Monday, April 27, 2009
Tabarrok At TED
My dissertation chair, Alex Tabarrok, gives an inspiring talk at TED on growth and the future. Watch, won't you?
Wealth in Sweden
An episode of the Daily Show last week paints Sweden as a wealthy country thanks to it's government interventions. Sweden is certainly wealthy by international standards, but is it wealthier than the US? The simple data say yes, but reality is more complicated.
Sweden's GDP per capita is $52,789 compared with the US's $46,859, but that's in nominal dollars and doesn't adjust for how much you can buy with the money.
When we adjust, the Sweden's wealth changes radically: GDP per capita falls to $37,245: a 30% drop! (The United States numbers don't change since these are in dollar amounts.) In other words, while the Swedes get paid more than Americans, everything they buy costs much more and, on net, they are poorer.
Note this underestimates the wealth difference. Technology spillovers from America to Sweden is much larger than the reverse but these wealth effects from technology (which are quite large) aren't included in the data. Much of the Swede's wealth comes from technological innovation abroad not social safety nets, though nailing down exact numbers is quite difficult.
Sweden's GDP per capita is $52,789 compared with the US's $46,859, but that's in nominal dollars and doesn't adjust for how much you can buy with the money.
When we adjust, the Sweden's wealth changes radically: GDP per capita falls to $37,245: a 30% drop! (The United States numbers don't change since these are in dollar amounts.) In other words, while the Swedes get paid more than Americans, everything they buy costs much more and, on net, they are poorer.
Note this underestimates the wealth difference. Technology spillovers from America to Sweden is much larger than the reverse but these wealth effects from technology (which are quite large) aren't included in the data. Much of the Swede's wealth comes from technological innovation abroad not social safety nets, though nailing down exact numbers is quite difficult.
Saturday, April 25, 2009
A Third Way: Healthcare
A friend of mine works multiple part time jobs and has a pre-existing medical condition. Not surprisingly, he supports government subsidized (though not free) health care for people like him: working full time but without benefits. Companies don't want to provide benefits and often fire a full time person to hire a pair of part time people: same work and pay, but no costs of benefits. But this firing/hiring trend is common in every recession: it seems strange to create a permanent agency to solve a temporary problem. Still, the multiple part-time jobs is a permanent fixture in the economy and is worth thinking about.
My knowledge of tax law is somewhat lacking, but my understanding is that firms give benefits instead of an equivalent amount in cash because (a) tax laws make benefits cheaper and (b) people prefer that warm feeling of someone watching out for them over cold hard cash. Besides, matters of mortality is not something people like to think about so there's benefit in having someone else handle it. But part time workers aren't paid enough for the worker to be willing to take such an income hit in exchange for benefits. Moreover, tax laws wouldn't motivate the employer and minimum wage laws would prevent people from working for just benefits.
It seems we're stuck. Either provide subsidized health care and suffer all the inefficiencies that come with moral hazard or let the working poor suffer and with it the costs of delayed care.
But suppose we re-wrote the tax laws so firms would get tax breaks for benefits of part time workers and created an exception for the minimum wage laws (or just got rid of them) allowing people to be paid an equivalent amount in benefits. That way someone working multiple jobs would have one job where they're paid exclusively (or partly) in benefits and other jobs they get cash normally.
There's surely additional complexities because I'm not familiar with all the details of the tax code. But it has the advantage of giving people access to greater health care without running into the strong case of moral hazard that spawns comes from universal health care. The only hitch is that a lot of politicians hung their hat on universal health as the only reasonable solution so a compromise in the tax code probably won't be enough satisfy their constituents.
My knowledge of tax law is somewhat lacking, but my understanding is that firms give benefits instead of an equivalent amount in cash because (a) tax laws make benefits cheaper and (b) people prefer that warm feeling of someone watching out for them over cold hard cash. Besides, matters of mortality is not something people like to think about so there's benefit in having someone else handle it. But part time workers aren't paid enough for the worker to be willing to take such an income hit in exchange for benefits. Moreover, tax laws wouldn't motivate the employer and minimum wage laws would prevent people from working for just benefits.
