Congress COMPETES

The America Creating Opportunities To Meaningfully Promote Excellence in Technology, Education, and Science Act (America COMPETES Act) was reauthorized by the 111st Congress. I admittedly don't know much about these prizes and will be looking closer at them in the near future. Here's a link to various prizes the government's offering (the core of the law's been around since 2007; it looks like the reauthorization, among other things, increased the role of prizes).

The Spirit of the Season

Rasmussen Reports published today that most people prefer stores greet them with "Merry Christmas" (69%) versus the 24% preferring Happy Holidays.

But:

Very few Americans are offended when someone wishes them a "Merry Christmas," but most are more likely to say "Happy Holidays" to someone else rather than risk offending them.

And:

Also, few who don’t celebrate the holiday are offended when an acquaintance wished them "Merry Christmas."

Wishing someone a "Merry Christmas" is an externalized benefit (people prefer it more) at a small risk of an internalized cost (offending someone...which is also an externalized cost but I figure if you're going to bother to say anything in the first place, you have sympathetic preferences). According to these reports, as economics predicts, we have too few "Merry Christmases" because (drum roll please), people are taking their niceness too far! It's a strange world when a selfish Scrooge can teach us about spreading some Holiday Christmas cheer.

Merry Christmas.

Growth Is Efficiency

An article by Steve Horwitz brought on one of Brad Delong's most prestigious awards: Stupid Economist Alive. Horwitz argues that supply, not demand, is the key behind economic growth.

Starting the analysis with consumption assumes one has already acquired means. Contrary to that analysis, wealth is created through acts of production that rearrange resources in ways people value more than alternative arrangements. These acts are financed with savings that come from households refraining from consumption.

Delong (and Karl Smith and Matthew Yglesias and other Keynesians) argue growth comes from demand (hence the call for stimulus packages). From Smith:

That having been said there is a difference between consumption and investment. Investment – which is perfectly good Keynesian demand by the way – is using the resources of the universe to create tools that will allow me to make even more stuff in the future.

However, I don’t just do this for the hell of it. I hope that one day this investment will lead to a world of even greater consumption. Consumption is still the ultimate goal.

The whole discussion strikes me as silly because it ignores what economic growth is and it's not people buying things or people making things. The Soviet Union learned that when it made a bunch of stuff people didn't want and then bought of bunch of stuff people didn't want. Growth is efficiency. Period.

When we think of efficiency, we think of giant machines doing monotonous tasks but efficiency is much more than that. At its core, it's getting more output with the same amount of input, "output" and "input" broadly defined. So this isn't just technology. It's also new companies, new products, new hobbies, a better division of labor, smarter organization, etc. Anything that enriches our lives in a material or non-material way. If there's a new religion that enriches souls more fully than an older one (holding costs equal), that's growth (maybe not in terms of GDP, but growth in a way that still matters).

Now if you think this sounds like I'm echoing Horwitz's argument, think again because achieving efficiency isn't free. If it was, we'd have invented flying cars and Google a long time ago. Inventing new technology, taking on the new workers for the better division of labor, designing new products...these things are expensive to do. I'll need some kind of incentive to take on these costs, not to mention the costs associated with uncertainty. To achieve efficiency, we need not just the means, but the motive.

Roughly stated, the means are what we hear from the right/libertarians. Reduce capital gains taxes, cut down on regime uncertainty, etc. It's all about reducing the costs of operating a business, which is largely about finding ways to boost efficiency. And roughly stated, the motives are what we hear from the left/Keynesians. Increase unemployment benefits, make stimulus packages, boost aggregate demand. My point is that you need both mindsets.

This doesn't mean I'm behind more stimulus spending or cutting taxes across the board. There are good ways to embolden means and motives and there are not-so-good ways. The key point is that these two sets of policies aren't substitutes...they're complements. If you increase aggregate demand and pair it with a drop in aggregate supply (costs), then you're much more likely to increase efficiency than if you do just two policies from one set of theories.

Growth is efficiency. Understand that basic point and it's clear that the debate about if supply or demand is behind economic growth is foolish debate. You might as well ask which blade of the scissors cuts the paper.

The Bush Tax Cuts

I was largely agnostic when it came to the Bush-era tax cuts. But I had no idea how much taxing the rich taxed small business.

From what I gathered (via this video), all revenue from a privately held company (which small businesses are) counts as income for the owner. If the efforts of dozens of people bring in half a million, that's the legally the same as a CEO of a big company making half a million. In the former case, that money goes to employ the people to keep the business afloat. In the latter case, it's not. The narrator in the video underlines how risky it was for him to hire more people since it's unclear if the tax cuts will expire or not.

The video's produced by the Small Business & Entrepreneurship Council, so I assume they're correct that the tax system works as described, but of course there could be many exceptions that exclude most small businesses and the narrator's just in a bad place. Still, I think when most of us think "the rich's income" we're not thinking small business revenue.

That's not to say that small business is the "key" to economic recovery...I don't think it is. But it's not insignificant, either, and allowing the cuts to expire look less and less like a good idea.

When To Tariff

Subsidizing an industry (ignoring positive externalities) is not good for efficiency. This sort of argument is often cited about trading with China and its alleged undervalued currency. I have some thoughts about fixed exchange rates, but I'll post them another time. Right now, I'm more interested in the talk about if the US should institute retaliatory tariffs against China on the basis of its more direct subsidization (i.e. giving money directly to firms, not keeping the exchange rate down).

The nice thing about retaliatory tariffs, is that if they succeed, China will stop subsidizing industries. This is not good because the US will export more; it's good because it decreases price distortions. Wealth (on a global scale) increases. But such tariffs can back-fire if China doesn't back down. Instead of having one problem, you have two.

Suppose China will remove subsidies at a probability of x. If W is world wealth, S is the effect subsidies have on world wealth, and T is the effect tariffs have on world wealth, the US (assume the US cares about the world's wealth, not just American wealth) should not threaten a tariff if:

W - S > W - (1 - x)(S + T)

or...

S < (1 - x)(S + T)

If that equation looks familiar to you, then bravo to you! It's the Learned Hand Rule. To quote the Wikipedia entry,

an act is in breach of the duty of care if:
B < PL
where B is the cost (burden) of taking precautions, and P is the probability of loss (L). L is the gravity of loss. The product of P x L must be a greater amount than B to create a duty of due care for the defendant.

In other words, you're held liable for something if it was cheaper to remove the possibility of the bad thing from happening than it was to suffer the bad thing, weighted by the probability that the bad thing would happen. For example, it's easy to install a guardrail, likely someone will fall and very harmful if the person falls. So if you don't install a guardrail and someone falls, you're held liable.

My equation runs a similar vein, though you tolerate a subsidy instead of put up a guardrail. If the cost of suffering the subsidy is less than cost of the subsidy and tariff, adjusted for probability, you shouldn't threaten a tariff. Not tolerating the subsidy is negligent as threatening the tariff exposes the world economy to an inefficient level of risk.

Let's rewrite the equation:

S/T < (1-x)/x

If the above inequality holds, then threatening a tariff would be negligent. Let's summarize the right handed side with a graph. If S/T is above the line, you should threaten the tariff; if below, you should not.



Suppose we agree that subsidies and tariffs have an equally negative impact on wealth, or S/T is one. That means if x < 0.5 (Chinese have less than even odds at backing down), don't threaten. If x > 0.5, then you should threaten. Yes, you can get into a lot about reputation building, threatening (and following through) even if x is low in an attempt to increase x. But this post is already quite long and would make this model very complex.

It's politically harder to get rid of subsidies than tariffs, I'd wager, since tariffs are a tax and people love seeing their taxes fall. Therefore, S > T because the long term damage is higher. But it also means x is lower than we thought since it's harder for the government to give up something that is so popular. Assume S is twice as bad as T (S/T = 2) because it is twice as hard as we thought to get rid of (x is 0.5x). Because of the curve of the graph, x would have to be 0.67 (before adjusting for the change due to political viability) before you get the same payoff threatening a tariff as you do letting the subsidy stand. That's higher than the even odds I mentioned earlier.

