time. The learning experience you gained from the first time enhances your telling for the next time. You might be a little bored of the joke because it's in your recent memory, but the smoothness of the execution of the punchline more than makes up for it. But it doesn't have to be educational in nature. A little bit of the drama carries from experience to experience. Similar experiences can enhance each other (which is why there are so many people who throw themselves into a TV show).

The same could be said in other areas people specialize in, such as their job, a discipline, or a sport. You can think of it as going to the same amusement park each day in a week. Each time you experience another part of it, but can also avoid the costs of constantly learning how to navigate its paths. Obviously, this can't last forever (not even academics think in terms of the discipline every waking hour) but it does suggest that dabblers may well be served to throw themselves into a discipline instead of constantly moving about. And perhaps it's worth it to visit the Louvre twice in the same visit to Paris--you're surely discover great things most people don't notice.

Tuesday, April 22, 2008

Earth Day Is Capitalism Day

On this Earth Day, George Mason University's Don Boudreaux celebrates what he calls Capitalism Day:
...far more than any other, has made human lives clean, safe, dignified, and culturally rich. Capitalism is also responsible for giving people the wealth and leisure to permit them to mis-perceive nature as loving and bountiful, and to enjoy nature in a way that few of our pre-industrial ancestors could ever have enjoyed it.
It is this latter point that is often ignored. A wealthier society is a gateway to all other things we value. Wealthier societies not only have more stuff (from Wiis to advanced medicine) and more options (for jobs, living areas, places to travel) they also give us the gift of time.

Time is our most precious resource. Our ability to save time (though greater productivity) is critical to our happiness. We spend time to enjoy the company of others, find love, seek enlightenment, discover our purpose in the world, and enjoy nature. In a lot ways, nature is a really nasty thing. It's a little strange we leave the safety of modern society to visit it. Nature is filled with bugs, dirt, and disease. The sun spews radiation. Some hiking trails are small and uneven, making it easy to get lost and then sprain an ankle. There is no plumbing, no Internet, and no one to gut and cook a fish for you. Poison ivy crops up in unexpected places. Water needs purification tablets and food needs to be hoisted in the air out of the reach of wild animals. Birds scream all the time. And this assumes it doesn't rain.

Few would ever want to live permanently in such a place and most that try don't last long. But all this "roughing it" can be fun if it's temporary; nature is best left as a tourist attraction. But only with the time capitalism awards us can we afford to "get away from it all" for days at a time. Visitors cut themselves off from the world that they rely on for everything they brought out to the wilderness to make sure they don't die. If there was no capitalism, if people were too busy to see how beautiful nature can be, we likely wouldn't have an Earth Day which celebrates the wilderness. Or, worse yet, we'd be out there all the time.

The Nature of Trade

Jeff Faux (Economic Policy Institute, founder) on the Diane Rehm Show argued against NAFTA today, arguing that globalization changed the nature of trade. It's no longer about exchanging goods but about US firms manufacturing abroad and importing back to the States. The trade deficit, he concludes, is a problem.

Mr. Faux should know better. The trade deficit (aka the current account) is an arbitrary distinction between the net flow of goods and the net flow of investment (capital account). By definition, the two add up to zero (the balance of payments or BoP). Americans import goods and in exchange they spread the US dollars that give foreigners the ability to invest in the US economy. As a result, US citizens maintain a very low savings rate without losing the technological and economic progress that investment generates.

Here's a simple graph to drive home the point:

Friday, April 18, 2008

Keep Your Numbers Real

Today CNN commented on the Pope's visit to New York City, arguing it would bring $50 million to businesses in the Big Apple. They compared this to when Pope John Paul II visited the city in 1995 who spent $45 million. They then briefly commented why the Pope might be bringing in more and what's changed in the past twelve years.

But they didn't mention what's definitely changed: the price level. Usually when they bother to adjust for inflation, they mention it. But not today. A simple check reveals that the real value of the last Pope's visit was $62.2 million--over $12 million more. Say what you want about popularity or Pope expenses, but always check for inflation.

Thursday, April 17, 2008

The Secret Safety Record of Nuclear Power

When it comes to the environment and electricity there are two basic schools of thought for clean energy: nuclear power versus wind/solar (and occasionally hydroelectric). Nuclear power has the advantage of being reliable (the weather doesn't effect it so it's great for base-line power) and cost effective. Its main problem is that it's scary.

There's only been two major accidents in nuclear power history--Chernobyl and Three Mile Island. Lots of other accidents involving isolated radiation leakage occur, but it's the disaster scenarios that people are scared of. It's very strange, much like how people are afraid of flying because there's been a few big accidents yet don't bat an eye at the thousands of car wrecks a year. If we want to truly judge the safety of nuclear power versus other sources, let's examine how many people die per terawatt-hour. Note these deaths can occur in many ways, such as accidents, pollution, construction and maintenance.

Coal: 32.6
Solar: 0.83
Wind: 0.4
Nuclear: 0.052

The solar rate are based largely on rooftop solar and most of it comes from the danger of installing it (roofing is one of the most dangerous occupations in the States). See this article for more information. I picked up the coal and nuclear numbers from this article.