It seems we're stuck. Either provide subsidized health care and suffer all the inefficiencies that come with moral hazard or let the working poor suffer and with it the costs of delayed care.
But suppose we re-wrote the tax laws so firms would get tax breaks for benefits of part time workers and created an exception for the minimum wage laws (or just got rid of them) allowing people to be paid an equivalent amount in benefits. That way someone working multiple jobs would have one job where they're paid exclusively (or partly) in benefits and other jobs they get cash normally.
There's surely additional complexities because I'm not familiar with all the details of the tax code. But it has the advantage of giving people access to greater health care without running into the strong case of moral hazard that spawns comes from universal health care. The only hitch is that a lot of politicians hung their hat on universal health as the only reasonable solution so a compromise in the tax code probably won't be enough satisfy their constituents.
Tuesday, April 21, 2009
I Think I'm Getting Soft In My Old Age
I've decided to offer my students some extra credit. Here it is:
This extra credit is worth three points, added to your final grade (for perspective, this is the equivalent of 60 points added to a homework assignment). You must answer it in 75 words or less. If you use anything more than that, even by one word, than it will be worth zero points. Your answer must be typed with few spelling or grammatical errors (if it needs to be stapled, you did something wrong).This assignment is due on May 4, 2009.
“It is through exchange that difference becomes a blessing, not a curse.”
—Jonathon Sacks, The Dignity of Difference, 2002
This quote opens our syllabus and captures a subtle theme of the course. What’s the theme? (There are probably multiple answers to this question.) In answering this question, you better off using information from at least one of the following podcasts, preferably two. Indicate via footnote which podcast(s) you use; these references do not count to your word limit. You might want to listen to more than you intend to use; some of these podcasts are better for answering this question than others.
Leamer on Outsourcing and Globalization
Brook on Vermeer's Hat and the Dawn of Global Trade
Bernstein on the History of Trade
Munger on Middlemen
Boudreaux on the Economics of "Buy Local"
Fifteen Lawyers On a Dead Man's Chest
Pirates portrayed in popular media were not the kind of heroes we make them out to be today. Like the modern Somali pirates, they disrupted trade and threatened fortunes. They murdered, raped, and stole. They burned ships and killed innocent people. Centuries ago, pirates would occasionally be acting on the behalf of a government, acting as a Crown thug rather than the rugged rogue we think of them as. Perhaps their only endearing quality is that some were made up of sailors dodging the English draft.
Cyber piracy is different story entirely, highlighted by the Pirate Bay Trial. Internet pirates download and/or view copyrighted material without paying for it. Studios argue that they are stealing media and more than one commercial depicts it as the same as swiping a CD from a store. But that's not quite true.
Granted, it is possible that downloading illegally is effectively the same as taking a hard copy. Taking a hard copy is always denying the company revenue, even if you would never buy it because your theft denies someone else from buying that particular CD. But downloading a file copies it, leaving the original in tact. Your consumption of it does not deny someone else from consuming it. The company loses revenue only if you pirated instead of paying for it. If you were never going to buy it (you value it less than the price but more than zero), the studio/actors/retail store/etc lose nothing. There are no distorted incentives and no real theft.
In an ideal world, only those who download for few are those who wouldn't have paid in the first place. But I know of no way to reasonably get to that world for it requires each consumer to honestly determine what they are willing to pay for, act accordingly, and, when appropriate, resist the romantic call of a pirate's life.
Cyber piracy is different story entirely, highlighted by the Pirate Bay Trial. Internet pirates download and/or view copyrighted material without paying for it. Studios argue that they are stealing media and more than one commercial depicts it as the same as swiping a CD from a store. But that's not quite true.
Granted, it is possible that downloading illegally is effectively the same as taking a hard copy. Taking a hard copy is always denying the company revenue, even if you would never buy it because your theft denies someone else from buying that particular CD. But downloading a file copies it, leaving the original in tact. Your consumption of it does not deny someone else from consuming it. The company loses revenue only if you pirated instead of paying for it. If you were never going to buy it (you value it less than the price but more than zero), the studio/actors/retail store/etc lose nothing. There are no distorted incentives and no real theft.