The point of this post is to get us to think more about retaliatory tariffs as an efficiency goal, not a justice goal. Lots of people point to "leveling the playing field" and "fairness" when they advocate retaliatory tariffs, as if the aim is to punish people for wrong doing. But that's a means to an end, which is to stop subsidies. Recognizing that some subsidies aren't worth the risk of retaliation is the first step to being smarter about trade policy.

A Theory of Book Survival

Russ Roberts believes the days of the physical book are numbered.

So while there are some advantages to physical books, I’m predicting that the advantages of digital books will crush them. And it won’t take long...There will be one exception. The Jews. We will still publish prayer books and Bibles and Talmuds for use on the Sabbath when the iPad and the Kindle take a rest. But for the most part, I think that’s going to be it.

No doubt investing big in a physical book market is a fool's errand. But I don't think new physical books will become extinct. In fact, I think the disadvantages of such books will be the key to their (muted) survival.

Books as yard signs. Because books have that hefty annoying mass, they can be displayed in a home. I once heard that most people who buy books written by popular public figures don't actually read them, or read very little of them. They mostly have them to display in their bookcases. "Look what team I'm on," they scream. Displaying your copy of a hip new author plays a similar role.

Books as uncomfortable shoes. We wear uncomfortable clothes when we're trying to be serious because genuinely serious people are more willing to tolerate such discomfort. Similarly, "true readers" will read the book in the physical form because it's a pain to do. Only people who want to be part of that "serious readers" club will tolerate a physical book. Oh they'll fool themselves that the minor differences between the physical and the digital matter, e.g. the smell of the book, but it will really be about signalling.

Books as candles. While I think most of the "smell of the book" stuff is nonsense, it's true that people like nostalgia and novelty. Yeah, I think candle light's romantic but I might think that because I grew up with electricity. Old stuff always seems exotic and cool.

GRANTED, there's lots of old media where new stuff doesn't exist. Vinyl records. VHS. Cassette tapes. But such things weren't around very long. They didn't have the opportunity to entrench themselves as a nostalgic enough to warrant making new ones and they make even poorer signalling. But physical books have been around for a while and when you add in print on demand services, I think we'll be seeing new physical books around for a long time.

Bookstores, however, are a different story.

Tuition Fee Riots

Protests against rising tuition fees in London turned violent today with massive property damage as angry students swarmed the street. I first heard this story on CNN and saw it again on the BBC. Both networks kept citing that the fees would triple, which is a very dramatic increase. But no one said how exactly how much fees were increase which told me it wasn't as high as your gt reaction might believe.

I found the actual increase (notably via the BBC...apparently it's worth writing in an article but not worth saying in a newscast). For one, they are not increasing the fees per se, but increasing the cap universities can charge. It will grow from $4,830 to $14,500 (3,000 pounds to 9,000 pounds, using current exchange rates). So yes, a $10,000 increase is quite a hunk of money. But the average in state tuition in the US is $10,674. Out-of-state tuition for public universities is much higher. And that was in 2004; average tuition is certainly higher today for the same reason the Brits kicked up fees: governments are strapped for cash.

In other words, tuition rose not because the Tories, et al are picking on students but because students have been underpaying for a long time. That's why even in the wake of the violence, the Tories aren't backing down.

The Significance of Significance

William Easterly admits to being sloppy with his statistical reporting.

Aid policy was based on the premise that aid raises growth, but …{a major} study of this question was saying that this premise was false.

This quote refers to the Rajan-Subramanian paper (later published in a peer-reviewed journal) that was unable to reject the hypothesis of a zero effect of aid on growth. As I never tire of pointing out, we often get our conditional probabilities mixed up. Based on standard statistical methodology, the (1) probability of failing to reject the zero effect hypothesis is high when the effect is indeed zero. Unfortunately, the author of the quote incorrectly thinks this implies the opposite probability is high — (2) the likelihood that the effect is indeed zero when you fail to reject the hypothesis of zero. This likelihood can actually be quite low even if the first probability is high.

This is an important point, but it's not intuitive. Let me take a moment to interpret.

Suppose you and some friends are out partying but your friend Bob didn't show up. Where's Bob? It's late: Bob's probably at home. Bob being at home is your null hypothesis. (When I first learned about null hypothesis, I learned it as the theory that nothing interesting's going on. It's more complex than that but that will suit us for our purposes.)

You decide to call Bob to figure out if he can come party with you. Granted, Bob might be busy playing poker or getting drunk at his favorite bar. But he also might be home and it's a lot easier to get Bob to do something when he isn't doing anything.

If Bob tells you he's at home, you can accept the null hypothesis. Bob is indeed at home. (Technically, you never actually accept the null due to mathematical constraints but ignore that to build the intuition.) If Bob tells you he's in the gutter somewhere, at a strip club, or doing something else "interesting," you reject the null hypothesis. But if Bob doesn't pick up the phone, if it just rings and rings and rings, then you fail to reject the null hypothesis. This is not the same thing as accepting the null. Bob could be asleep in bed OR he could be in jail after having just spray painted a cop's car while wasted on vodka. You just don't know.

That confusion, that not getting an answer is the same thing as getting something boring, is the confusion William Easterly made. The Rajan-Subramanian paper didn't get statistical significance when it came to aid's relation to growth which is the same as the phone not picking up. To quote Easterly once more, "Absence of Evidence does not constitute Evidence for Absence."

The Fake Endorsement

I've always known what a politician said and what they believed were often at odds but this brings it to new heights.

Trying to be even-handed and polite, the [visiting] Brits said something diplomatic about McCain’s campaign, expecting Bush to express some warm words of support for the Republican candidate.

Not a chance. “I probably won’t even vote for the guy,” Bush told the group, according to two people present.“I had to endorse him. But I’d have endorsed Obama if they’d asked me.”

Endorse Obama? Cue dumbfounded look from British officials, followed by some awkward remarks about the Washington weather. Even Gordon Brown’s poker face gave way to a flash of astonishment.

When I first read that, I was utterly confused. "Had to?" You're the President at the end of his final term. You're basically done with politics; you don't need to be re-elected or get any bills passed. But I suppose between the speaking opportunities and book deals, you want to leave on good terms with the party faithful. A good example of how strong of an impact incentives are.

The Most Expensive Liquid You Can Buy

I'm in the market for a new printer. My existing one, a cheap Canon printer I've been using for over five years, is wearing down. It jams and the head occasionally prints a letter out of alignment. Since I'm sending out job applications, a new printer would be a big help.

But printer ink's the most expensive liquid you can buy. Printer manufacturers claim it's the technology which drives up the price. And yes, ink technology has noticeably improved over the past 20 years. A single cartridge for my printer runs $23.49 at Office Max and contains about 12 ml of ink, or $7,409.94 per gallon. I'm not buying the technology story.

I trust the tying pricing model, a form of price discrimination. Manufacturers sell a cheap printer (another reason to discredit the technology story: about half to one-third the price of the printer is eaten up by the ink it comes with) but charge a lot for ink. They are able to charge more for people who like to print and less for people who don't print very much, capturing the gains from those who are willing to pay a lot while still getting profit from those who are willing to pay only a little.

I tell my students to make sure you know the whole price of a good before you buy it and so I called Cartridge World to verify they carried cartridges of a printer I'm looking at, the Epson Stylus NX125 (the web site says it's $50 but I swear when I saw it in the store it was $40). They do not...yet. Cartridge World takes the empty cartridges people bring in (presumably for some store credit or a discount), fills them up, and sells it back. But the NX125's a new model and they don't have any cartridges yet. Moreover, manufacturers know places like Cartridge World exist and reformulate their ink so it only works with that cartridge (the printer head's a patented piece of technology), requiring other guys to figure out the formula so they can produce it for the manufacture's competitors.

It's around this point in our conversation I realized printer pricing is backwards from pricing of virtually all other consumer products: the new stuff isn't more expensive than the old stuff. It's cheaper.

If you buy an old printer, the manufacturer knows they can't get as much money from you since you can reliably buy ink elsewhere. They have competition from a key source of revenue. So they charge more for the printer to (a) capture some of the value when they can and (b) discourage you from buying the old printer in favor of the new one. I doubt new technology's driving up the price of ink but it looks like it's driving down the price of printers. Weird.

Note this also puts manufacturers in a tough place when it comes the planned obsolesce. They want you to buy a new printer but they don't want your printer to fall apart so fast you go to another manufacturer.