Granted, it's difficult to tell how dangerous nuclear power is given the long-term effects of radiation and issues regarding nuclear waste. At the same time since nuclear power is so much cheaper its customers could afford other things that they couldn't otherwise such as healthier food or better medical care. The net effect is far from obvious but it seems unlikely to overcome the ten-fold increase in the death rate compared to its clean alternatives. Nuclear power is a lot safer than you think.

Sunday, April 13, 2008

Contracts and Adultery

Contracts are great. They let us plan our life with confidence. They secure trust and obligation. Even when informal, they just make everything run smoother. Contracts, in all their forms, are at the heart of a well functioning society.

Marriage is a contract: "I give me life to you so long as you give your life to me" etc etc. Cheat on your spouse and you get what's coming to you. You made a promise; make sure you keep it. It all makes sense. But some have a very strange approach of cheating: they blame the cheating partner just as much as the one they cheated with. They call them home-wreckers, sluts, jerks, and monsters. Sometimes they are threatened with violence. Some are killed. Even if they're not married, they're called adulterers.

This is nonsense. Your spouse is clearly in the wrong, but the other party isn't (unless s/he's married, too), even if they knew about the marriage. They didn't break contract. They may have allowed your spouse to break it, but so did the hotel they stayed in. Third parties made no promises to break.

Suppose Ethan promises Steve to sell him a book for $10. Then James, knowledgeable of the contract, offers Ethan $20 for the book and Ethan takes the deal. It's hard to imagine Steve being angry at anyone other than Ethan, but yet the same logic doesn't apply to marriages. You might say these third parties aren't respecting marriages and that's their flaw, but you could say the same thing about James and contracts. And since marriages are contracts, that doesn't get us far. What's special about marriage?

I have yet to hear a good answer, though married people seem to loathe this position more than single ones. The best explanation I can come up with is that they just don't like the idea of someone they care about cheating on them and they'd rather blame someone other than the one they love. So the lesson today is that if your spouse (or girlfriend, or boyfriend) cheats on you, the problem lies with them and your relationship, not some random person you just want to be angry at.

Thursday, April 10, 2008

Listen to Your Mother

I have vivid memories of my mother insisting I wash my hands before dinner. I remember thinking: "What on earth does she think I've been doing that would justify all this hand-washing? I'm eating pasta, not performing surgery." But insist she did and the rule has (somewhat) stuck. I live a pretty quiet life--academia isn't exactly a dirty job.

Doctors are a different story. They expose themselves to dirt and disease with every patient they visit. But for some reason, they rarely wash their hands. Even though washing between each patient is time consuming, using ultraviolet germicidal irradiation (and wearing rubber gloves to mitigate the dangers associated with constant exposure) would cut that time down to a negligible value.

We talked about this issue and others (interns work for 24+ hours, doctors wear "sterile" scrubs to the cafeteria, aspirin before a heart attack is rarely used) during law and economics today. The existence of these deficiencies is a puzzle. They are very easy and effective ways to save lives yet in the avalanche of medical malpractice suits they are rarely employed. More puzzling, they are rarely cited as a cause of negligence--a lack of this or that test is more common.

The latter seems to explain the former (hospital's aren't willing to accommodate because no one's complaining) but that only makes the latter more puzzling. Most people who file a suit don't have a legitimate claim of harm, but surely they could secure a victory if they point out the doctor/hospital didn't take simple steps for avoiding harming. Why are doctors being sued for not ordering an obscure and expensive test and not being sued for being less hygienic than the seventeen-year-old at McDonald's?

My best guess is that people don't want to believe doctors could be so careless. This doesn't quite explain it since you'd think the possibility of infection or death would encourage people to think more carefully (rational irrationality doesn't get us far). Still it is consistent with the fact that of the people who have a legitimate case against their doctor, only about 2% sue. What a strange world we live in.

Thursday, April 03, 2008

The Canadian Giant

When Americans think of Canada, a handful of quaint images usually run through our heads. Lumberjacks. Mounties. Maple syrup. It might seem backwards, rugged, or even primitive. But Canada is America's largest trading partner, greater than even China or India. There are virtually no tariffs put on items exchanged between the two countries--about as close as I've ever seen of actual free trade. It's a wonder Lou Dobbs doesn't focus his wrath on America's northern neighbor.

On the most recent Southpark episode, Canada becomes so angered by their lack of respect worldwide that they strike. After an unknown course of time (several die during the strike due to hunger and fatigue), it's revealed that Canada lost $10.4 million in lost production as a result of the strike.

I suppose the writers felt this was a high sum or knew it wasn't and used to to poke fun at Canada. But in all honesty, for a country of 33 million people, that adds up to less than fifty cents a person. The Canadian economy is actually quite robust (no doubt in part due to trade with the US and other countries), with a GDP per capita on par with the United States ($38,200 versus America's $43,594).

To capture how small the number is, understand that we can use it to estimate the length of the strike. Canada's GDP is $1.274 trillion. That means the strike lasted for 0.00000816 years, or, ignoring weekends and assuming an eight hour work day, 1.02 minutes. (I use USD here; note that if you switch to Canadian dollars it changes nothing since you'd be multiplying the numerator and the denominator by the same constant.)

The world economy is huge. Mind blowingly, fantastically huge. It is so large, Americans scarcely notice a nearby one trillion dollar economy and the toil and effort of a population the size of California. How great we have become, and how small each of us are.