In an ideal world, only those who download for few are those who wouldn't have paid in the first place. But I know of no way to reasonably get to that world for it requires each consumer to honestly determine what they are willing to pay for, act accordingly, and, when appropriate, resist the romantic call of a pirate's life.
On Solow On Posner On the Economy
Nobel Laurette Robert Solow wrote a review of Richard Posner's new book about the economy. In a surprising move, Posner blames market failure--not government failure--for the recent problems. In an unsurprising move, Solow agrees with him. I don't.
Both point out that the market is not perfect and there's no denying it. You'll be hard pressed to find any economist who thinks businesses, and even whole markets, make mistakes. But the temporary or systematic failure of a firm, or the temporary failure of many firms (i.e. the market) does not mean there are inherent problems with the system. On the motivations of engaging in investments investors knew little about, Solow writes
Imperfections and information asymmetries always exist. People understand that and people adapt to it. They don't adapt instantly and they don't do it perfectly, but they adapt as well as they can. Solow and Posner seem to agree unless we're talking about regulators. One cannot point to information asymmetry as a key problem and then call for non experts to correct it.
That is not to say regulation never has its place, but the issue is one of costs and benefits. What is less costly to society: the costs of establishing and maintaining the regulation plus the good opportunities regulation renders impossible or the occasional, but vary painful, market corrections that come with no regulation. The answer is not obvious, especially when you consider that people will adapt to the rules. There are many ways around regulation (creating a false sense of security), many ways to game the system (making regulation more costly), and many reasons to embrace prudence when you know one's going to save you if you screw up. The essential mechanism of market self-correction doesn't go away when errors get big, though the additional time it takes to fix itself (increased by uncertainty in the political climate) might fool even famous judges and Nobel Laurettes that it disappears completely.
Both point out that the market is not perfect and there's no denying it. You'll be hard pressed to find any economist who thinks businesses, and even whole markets, make mistakes. But the temporary or systematic failure of a firm, or the temporary failure of many firms (i.e. the market) does not mean there are inherent problems with the system. On the motivations of engaging in investments investors knew little about, Solow writes
Why did I do such a risky and, as it turned out, stupid thing? Well, it had worked in the past, and made a lot of money for many people. If I had backed off, others would probably have continued to make money for a while. I would have looked like a fool, and very likely an unemployed fool.Add "until now." And lots of banks didn't do it: Pittsburgh National, Wells Fargo, JP Morgan Chase, and Bank of America (the last one did, but only after the crisis begun). Now they look like geniuses. Believing firms are so mindless, myopic, and systematically prone to being duped violates basic economic principles of rationality.
Imperfections and information asymmetries always exist. People understand that and people adapt to it. They don't adapt instantly and they don't do it perfectly, but they adapt as well as they can. Solow and Posner seem to agree unless we're talking about regulators. One cannot point to information asymmetry as a key problem and then call for non experts to correct it.
That is not to say regulation never has its place, but the issue is one of costs and benefits. What is less costly to society: the costs of establishing and maintaining the regulation plus the good opportunities regulation renders impossible or the occasional, but vary painful, market corrections that come with no regulation. The answer is not obvious, especially when you consider that people will adapt to the rules. There are many ways around regulation (creating a false sense of security), many ways to game the system (making regulation more costly), and many reasons to embrace prudence when you know one's going to save you if you screw up. The essential mechanism of market self-correction doesn't go away when errors get big, though the additional time it takes to fix itself (increased by uncertainty in the political climate) might fool even famous judges and Nobel Laurettes that it disappears completely.
Sunday, April 19, 2009
On Coase and Income
I hope my international economic policy students can answer this:
Economist Ronald Coase argued that in cases where one person involuntarily harms another through their actions, (also known as a negative externality, such as a factory emitting smog on a community), that the group who should change their action is the one who is the least cost avoider (for example is it less costly for the factory to move than the community). How does income inequality create a negative externality? In the case of income inequality, who is the least cost avoider? Justify your answer.