If my current printer didn't work, I'd probably buy a "old" printer since I print a lot. But most of my printing are things like rough drafts of papers, things where great printer quality isn't an issue. So I'll probably buy a new printer and live off the ink it comes with, printing only professional documents. The only thing is I'm not sure how annoying it will be to constantly plugging and unplugging printers. But it will make me feel like I'm outsmarting these manufacturers and I do like feeling clever...

Site Launched

I've finally launched my professional site. Visit it to find information about the classes I've taught, my CV (a minor update will be coming shortly), research (as it is), favorite links, and past teaching evaluations.

I'll tag this as "Teaching" since that's what most of the information on the website covers.

Market Madness

This year's American Economic Association (AEA) Annual Meeting website presents "Market Madness," a spin off March Madness where 16 suggested reasons for the recession are pitted against each other. The winner of each pair is determined by voting (I think it was among AEA members). The pairings were made by Allen Sanderson and requested by University of Chicago Magazine. Here are the results (a description of each entry is here).

Externalities and Locking Your Car

Inertia Wins! posted this about a new regulation on locking your car.

Most car thefts happen to unlocked cars. The government of Bucks County, Pennsylvania, thinks it can help. It plans to issue $25 fines to people who forget to lock their cars. First-time violators get off with a warning.

I'm not a fan of this law, largely because of the reasons Inertia Wins! outlines (invasion of privacy when police check for locked cars, ability to be abused by thieves dressed as cops, etc). I'm also against it because I lock my car all the time.

Suppose everyone locked their car. Some car thieves would steal other things but their skill set is not easily transferable. I'd imagine most would focus on getting better at getting into locked cars. That's a cost to me as it increases the likelihood that my car will be stolen. So the strange unintended consequence of this regulation is that it punishes the people who are most careful.

Hans Rosling on Child Mortality

Prof. Hans Rosling has a new video about child mortality rates in Africa. Interesting, as always.

Latest on the Minimum Wage Studies

The famous Card and Krueger study examined the effects of a minimum wage increase in New Jersey by comparing workers hired there with workers hired in the neighboring state of Pennsylvania. What makes this study noteworthy is that despite its good design, its conclusion defied economic theory: the minimum wage didn't increase unemployment.

There are lots of studies showing the opposite but Card and Krueger was noteworthy not just in its conclusion but in its approach: they looked at local effects. Economist Arindrajit Dube did a more systematic study, looking at several state borders. His confirms the Card and Krueger study. Dube recently spoke to the Real News:

Dube’s findings indicate that a higher minimum wage helps service retailers attract and retain employees, increasing their productivity. He said that a restaurateur, for example, is likely to reduce his employees when the wage goes up if only one restaurant raises their wage, but if most of them raise it, the added cost is passed on to the consumer who is likely to absorb it without decreasing their demand.

In other words, people are very sensitive to the increases in price of one store but less sensitive to the increase in price of all similar stores. That makes sense: there are fewer substitutes for all stores than for one store. I wouldn't say "without decreasing their demand" as I'm sure it's decreased somewhat, but that's probably a media translation, not Dube.

But it still doesn't make sense. The idea of offering a higher wage, even one above what we would typically call a market wage, to attract good workers isn't a new idea in economics or business. Economists call it an efficiency wage: higher wages attract better workers which increases the chance that you'll hire a good worker. (It's hard to tell good workers from bad ones.) Firms use efficiency wages all the time because a good worker is a huge advantage over a competitor. The higher productivity worker pays for the higher wage. There's no reason why in this scenario a firm increasing their wages would feel the need to cut employment. Each worker pays for himself. You don't need a sector-wide increase. In fact, you prefer it. If everyone's getting the benefit of the higher wage, then much of the competitive advantages drain away. (It's not all the competitive advantage, though, as you attract workers from other sectors.)

That Dube was able to replicate the Card and Krueger study makes me less suspicious of it (as the study, while well designed, wasn't perfect...though no interesting study is!) and I'm more open to the idea that minimum wage laws can increase employment than I was yesterday. But I have yet to hear solid economic reasoning as to why this would occur.

HT: Mark Thoma

The Madness of the Many

Daniel Indiviglio suggests taxpayers have discretion over where their funds go. I love this idea. In fact, I considered it a while ago (though I called it "taxpayer earmarks" and was less ambitious than Indiviglio, thinking only a fraction of the tax payment would be available for discretionary spending). I can't find a post about me talking about it, so you'll just have to take me at my word.

I am concerned that the payments are just another form of cheap talk, but more directly destructive. In Indiviglio's example, he increases his share to the DEA from $3.14 to over $160. I think many Americans would applaud that increase despite the efficiency (and ethical) problems of arresting people for enjoying drugs. I'd expect subsidies and make-work jobs to rise, as well, depressing the economy.

You might wonder why politicians don't have to worry about this trade off (pleasing the people at the expense of the economy). Well they do, but its weakened compared to the average taxpayer. If the politician's in charge when the economy sinks, he's (rightly or wrongly) punished for it by losing his job. Moreover, he has business interests (and their campaign contributions) which help keep him in line. But a single taxpayer's virtually unaffected by slightly increasing a subsidy for a feel-good industry. Even if they don't send money that way, most will and that's what makes the difference. It's the cheap talk of voting but without the (and I can't believe I'm wording it this way) rational filter of the politician.

Anger of the Majority

Brad DeLong catalogs some angry blog posts about the supposed suffering wealthy, largely brought on by law professor Todd Henderson (the link is a snapshot from Google's cache as the original post was deleted).

Yes, Henderson comes off as a complete jerk, insisting the President tax "the-richer-than-me-rich" but not the "rich-as-I-rich." But just as the wealthy lose perspective because they spend all their time around other wealthy, the less well-off lose perspective as well. This quote is one of the more reasonable ones and captures the heart of the criticism:

The sympathy list they always go through are the costs of private schools, elite private universities, large mortgages, and large loans for graduate schools (I note the lack of large loans for undergraduate). This just isn't even a concern for 97% of Americans. And to say life is difficult if you send your kids to a nice public school in a nice suburb, go to a non-Ivy school, live in 10-20% less of a house or live without a graduate degree, is quite simply crazy and just goes to prove all the stats about how happiness doesn't increase with income...

Presumably, Prof. Henderson engaged in the life he did in part so he could live in the bigger house and send his kids to a private school. Presumably, he was willing to take out those loans because he knew he could pay them back. I know times are tough for everyone but can people not at least empathize with someone's frustration that they went the extra mile for decades on end, built a life, achieving specific goals, only to have them taken away because politicians (no, voters) can't manage the government's pocket book? This is not to say that relief for the hardest hit shouldn't happen but when the story becomes about ignoring the wealthy's goals and work as if they're just wallets to take from, as if they aren't people, is a childish thought process.

Which Public Figure Is This Describing?

He is acutely conscious of his personal safety. He feels targeted. Security guards trail him on the street. He wears bulletproof vests at public events.

Answer here, quote from page three of the article. Interesting throughout.

Too Many Heads

It's hard to imagine an industry with a natural monopoly (when the costs of running a business decrease per unit sold to the point that you can sell to the good's whole market). Small businesses can out compete the big guys because the management costs increase so much as you expand. Mass coordination is very, very hard which is why large companies often seen incompetent and CEOs appear grossly overpaid.

Take a simple example of the coordination problem from hot water heaters. From Inertia Wins!:

“If you turn your water heater down to 120 degrees Fahrenheit; you will cut your water-heating costs by 6-10 percent,” says EPA. Doing so also uses less energy.

But 120 degrees is not hot enough to kill the Legionella pneumophila bacteria. Legionnaire’s disease causes both flu-like and pneumonia-like symptoms. The disease is most often caught by inhaling the spiral-shaped bacteria via water mist, such as in the shower or near a lake or stream. That’s why OSHA recommends setting your water heater hot enough to kill the bacterium – 140 degrees.

This is a small example of why I'm not convinced by the argument that taxes are payment "for what you use up."

Great Sentence on Development

Lant Pritchett at AidWatch:

The MDGs are correctly interpreted as what will be accomplished when there has been development–not vice versa.

