Toil and Trouble

Robert Frank's submission for the Post's "2011 in charts" is number 12 and it's a bit strange. It's the toil index: Franks' term for "the effort required to rent a house served by a school of average quality." It shows a steady increase since the 1950s but it leaves out some key variables over the past 60 years. Homes have gotten larger, people per households have fallen, quality of standard household appliances have increased, etc. Some of these things are hard to measure, but median square feet is easy to find.

Below is the correction, with me eyeballing the original values from Frank's chart. My data only goes back to 1973 so I used those numbers for 1970 and excluded 1950 and 1960.



The original toil index is the green line (left axis) and the adjusted is the red line (right axis). You can think of the adjusted line as "the effort required to rent a square foot of space served by a school of average quality." All of a sudden, those numbers are not so severe. The 2000-2005 jump is still quite noteworthy, but general flattening of the curve cannot be denied (and this was just one correction).

The Capitalist Philosophy of the Muppets

The Muppets is about a dilapidated LA Muppet theater, an business tycoon looking to tear it down to drill for oil, and a familiar cast of characters trying to raise the money to save it. Last week Eric Bolling at Fox News claimed the movie is "brainwashing kids against capitalism" because the villain was a business man.

But The Muppets is the most capitalist movies this year. When they found out that their theater was in danger of being torn down they didn't lobby the California Historical Society to outlaw demolition. They didn't threaten to contact the EPA about the (admittedly real) problem of putting an oil well in downtown LA. They didn't head to Washington to seek a subsidy or add to construction regulations. They didn't even engage in California's infamous referendum system. In fact, none of these ideas ever occurred to them.

No, they did what every good capitalist does when someone tries to buy something they want: they outbid him.

Of Causation

MJ Perry posts this graph on his blog yesterday.



Perry quotes Scott Grannis who argues this chart lends support that Keynesian ideas are wrong. Expansion of the government leads to more unemployment and this is because the government is inefficient. It mostly takes money from one group and gives it to others.

But precisely because that's true, we should be suspcious of that interpretation based on this graph. Causation could easily run the other way. When unemployment increases, that puts more pressure on unemployment insurance, Medicaid, and other programs. It also increases the demand for fiscal stimulus.

Causation could also be confounding as well: something that's causing both higher unemployment AND a rise in government spending as a percent of GDP. This seems very likely as the "as percent of GDP" means the value could rise even if all that happens is GDP falls. Which is exactly what you'd expect to see if people are losing their jobs.

As sympathetic as I am to this anti-Keynesian take, this graph doesn't actually tell us anything useful.

Things ARE Getting Better

I end each principles of microeconomics class talking about the future. Historically, innovation does well to solve problems associated with an increasing population and society ends up better off than when it was when fewer people were around.

One of my students was very skeptical, especially about our ability to cure cancer. I hope she finds this article uplifting. We may be closer than you think to a cure.

How Food Stamps Can Send You To Hawaii

PolitiFact rated Gingrich's claim that food stamps can send people to Hawaii as "Pants on Fire," it was so wrong. Food stamps can only be used for food.

Yes, that's true, but that doesn't mean getting food stamps can't result in you being able to afford going to Hawaii. (I doubt that's what Gingrich meant, but it is true nonetheless). Food stamps are basically gift certificates. If I give you a $1,000 gift certificate to Wal-Mart, it will assuredly result in you buying more goods that don't come from Wal-Mart. You will substitute money you would spend at America's biggest retailer and instead spend it on other things. If you get food stamps, the effect is the same. So yes, food stamps can send you to Hawaii, though not directly.

Prices Solve Problems

As I read Naomi Klein's Nation article about climate change, I am once again reminded how little she knows about economics. So little, it is almost not worth pointing why she's wrong. Almost.

The fact that the earth’s atmosphere cannot safely absorb the amount of carbon we are pumping into it is a symptom of a much larger crisis, one born of the central fiction on which our economic model is based: that nature is limitless, that we will always be able to find more of what we need, and that if something runs out it can be seamlessly replaced by another resource that we can endlessly extract.

This is both completely wrong--scarce resources is what defines economics--and deceptively correct--we do assume we will adapt to greater scarcity. We assume this because when prices are allowed to function, we adapt. And we're adapting now. Let prices work, and we'll adapt more quickly.