Tuesday, April 14, 2009
Thin Film of Life
This one ranks high as my favorite YouTube video:
Consider the words Carl Sagan used: "a thin film of life." Exactly how thin are we talking about? I did a simple calculation and it's quite humbling.
Suppose we consider the thickness of the film of human life on Earth to range from the Dead Sea to Mount Everest (the lowest and highest point on land, respectively). That comes to 9,226 meters. The average diameter of the planet is 12,742,000 meters: a ratio of 1:1,381. In other words, if we inflated a beach ball four feet across (large by beach ball standards) and painted it, the thickness of the paint would encompass the whole of human civilizations: every monument, empire, family, and philosophy (save satellites and other space artifacts, of course). A thin film, indeed.
Consider the words Carl Sagan used: "a thin film of life." Exactly how thin are we talking about? I did a simple calculation and it's quite humbling.
Suppose we consider the thickness of the film of human life on Earth to range from the Dead Sea to Mount Everest (the lowest and highest point on land, respectively). That comes to 9,226 meters. The average diameter of the planet is 12,742,000 meters: a ratio of 1:1,381. In other words, if we inflated a beach ball four feet across (large by beach ball standards) and painted it, the thickness of the paint would encompass the whole of human civilizations: every monument, empire, family, and philosophy (save satellites and other space artifacts, of course). A thin film, indeed.
Friday, April 10, 2009
On Reputation
Recently (in no small part to EconTalk's new book club starting with the Theory of Moral Sentiments) I've been given thought to if people should speak bad of others and if a person owns their reputation. The impulse seems to be that of course they do. It is their reputation, isn't it? Do they not have a right to know if someone speaks ill of them and to prevent harm to their reputation?
But calling it "my" or "her" or "their" reputation is really a semantic shorthand, much like "my" job or "my" girlfriend. We do not say it to convey possession, but rather relation. It is fundamentally not the same thing as my book, my computer, or my wallet.
The fact that a person's reputation can be harmed (and thus the person herself) should not be considered, either. A firm can (and is) harmed by their competition, but no one says McDonald's owns Burger King. Similarly, a critic who gives a negative review of a movie is thus not controlled by the movie's studio. Just because something can harm you, doesn't mean you own it.
Your reputation is the sum of what others think about you. To say you own your reputation is to say you own others' thoughts which is clearly nonsense. You don't own your reputation. Others do.
This is not a green light to spread lies. Lying is a violation of implicit contract between the listener and the talker--regardless of if a reputation is actually harmed (I'm told many things about many people I don't believe). But if reputation is harmed through expression of fact (including opinion presented as opinion), it's hard to claim the subject of conversation has a case of being wronged.
Smith advocated against harming another's reputation but has a valid function. People get bad reputations for reasons, most of which are justified. Spreading opinions can prevent disasters for others later (again, assuming there are no lies involved). Far from being malicious, speaking bad of someone actually helps people.
But calling it "my" or "her" or "their" reputation is really a semantic shorthand, much like "my" job or "my" girlfriend. We do not say it to convey possession, but rather relation. It is fundamentally not the same thing as my book, my computer, or my wallet.
The fact that a person's reputation can be harmed (and thus the person herself) should not be considered, either. A firm can (and is) harmed by their competition, but no one says McDonald's owns Burger King. Similarly, a critic who gives a negative review of a movie is thus not controlled by the movie's studio. Just because something can harm you, doesn't mean you own it.
Your reputation is the sum of what others think about you. To say you own your reputation is to say you own others' thoughts which is clearly nonsense. You don't own your reputation. Others do.
This is not a green light to spread lies. Lying is a violation of implicit contract between the listener and the talker--regardless of if a reputation is actually harmed (I'm told many things about many people I don't believe). But if reputation is harmed through expression of fact (including opinion presented as opinion), it's hard to claim the subject of conversation has a case of being wronged.
Smith advocated against harming another's reputation but has a valid function. People get bad reputations for reasons, most of which are justified. Spreading opinions can prevent disasters for others later (again, assuming there are no lies involved). Far from being malicious, speaking bad of someone actually helps people.
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