Stranger in a Strange Hobby

Robin Hanson wonders why people don't try new things:

It seems we see far larger costs than the time for a trial. My guess: we value our current identity, integrated as it is into our job, hobbies, friends, etc. We fear that if we try new joys, we will like them, and jump to practicing them, which will change us. We fear that by jumping to juicy joys, we won’t be us anymore.

Relatedly, it's more of an issue of being a stranger. Trying a new thing means you're surrounded by a strange world, something that humans find very uncomfortable (which is why tourist traps are some of the most American parts of a foreign country). Having someone familiar with us, especially if they are close to us and share the strangeness, blurs that outsider feeling. For example, a couple of months ago I went to a baseball game with my girlfriend who shares my apprehension about sporting events. I would not have gone without her (and not just because we were attending an event hosted by her firm).

This runs counter to the common intuition, that going with an insider makes it easier because you have a "guide." But if the guide's more associated with the surroundings than with you, you're still just an outsider but now find it socially awkward to escape.

New Smoking Bans

If anyone you know dismisses the "slippery slope" argument as paranoia, point to smoking. First, it was no smoking in enclosed areas or places where people with poor health concentrate: e.g. airplanes and hospitals. Then came the public buildings. Then offices. Then the restaurants. Then the bars. Now John Stossel reports Mayor Bloomberg is taking on the outdoors. Yes, the outdoors.

To protect the public from the health effects of tobacco smoke, the new law will go a step further and not allow smoking in parks, beaches, marinas, boardwalks and pedestrian plazas.

That this measure has 65% approval underlines that smokers have become New York's second class citizens.

Cause and Effect

This graph from small business surveys (btyb the National Federation of Independent Businesses) has been going around the blogosphere. Matthew Yglesias and Paul Krugman comment.

Take a close look. See what I see?

The graph is nonsense.

First, the obvious: what exactly is the difference between "poor sales" and "competition from large business?" Isn't the latter just a subset of the former? I have a hard time believing there's a business owner out there saying "Well, I've encountered a lot of competition lately, which is a problem, but my sales haven't gone down." That's why competition's a problem for small businesses: they reduce their sales.

Second, really all problems are sales problems. Any expense that seems too large can be fixed with more sales. No one cares about a high cost of insurance if you're making money left and right nor more than I would care about the savings from generic brands if I made six figures a year.

What the survey really measures is what disappointing economic news is popular. In the late 1990s, during the boom, good labor was hard to come by so labor quality was a concern. During the 80s to the mid 90s, anti-government rhetoric was at its peak so the culprit was regulations. Health care costs dominated the discussions during the 2000s. Now, all the talk is about how people aren't buying things so they focus on sales.

If a business is struggling, the owner will focus first on what's being talked about. There's nothing wrong with that as long as they check it against their own business (reasonable assumption). But the "sales" option pollutes the data. If taxes were lower, wouldn't the sales problem go away? If there were fewer requirements or cheaper insurance, wouldn't that increase your bottom line just like sales would? Essentially this survey asks:

How do you increase X?

X=A-B

1. Increase A
2. Decrease B

It's both!

Update: Russ Roberts and Arnold Kling weigh in.

Quote of the Month

For the month not just because of the words, but because of the unexpected source.

The American experiment was based on mutual respect, acceptance of differing religious beliefs and common decency. Burning anyone's sacred scripture is an affront to all of these.

The world needs more voices not fewer. More faith not less. It is not God that tells man to hate, kill or stifle thought. It is a fringe understanding of religion. God beckons us to seek His face. I refuse to believe that a loving Father would punish honest and bold questions. But I do believe there must surely be eternal consequences for those who hate or kill in his name.

Let us not fail to recognize that this week we witnessed Christian extremists behaving in ways made infamous by a monster fascist. The reactions by Muslim radicals only mirrored the minds of those in Iran who currently stone people to death for what they call the "sin of homosexuality."

The world has once again come to a point where it cowers at best and, at worst, appeases crazy and dangerous men of all philosophies of God and man. We must again link arms and unite despite our differences against evils that only wish to destroy or enslave no matter the god they hide behind. "The truth shall set you free" is more than a phrase -- it is a universal principle that cannot be changed by a bonfire or suicide vest.

History teaches us what happens to those who not only burn books, but also to those who do not respect freedom of speech -- especially when most find it vile and offensive

HT: Megan McArdle

Kling on Experts

Arnold Kling explains when to trust and when to dismiss experts:

I have faith in experts. Every time I go to the store, I am showing faith in the experts who design, manufacture, and ship products.

...Expertise becomes problematic when it is linked to power. First, it creates a problem for democratic governance. The elected officials who are accountable to voters lack the competence to make well-informed decisions. And, the experts to whom legislators cede authority are unelected. The citizens who are affected by the decisions of these experts have no input into their selection, evaluation, or removal.

A second problem with linking expertise to power is that it diminishes the diversity and competitive pressure faced by the experts.

Read the whole thing.

A Tale of Two Frances

Measuring GDP per hour worked, adjusting for purchasing power, France ranks very high in terms of productivity:

Country	GDP/hr
USA	38.00
Norway	36.24
France	35.74
Belgium	34.88
Luxembourg	34.11

This is surprising given their laws making it difficult to fire existing workers. But there's another way to look at the data. Suppose a firm is pretty good at estimating worker productivity which occur at low (L), medium (M), and high (H). But the firm is not perfect and sometimes one level off: L can be mistaken for M, H can be mistaken for M, M can be mistaken for L or H, etc. If you know that getting an L will lock you into that person, and since the Ls can make the Ms and Hs worse, you refuse to hire anyone that's an L or an M just be sure. Therefore, French companies are chuck full of Ms and Hs while the unemployed are all Ls and Ms. There may not be two Americas, but there just might be two Frances.

Someone Should Have Gone to My Last Micro Lecture

When I taught micro this summer, I ended the class on an optimistic note: a growing world population is not an inherent problem. In fact, it is often a boon as more people translates into more active minds at work. We might consume more resources, but we also have more people solving the increasingly scarce resource problem. "People are more than mouths and stomachs," I say. "They are also hands and heads."

A man named James Jay Lee took hostages at the Discovery Channel HQ in Maryland today, demanding that, among other things, the Discovery Channel have prime time programming where

Focus must be given on how people can live WITHOUT giving birth to more filthy human children since those new additions continue pollution and are pollution. A game show format contest would be in order. Perhaps also forums of leading scientists who understand and agree with the Malthus-Darwin science and the problem of human overpopulation. Do both. Do all until something WORKS and the natural world starts improving and human civilization building STOPS and is reversed! MAKE IT INTERESTING SO PEOPLE WATCH AND APPLY SOLUTIONS!!!!

It gets stranger from there.

I'm not sure what's stranger about this man. That he believes people are pollution or that he believes Discovery Channel programming will encourage Africans to stop having children (fertility rates in most other areas are quite low). I wonder how many people in Niger get cable?

The Government Reflex

Another case of libertarianism run amuck. Gourmet cupcakes only exist because of... zoning laws and (local) government planning! It's always hilarious when 'pro-market' folks see a type of consumer good they don't like, so let's blame it on government!

That's Jeremy Horpendahl's comment via Google Reader on this article. It's about those tiny stores--specifically cupcakes--which sell expensive gourmet treats and how they are really the engineering of government action.

Consider the cupcakes. Sure, there is clearly a market for gourmet cupcakes with high-end ingredients. But it’s probably not a viable storefront business in most locales. Except due to zoning and government planning, there are commercial districts with “excess” capacity. Simultaneously, governments strongly discourage home-based and informal businesses that promote trade outside designated “commercial” areas. Planners also want commerce concentrated in areas where customers are more likely to pay upscale prices — and thus higher sales taxes — which contributes to the appearance of economic growth.

Gourmet cupcakes are a city planner’s dream business. It’s an impulse purchase that fits into high-foot-traffic areas (no cars!) and provides the customer with the illusion of luxury. It also tends to bring attention from fad-conscious media outlets — there’s a cable television series devoted to a Washington, DC cupcake store — which also feed the illusion.

Its tortured logic. Planners want cut gourmet shops. They have the ability to make easy for some shops to open and hard for others. We have many gourmet shops. Ergo, they are they because of government.

I don't know if we have "many" of these shops or "too many" of them. I have not idea what that means. I know that once Tanya and I ducked into a gourmet cupcake one in Georgetown (not the one on the show). It's off the main street, a bit hard to find actually, and it was so crowded we could barely walk around. Yeah it was a weekend, but it was about as stuffed as a Starbucks on a Monday morning.

Is it so hard to believe that if people are willing to pay a premium for coffee (which is one of the easiest things you can make in your kitchen), they won't also pay a premium for hot dogs, ice cream, and cupcakes? That these aren't daily purchases only translates into fewer stores. A struggling Cold Stone Creamery is more likely the result of the recession, not the beginning of some sort of gourmet bubble.

I assume that, like restaurants, these stores have a high failure rate. That is hardly grounds to weave an elaborate story involving sugar, bureaucrats, and dreams of a centrally planned future. It's haphazard and sloppy. It's embarrassingly knee-jerk. It's intellectually lazy. It speaks to everything people hate about libertarians.

Sometimes a short comment says a lot more than a long article.

The Fake Helium Crisis

From MR:

Is it possible that the relative price of helium will rise in nearly unprecedented fashion? Robert Richardson voices his opinion:

[The US government should] Get out of the business and let the free market prevail. The consequence will be a rise in prices. Unfortunately party balloons will be $100 each rather than $3 but we'll have to live with that. We will have to live with those prices eventually anyway.

He notes:

There is no chemical means to make helium. The supplies we have on Earth come from radioactive alpha decay in rocks. Right now it's not commercially viable to recover helium from the air, so we have to rely on extracting it from rocks. But if we do run out altogether, we will have to recover helium from the air and it will cost 10,000 times what it does today.

Apparently the government has a giant store of helium which it built up in the 1920s for dirigible-related emergency reserves and now it's selling it off, flooding the market and depressing the price--that's the intervention Richardson is talking about. This is a problem, but not a long term problem: the goal it so sell it all off by 2015. When the reserves are gone, the price will rise. In fact I bet that people are buying helium now and storing it to sell later, when those reserves are gone. So I'm not terribly concerned about a helium crisis mostly because of a link I followed in the MR article:

On Earth, Helium is found mixed with natural gas, but few producers capture it.

In other words when the price rises, companies will start extracting it. I think we all (squeakily) breathe easy.

Obama Is a Secret...Oh Who Cares?

Matthew Yglesias suggests that an increasing share of Americans (18%, up from 11% in March 2009) believing Pres. Obama's a Muslim derives from poor economic conditions.

My best guess is that we can just chalk this up to the general dynamic of recession-induced suspicion and incumbent unpopularity.

Possibly. I have another, complementary, theory: no one cares.

When there's a lot going on in your life and you're stressed about losing your job or finding another one and the bills are piling up, you don't care what religion the President is. Spending time caring/screaming about irrelevant facts is a normal good for some: it rises as income rises. In the early days of the recession, when some thought it might be a small blip, people cared about this. They were willing to listen beyond the occasional yelp that he's a secret Muslim, sometimes onto more reasonable people that correctly point out he's Christian. But now they hear those screams, brought up again surely because of the midterms and because commentators know people aren't going to look into it as hard, and accept it. Because double-checking is a pain, thinking hurts, and they have better things to do.

Collaboration Brings Progress on Alzheimer’s

My research involves how patents make it difficult to share their knowledge which makes it harder to create derivative inventions. Suppose everyone controlled a single puzzle piece. Putting together that puzzle would involve negotiations for each piece and even if you were to get 90% of what you need to assemble it, the puzzle won't be complete and it'll show. Knowing that danger, you don't bother trying to assemble the pieces.

Patents are puzzle pieces and gathered together the right ones can make something truly amazing. But getting them together is hard, especially in the biotech world where so many crucial pieces are spread among so many people/firms. So I was thrilled when I read this in the NYT:

The key to the Alzheimer’s project was an agreement as ambitious as its goal: not just to raise money, not just to do research on a vast scale, but also to share all the data, making every single finding public immediately, available to anyone with a computer anywhere in the world.

No one would own the data. No one could submit patent applications, though private companies would ultimately profit from any drugs or imaging tests developed as a result of the effort.

Now, the effort is bearing fruit with a wealth of recent scientific papers on the early diagnosis of Alzheimer’s using methods like PET scans and tests of spinal fluid. More than 100 studies are under way to test drugs that might slow or stop the disease.

While patent pools--firms making an agreement to share each others' patents--is not new, the notion of not allowing people to patent the work in the first place is. One of the unintended consequences of patent pools is that firms patent things just so they can join the pool. This method avoids that problem, though the fact that if focuses on basic research is surely an important part of its to-date success.

My Students On Opportunity Costs II

This was on the final I gave my students last week:

Suppose a friend offers to take you bowling for your birthday, an option you value at $100. You can also spend $50 for a bus ticket so you can spend your birthday with your significant other, an option you value at $200. You cannot do both options. What is your opportunity cost of going bowling?
a. $100
b. $150
c. $200
d. $350
e. None of the above

A similar question was put before professional economists not too long ago (the scenario was different and there was no "None of the above" option). Astonishingly 78% of those economists got it wrong which is worse than if they guessed randomly (there, 75% would get it wrong).

For my class, I am proud to say, 71% got this question correct. Part of this is surely because they read about the original question in The Economic Naturalist which they read. However, that was at the beginning of the summer semester and this was on the final. Still, it likely had a big impact because I did the same trick last year for my international economic policy class. Only a quarter got it correct then (I repeated the question for the final with some tweaks to make it clearer; 52% still got it wrong). They did not have The Economic Naturalist but they did have the same question twice in a row.

Other theories:

This year I used the Modern Principles textbook (blog here, which I help write). I think having a textbook, especially this one, helped. It gave students another resource to consult and went into more detail than I could in class.

I think this is also the year when I started systematically referring to opportunity cost as the "net benefit of the next best option," not "value of the next best option." Most resources (including Modern Principles) use "value" which I think confuses students into thinking it's about how much I value the option, not how much I gain. In other words, opportunity cost includes the cost of the forgone option, which is why the answer is (b): $200-$50=$150.

In Defense of Recalculation and Capitalism

Arnold Kling's gotten some heat that the Recalculation Story suggests, as Matthew Yglesias puts it, "radical underlying flaws in the capitalist economic model that call not for small-bore government intervention but for wholesale rethinking of the way the economy functions." For those of you just joining us, the Recalculation Story attempts to explain booms and busts through fundamental changes in the landscape of the economy and the difficulties in adapting to those changes. The wrong people go to the wrong jobs as firms try to adapt. Productivity struggles until firms figure out how this brave new world functions.

Nothing in the story suggests the capitalist system is fundamentally flawed and should be scrapped. When there's massive technological change, growth is hard. This should not be surprising because growth requires time to invest in both skills and capital. It requires planning and when you can't plan, you can't grow. But once you figure out the landscape, you're much better off for it.

Think of high schoolers dating. You don't really know what you want in a partner when you're young but dating's fun and you get pretty good at it. You might happily date someone regularly for years. But then you go to college and everything changes: you're exposed to new people, new ideas, things you never considered before, couldn't consider before, because you lived your life in a world in which you had no idea how small it was. Try to return to your old ways and you'll be miserable. So you break up and spend a lot of time dating new people, trying to determine what you want in this much larger world. That's recalculation.

Technology expands our world. It makes things we thought impossible, possible. This is hard to adapt to: clearly seen in how newspapers are struggling to evolve with the Internet. And yes, the system is not perfect, but few economists will say capitalism is perfect. But trying to fix the problems derived from mere mortals by mere mortals is doomed to make a mess of things. In some countries, we still have that in dating: arranged marriages. And young people hate it.

The Shape of Things (Well, Just Taxes)

The Laffer curve is an inverted U-shaped curve which dominates the economic and policy discussions of taxes. It illustrates the relationship between tax rates (x-axis) and tax revenue (y-axis): as tax rates increase, the government gets more money until rates are so high, people leave the formal sector altogether and stop paying taxes. At both 0% and 100%, government gets no revenue.

The discussion about increasing or lowering taxes often reverts to where we are on the Laffer curve. If we're to the left of the peak, raising taxes raises revenue while on the right of the peak, lowering taxes lower revenue. Brad DeLong recently posted this graph of OECD countries' tax rates and revenue, claiming the peak is pretty far to the right.

What's bizarre about these discussion is that there's so much incentive to operate the peak. Raising taxes on everyone by just a bit (or raising taxes on unpopular people by a bit more) gives lawmakers a huge chunk of change to hand out to constituents. From the politician's perspective costs are low and benefits are high. In lowering taxes even more so: you get to lower taxes, raise revenue, and tell the truth! No politician would give up that option. So it seems pretty obvious to me that most countries operate at more or less the peak of the curve.

So why does DeLong have this graph with a clear upward sloping relationship? Because each country has a different peak. Operating in the extralegal sector means you can't operate in the legal sector. Therefore, the opportunity cost of going extralegal is higher in some countries than in others based on the quality of the legal sector. This is why developing countries, with an awful legal sector, have to depend on inflation to make ends meet. It's also why Sweden keeps a high tax rate: its government functions very well (for various demographic and cultural reasons). If you want to make a claim in favor or against taxes efficiency is much firmer ground.

Krugman on Spending

Paul Krugman argued that the Obama administration actually hasn't spent that much. When you adjust for potential GDP (as defined by the CBO), government consumption and investment is about 19% of GDP. Throw in the transfer payments--Medicare, Medicaid, Social Security, unemployment insurance--and we get a leap to almost 34% of GDP.

All interesting stuff. But then it gets weird.

In short, the giant increases in government spending we keep hearing about are a myth

Wait, what? Let's look at that chart again.

That looks like a giant increase in spending to me! Yes, Krugman's addressing the concerns about Obama going on a spending binge with policy but really the increases are coming from automatic stabilizers. But since Obama approved extending unemployment insurance, that automatic stabilizer Krugman credits for the spike, then those arguments about a spending binge stay just were you left them, though admittedly in a different form.

It seems strange to judge if someone's spending too much by basing it on GDP: you can still overpay for something if you're rich, especially when the opportunity cost is high. And since government tends to be less efficient than non governments, you can almost always bet that opportunity cost is high. A government spending 30% of a small GDP country is less damaging than a government spending 10% of a country with 100 times the GDP (ceteris paribus). The bigger country has more potential: more schools, technology, fashion, whatever that is lost. That's because the "slimmer" country is sacrificing more wealth than the bureaucratic country, even if (and possibly because) it is producing more wealth, too.

Free Riders?

I hope my micro students can answer the following:

True or False

Suppose everyone in this class got the same grade which is based on what percent of people got an answer correct. This system would lead to many free riders.

Naturalist Questions

Every time I teach microeconomics, I assign Robert Frank's The Economic Naturalist and have students come up with their own question and answer it. Most of their have their own questions ready but for those that want something different, here're some questions I've found myself asking.

Why does the Trader Joe's in Foggy Bottom (and other stores like Best Buy) use a queue system but the one in Fairfax (as well as stores like Safeway) does not?

Why do AC units and fans have the "high" option next to the "off" option which then decreases (OFF, HIGH, MED, LOW) while stoves use a gradual increase (OFF, LOW, MED, HIGH)?

Why do restaurants give away free bread, which crowds out room for a paying dessert?

Why does popcorn costs so much at the movies (and no, it's not because they have a monopoly on popcorn)?

Why do different movies cost the same amount no matter how crappy or good they are?

Oh The Things You Can Filibust!

Matthew Yglesias claims dropping the filibuster is just a matter of when, not if.

The only reason filibustering has been allowed for as long as it has has been because of strong norms against its over-use. But those norms have been eroding for decades. The idea that Senate majorities are going to allow this trend to continue indefinitely is silly. The way this movie goes is that the downward spiral of obstruction continues until some majority gets sick of it and changes the rules.

Do a little backward induction and you'll find that doesn't hold. Knowing too much abuse will lead to the filibuster going away completely and permanently so senators have a strong incentive to push far and no farther. There's a cautious exploratory process going on by Republicans, but extrapolating mindlessly from the current trend isn't near enough to claim this strategy is on the way out.

And let's not forget retaliation: dropping the filibuster means you can't use it later when you might need it. And senators are reelected more often: those safe seats know a vote to drop the filibuster now is a vote to deny them an important political tool later. If we added some term limits that would help drop the filibuster, but it's just too versatile to expect to witness its passing any time in the foreseeable future.

James Surowiecki Forgets How To Do Marginal Analysis

His interesting piece about regime uncertainty and its role in the sluggish recovery leaves me confused.

Those who think that they are say that “uncertainty surrounding regulations and taxes,” ... is making business hold back. But uncertainty is a fact of business life,

So if there's already some uncertainty in an activity, then adding uncertainty shouldn't change your behavior? Suppose flipping a coin costs you $1 and you get $3 if it turns up heads. If the rules change to flipping two coins for $1 and you get $3 when they both come up heads this is clearly a smaller gain (in fact, your expected gains in the first are positive while in the second, they are negative). But not to Surowiecki.

and the impact of new regulations on most companies has been overhyped: unless you’re a financial-services or health-care company, Obama’s initiatives aren’t remaking your business.

But they are! Markets are linked and those two altered sectors are big and critical parts of the economy. It's not as if there was heavy reform in the knitting sector. If the financial sector is a big part of the cause of the recession (and I think it was) then uncertainty in the financial sector is likely a big part of why the recovery is slow. This doesn't even touch on people's expectations about future regulation. If the administration is willing to turn not one but two sectors of the economy upside down, then where is the line? The BP disaster already brings on calls for re-regulation in the energy sector.

If businesses aren’t hiring or investing, in other words, it’s because they don’t need to: they have enough workers and factories to meet the demand for their products. And there are few signs that this is going to change any time soon: consumer demand remains weak, economic indicators—inflation rates, consumer confidence, the stock market, bond rates—aren’t forecasting a quick return to boom times, and, just last week, the Fed chairman, Ben Bernanke, told Congress that the state of the U.S. economy was “unusually uncertain.” So it’s no wonder that companies are feeling cautious.

No doubt uncertainty about future economic growth retards current economic growth. But uncertainty about the administration compounds that uncertainty about the economy. Regulation has the potential to transform good ideas into poor ones so even if a company's willing to try out an investment despite poor confidence, regime uncertainty can cause them to hold back. If heads comes up on only one coin, the deal will still sink.

Yes, recovery is not a simple matter of "making the suits feel better" but on the margin, it does make things worse. When it comes to uncertainty President Obama is no FDR but the demand curve still slopes down.

States of Unhappiness

Here's a video showing continental US states' mood through the day as inferred by Twitter (their size adjusted for population, measured by tweets). (The video shows the same 24 hour cycle twice.)

If you're like me, you immediate zeroed in on your state and followed it throughout the days. And if you're really like me, you'd follow Iowa and you'll notice Iowa's always sad. Really sad. So I ran it a couple of more times to find out which other states share Iowa's angst. Here's a list (some might be wrong because the states' altered size make some hard to identify).

Iowa
North Dakota
South Dakota
Montana
New Mexico
Nebraska
Kansas
West Virgina
Mississippi

My first impression is that these are all low population states; Iowa's the highest at number 30. The basic rational is that people like to live near other people. It creates better job opportunities, more interesting things to do, a larger pool of potential friends, etc. And while there's several states which are unhappy nearly all the time many other states aren't (like Maine, which is #41 in population). But a much better of the "people like clumps" theory is population density (unhappy states italicized).

State	Density Rank
West Virginia	29
Vermont	30
Minnesota	31
Mississippi	32
Arizona	33
Arkansas	34
Iowa	35
Oklahoma	36
Colorado	37
Maine	38
Oregon	39
Kansas	40
Utah	41
Nevada	42
Nebraska	43
Idaho	44
New Mexico	45
South Dakota	46
North Dakota	47
Montana	48
Wyoming	49

And many of these states were close to being unhappy all the time but had some moments of tepid joy (i.e. Arkansas and Idaho). Others have a skewed density: Nevada has a handful of major cities and the rest is unpopulated desert. Other factors come into this of course such as climate and state size (smaller states are easier to leave) but I have no doubt the draw of the city plays a major role.

HT: Brian Hollar

The Perfect Is the Enemy of the Good

Mark Thoma thinks that geoengineering is too risky as a solution to global warming. Quoting an article in Scientific America he writes,

Geophysicist Kate Ricke of Carnegie Mellon University and her colleagues show that one of the more feasible geoengineering methods—injecting reflective particles into the atmosphere to mimic the world-cooling effects of a volcanic eruption—will have effects that vary from place to place. So, for example, India might be rendered too cold (and wet) by a level of particle injection that's just right for its neighbor China while setting the levels to India's liking would toast the Middle Kingdom.

What's worse, the computer models that show that such injections might work in the short term also show that they will change global weather patterns by making part of the atmosphere more stable—and therefore less likely to promote storms. That means less rainfall to go around—and these side effects become worse with time. ...

He goes on to conclude

Engineers used to show up in comments and tell me that, unlike economists, they know how to build systems in ways that prevent the chance of catastrophic collapse like we had in the financial system. ...Even if the models said this will work without any worrisome side effects or geographic differences, the stakes are too high to use that result as an excuse to delay action on the global warming problem. We need to start solving this problem now...

Considering conventional wisdom's solution is ridiculously expensive and politically infeasible, avoiding a viable and inexpensive strategy even if they models say they are fine is embarrassingly sloppy. I'll certainly agree that the climate change models are better than the economists by a long shot (climatologists don't have to worry about the cloud's expectations or rainfall's irrational exuberance) but let's be careful about putting too much faith in them. And even if the models are accurate and this strategy will have adverse side effects (lower rainfall being a big one) that doesn't mean it's not the best option. Cutting global warming the traditional way generally runs in the tens to hundreds of billions of dollars a year. Volcano simulation (from what I read in Superfreakonomics tallies in the tens of millions of dollars a year. That's a lot of extra money to subsidize irrigation.

But what really irks me is that this geoengineering plan could be set up and executed in a few years and we would notice the effects, both positive and negative, in less than a year. Then, if the models were correct, we could just shut it off and, in actually trying something, gain so much insight about fixing the problem that the quality of our discussion of climate change would increase ten fold. And the environmental and economic damage would be minimumal, not to mention that global warming would be (slightly) curtailed.

Poor in Hong Kong

Hong Kong will soon be introducing it's first minimum wage law. Exactly what that minimum will be set to is under debate: anywhere from HK$23 to HK$33 an hour ($3 to $4, respectively). The Economist reports the average wage for a fast-food worker is about HK$22; they also report that if the minimum goes to HK$24, about 30,000 people will lose their job and to HK$32, about 170,000 will be fired; these are according to a study cited by Miriam Lau, a Liberal member of the legislature. They are not in favor of the law (though they are willing to do HK$24), so take these numbers with a grain of salt.

The party also claims that 138,200 work below the rate of HK$24 and 400,000 work below HK$33. I'm interested in what the elasticity of the demand for labor is (or how responsive employers are to wage changes). Since HK$33 is pretty close to HK$32, I'll treat those as the time. This seems like a good time to highlight that these are very rough calculations: don't take them to the bank.

Assume the average for fast-food is the same for all low-wage workers (as in, for those 138,200 working below HK$24). That means we are looking at an 8.7% increase. Since fast-food probably pays a little better than many low wage jobs, let's round that up to a 9% increase (HK$2/HK$23, where 23 is the average between HK$22 and HK$24). We should also see a 24% fall in low wage employment (-30,000/123,200, with 123,200 being the average of 108,200 and 138,200). This gives us an elastic demand curve for labor: -24/9 = -2.67, the absolute value of which is way more than one.

Let's see what happens when they increase to HK$32. That's a 37% increase (HK$10/HK$27). Employment for those in that group falls by 54% (-170,000/315,000). So -54/37 = -1.46, the aboslute value is still more than one and thus still elastic.

So what does this mean for the low wage workers of Hong Kong? It means that, on average, the poor will be getting paid less money. (I bolded that for those that wanted to skip the math.) Yes some will be paid more but others will be fired and the increase in payment is not nearly as much as the decrease in employment. Of course all of this is from the group that's ideologically opposed to the minimum wage law and I doubt the degree of effect will be as strong as it is here, but the direction (i.e. it's an elastic demand curve) is probably spot on.

Why? If you went to my class, you'd know. There are increasingly more substitutes for low-wage workers because it's generally easy to replace with a machine. (This is also why these results are believable: elasticity went down as the wage hike went up because higher wage workers are harder to replace.) We see this a lot in the US: fast food workers work a lot with machines and as robotics improve, labor gets more elastic. In economicspeak, machines are a substitute.

Good Sentence

From Thomas Friedman today:

In the age of Google, when everything you say is forever searchable, the future belongs to those who leave no footprints.

[Insert Witticism Here]

Gene Weingarten at the Washington Post mourns the death of clever headlines.

The only really creative opportunity copy editors had was writing headlines, and they took it seriously. This gave the American press some brilliant and memorable moments...[but now] on the Web, headlines aren't designed to catch readers' eyes. They are designed for "search engine optimization," meaning that readers who are looking for information about something will find the story, giving the newspaper a coveted "eyeball."

Here's a great time to do a little cost-benefit analysis. The cost of more online news sources is that consumers lose cute phrases as news outlets compete for attention. Meanwhile copy editors don't get to use their degree in English literature to write a few dozen of those phrases everyday. The benefit is that millions of people have an infinitely easier time find the information they want from sources all over the world. And if they still want a clever phrase with a picture, they can search for that, too. Do we even have to run the numbers?

I got a headline for you: Journalist Once Again Screws Up Basic Economics. Oh wait, that's not news.

Very Good Sentence

Perhaps the behavioral economists can come up for a solution for our apparently excessive focus on behavioral economics?

That's from Ryan Hahn at the PSD blog at the World Bank.

Where I Try to Disagree with Someone I Agree With

If you're interested in understanding what's going on, confirmation bias is a scary thing. I once heard that as you age you just become an extreme version on yourself and I bet confirmation bias plays a big role in that (on the ideology dimension at least). To combat confirmation bias, I now try to challenge Arnold Kling's argument about job creation.

He basically says that job creation in a modern economy comes from stability. Modern middle class jobs are weird and tend to be things that firms want to buy ("Logistics expert. Database administrator. Corporate event planner. Training co-ordinator. Media relations person.") and since they require a lot of training (human capital), firms aren't going to hire unless there's steady waters. Just it's not just any firm which hires (most established firms already have these individuals in their payroll or Rolodex); it's entrepreneurs. This is why he claims it's not aggregate demand nor firms that create jobs. Fiscal stimulus doesn't help: it's a one time boost to existing firms when wasn't needed are steady waters and start ups with good ideas.

Let's set aside Ricardian equivalence (that if the government spends a lot of money, people will save more because they know their taxes will have to increase down the line). We're talking a one-time boost in spending which will be paid back over 20-30 years. On net, I think we can say if people get more money (even if it's a one-time thing), they will, on average, spend more. Yes, many will use it to pay back debt, but all that means is they will get out of debt sooner, freeing up income for spending. Let's also remember that banks who lent money don't burn the cash when they collect it. They either spend it, or save it (which is then lent out, which is then spent). Like from the consumer's side, it's either spent now, or it results in more spending later.

OK. Now consider the banks and firms out there with debt-derived assets (ie people owe them money and for the record, I don't feel like looking up these terms so I'm just making up some that sound plausible). You are in unsteady waters: will you get your money back or will you get a lot of defaults? Now suppose the government gives a bunch of people money and some of that comes to you to pay off debt. Success! You are more stable than you were before. Even in a one-time stimulus scenario, you added stability.

What about the people who bought durables? (I think buying durables, or items people use a lot once bought, like a TV or frig, as a common item bought if one time aggregate demand increases; I know if the government gave me a check for, say, $500 and I don't save it, I'd buy a durable.) That's an increase in aggregate demand, sure, but that's not stable. In fact, that's the opposite. You are in a business and you see more people wanting TVs. How much of that is recovery and how much of it is the one time stimulus? That's an important question because if it's the former, you should expand. And (enter the entrepreneur) if you're trying to start a business, now's a good time. But if it's the latter, you're just setting yourself up for failure.

Hmm. So more stability in one area and more uncertainty (and thus less stability) in another. And I'm ignoring the delivery system for the stimulus, too (just assuming everyone got checks in the mail).

I do not know how one can possibly determine the effect of the stimulus on jobs. The jobs that the CEA and the CBO say are created are nothing but figments of some model's imagination. Counting workers hired by some particular subset of firms is a mindless exercise.

On that, I definitely agree.

Are Representations Ruining Advancement?

What I like about reading Matthew Yglesias is that of any post which isn't about sports, politics, or Obama cheer-leading (thankfully there are few of all three), he's sometimes right and sometimes wrong. Sorting out what's what makes me a better and more honest economist. For example, today he replied to a couple of lawmakers who called the American Reinvestment and Recovery Act (ARRA) signs at construction sites wasteful spending.

For one thing, the quantity of funds involved here is tiny so it’s not clear why anyone’s even bothering.

For the signs, the linked report is $5 million. Is $5 million tiny? It depends on the context. If you're trying to reduce the deficit then he's right: it's not worth the time and effort. But if we're talking about the opportunity cost, well $5 million can do a lot. I'm a skeptic of the benefits of the stimulus plan so I'd bet the opportunity cost is high. Me, I vote for the laser cannon.

For another thing, stimulus works in part through expectations, so informing people about its existence is important.

I'll grant you that. If Keynesian economics works, and it well might, expectations certainly plays a role. And not just expectations but it's close relative, verification.

And last, government purchases of paint and metal have a legitimate stimulative impact.

OK this I don't buy. You just said it was tiny and yes, here you compare the size of the expense with the size of the economy. It's very tiny! Besides, this seems like a "dig a hole and fill it up again" story. If the activity of making the signs is good in of itself, why not make them 50 feet high with a flashing LED display? More people will know about it, too.

I saw a lot of these signs when I drove from DC to Iowa this summer. For me, they mostly said "if Keynesian economics wasn't so tempting in a crisis, you wouldn't have to slow down right now."

Rational Crime

I used to be surprised whenever news came out about a wealthy person committing insider trading or a priestly sex scandal or a congressional scam. These individuals are already at the top of their game with seemingly great jobs. Why risk it, why risk jail? The standard explanation is arrogance or greed. These people think they can do whatever they want and they get stupid.

That's a pretty sloppy explanation and I've come to the conclusion that the real reason is far darker: it actually happens all the time and you rarely get caught (or are rarely prosecuted). Indeed, Congress spends an average of $1 million a year for settlements of congressional employees. That's all taxpayer money, by the way.

Tax Rates in Economic Development

Bruce Bartlett comments on the 2010 release of the African Economic Outlook which notes that African developing countries have low tax rates compared to developed countries when they were at a similar level of development.

[A]lmost every country in Africa has a low tax/GDP ratio. If low taxes were the primary key to growth then Africa would be far richer than it is.

I'll agree with Matthew Yglesias: this highlights the importance of a well-functioning government. It doesn't mean that low taxes don't help development. Recent work suggests that low taxes are a symptom of a bigger problem: a poorly-functioning formal sector. If taxes are at even a moderate level, then people in the formal sector will leave because the formal sector doesn't add much to their bottom line, anyway. Governments have to keep them low to get any tax revenue at all and they make up that difference is massive amounts of inflation. Show me a low inflation, low tax country and we'll talk if the role of low taxes in development is overrated.

Breaking Bozeman

Wednesday my micro class covered Bastiat's broken window fallacy, one of economics' most important ideas because it's about opportunity cost. The thumbnail version is that disaster is not good for the economy even if it puts a lot of people to work: resources spent replacing what you lost are resources not spent on adding to what you have. It's an idea that's pretty obvious once you point it but as the paper in Bozeman, MT (who recently suffered a hailstorm) illustrates, that pointing out part is really crucial.

HT Frank Stephenson.

Very Good Sentences

I say that lawyers are like nuclear missiles. We need them to keep us safe. But we avoid using missiles because we understand the collateral damage they do.

From John Stossel.

Black Swans and Evolution

Nassim Taleb argues that financial reform should take a page from nature and add redundancy to protect against "black swans," his name for unexpected, very rare events.

Let me summarise my ideas of how Mother Nature deals with the Black Swan. First, she likes redundancies. Look at the human body. We have two eyes, two lungs, two kidneys, even two brains (with the possible exception of company executives) - and each has more capacity than is needed ordinarily. So redundan cy equals insurance, and the apparent inefficiencies are associated with the costs of maintain ing these spare parts and the energy needed to keep them around in spite of their idleness.

Let's be careful. Some of those extra parts are not redundant; the "two brains" are different parts of the same brain and one is not a perfect substitute for the other. Our "extra eye" is not idle; two eyes allow depth perception and losing one is more than losing some insurance (though it's far better than losing both).

But it's more than that: a black swan is a very rare event. If losing an eye or a kidney is a black swan (and I think it is), then it is unlikely to happen before someone reaches maturity or even in their lifetime. And redundancy's costly. Energy devoted to a second, idle, organ is energy not devoted to keeping the body alive. Exactly how much this is, I admit, I don't know. But anything more than one redundant organ is very rare across across all animal species despite that all organisms exist in very different environments and places in the food chain.

It's more likely that these pairs are evolutionary hold-overs from a common ancestor who faced either a black swan kind of problem but the extra organ was very cheap to grow and maintain (unlikely as "black swan" again implies there's time, on average, to reproduce and pass on your genes) or the problem was more common than a black swan (though is still not "common") and the organ was less cheap to grow and maintain.

Despite it all I agree that some redundancy in the financial market is a good thing and to be sure, we already have some of that (competition between banks, credit unions, etc) and much of what he suggests I support. But a riskless world is not optimal and I wouldn't go so far as to ban complex financial products.

"Regulation lags innovation."

That's from the always insightful Richard Posner. Here's more:

Everything conspires against a government’s being able to protect its people against disasters, whether natural or man-made. A factor that retards prevention of man-made disasters is the rapid and relentless advance of technology. Regulation lags innovation. The Federal Reserve, Treasury Department, and SEC were no more able to keep abreast of advances in financial engineering than MMS was to keep abreast of advances in drilling for oil at very great depths under water. Slack regulation encourages private companies to adopt a high-risk business model.

Two final problems illuminate the nation’s vulnerability to disasters. First, it is very hard for anyone to get credit for preventing a low-probability disaster. Because such a disaster was unlikely to occur, the benefits of taking action beforehand could not be assessed unless the preventive action took the form of a dramatic last-minute save.

The second problem is that there are so many risks of disaster that they can't all be addressed without bankrupting the world many times over. In fact, they can’t even be anticipated.

Happy Birthday Bastiat!

Here's some of his best works. Here's another great work: Economic Sophisms. Here's a bio.

Inequality and Debt

Krugman recently posted these slides on economic inequality and if it is related to economic disasters. He measures inequality by how much of the total wealth the top 1% own (which isn't bad though I'd prefer a Herfindahl index, which is commonly used to measure the concentration of firms in an industry, or the Gini coefficient, which is used to measure income inequality) and notes how it follows household debt (which of course isn't the same thing as a recession but I think he's using debt as a proxy for financial instability...whatever). I can only assume Krugman is using the data from slide 9 and adjusting the debt by housing assets. People borrowing in step with the value of their house isn't news.

Admittedly, there appears to be a connection and Krugman proposes three explanations.

1. Coincidence
2. Common causation –e.g., neoliberal ideology
3. Actual causation: inequality somehow creates macroeconomic vulnerability

He admits he doesn't have an explanation for option three.

But between common causation and actual causation he misses one: reverse causation. People borrow because they spend it (you don't just borrow for fun, after all; you have to pay interest on that money). With lots of people spending more money, much of it flows into the hands of the wealthy in the form of dividend payments and large bonuses for successful quarterly earnings statements. Yes, some of it will go to workers in the form of higher wages and new hires, but from what I understand about corporate structure, the sum of the lower 99% will be less than the sum of the upper 1% so the very richest get wealthier compared to everyone else.

You could try to tell the story the other way: greater inequality encourages people to borrow so they can "keep up with the Jones's" but people tend to compare themselves with their neighbors, not their bosses. The debt tends to go with the bottom 99% but the graph shows the top 1% with a larger share. We don't really know what's happening to the various income levels of everyone else, again highlighting the use of following an index that includes everyone: not just the very top.