We do not need to "shred" economic thought. We just need to make pollution more expensive. Right now, it's too cheap. Skeptics say it's not that much cheaper (if at all) than it should be. Believers say it's way too cheap. But regardless where you land, the answer is the same: adjust the price and you'll get the answer you want.

Klein makes suggestions--more public transportation, more planning, fewer coal-burning power plants, produce less pollution, make less stuff--which will all occur if we get the price of pollution right. (Of course planning will occur regardless if prices are right or not, regardless if it centralized or decentralized...the question is planning for what.)

Look: I don't know much about the science of climate change but I know that there's a consensus among people who know more than I that we're a big problem for the environment. The know more than I do: I respect that a lot.

So please respect this consensus from economists: The right prices solve problems.

A Very Interesting Sentence

Greece and the United States are two of the very few countries in the world in which defense expenditures exceed 4 percent of GDP.

From Posner.

Capitalist Environmentalism

People often think of companies as inherently anti-environment. This seems a bit strange, since companies would love to not pollute if it was the cheapest thing to do. After all, pollution means that you bought something and then threw it away. Cutting costs ties at least as much to environmentalism, not against it.

Consider server farms, which are black holes of energy consumption. About 1% of the world's energy goes to powering the computers and cooling them down. And half of that one percent goes to cooling. So companies like Facebook are moving their server farms to the Arctic Circle, where they can use the natural cool air to cut costs. Facebook is now building one in Lulea, Sweden.

Lulea's dry, frigid weather "definitely is a big part" of the company's decision to build there, Facebook spokesman Michael Kirkland said. Using outside air to cool servers is "absolutely beneficial not just from an environmental perspective, but also from a cost perspective."

Analysts agree. There are "overwhelming financial advantages" to building in the far north, according to Rakesh Kumar, an analyst with Gartner.

Utilizing free outside air can result in "tens of millions, if not hundreds of millions [of dollars], of savings per year" for each site, Kumar said.

Full story here.

HT: Tyler Cowen

On the Average Person's Economic Intelligence

Matt Yglesias posted these survey results on how best to create jobs.



This is why I put so little faith in the economic knowledge of the average voter. The third most popular idea to encourage job creation is to simply not fire people.

Know Your Own Argument

From Megan McArdle:

Similarly, a libertarian of my acquaintance recently found himself cornered at an event by a fellow complaining that government spending was far too high and needed to be cut, a proposition for which he offered in support . . . the work of Art Laffer.

"But didn't Art Laffer say that cutting tax rates would raise the amount of revenue that the government collects?"

"Well, sure," said the Lafferite.

"But then wouldn't government spending go up?"

The Lafferite, never having actually connected these two things in his head, fell mute.

Reverse Causality at the Fail Blog

HT: Fail Blog

Myths Are Simple

Robert Reich lists 7 myths of economics. None of them are actual myths. Actually, he's worse than that: he calls them lies. Basically the same as a myth but without the quaintness that comes with gods having sex with animals.

If you're calling something a myth (or a lie), you're saying "this is completely wrong and people who know what they're talking about know this is wrong." There should be a lot of wide-spread agreement that the proposed myth is wrong.

For example, all toxicologists agree that it's the dose--not the substance--which makes the poison. Tiny amounts of radiation won't hurt you at all. But drink too much water and you'll stomach will explode. Too much salt is bad for you, but you need a little salt to keep your body functioning.

Actual myths are simple, so simple they completely miss basic lessons of whatever disciple they pertain to. There's a mountain of evidence demonstrating why these myths are wrong. Anyone familiar with how the discipline works knows about the evidence.

Let's look at each of his proposed myths:

1. Tax cuts for the rich trickle down to everyone else. He points to how the median wage is flat over Reagan and dropped since W. Bush. Setting aside the fact that Reagan raised a lot of taxes, simply comparing median incomes doesn't account for income mobility. If you're getting wealthier as new people enter the labor market (young people, immigrants), median income might fall. (See here, unfortunately also claiming to be dispelling myths.)

2. Higher taxes on the rich would hurt the economy and slow job growth. Reich points to historical evidence of high tax rates and high growth but this is sloppy. The question is not is it possible to have high taxes with high growth but will higher taxes reduce growth? Unless Reich wants to overturn the law of supply, the answer, at least on the margin, has to be "yes."

3. Shrinking government generates more jobs. Reich points out that government is an employer. And if the goal was jobs, that would be fine. But for economists, the goal isn't jobs; the goal is efficiency. And due to knowledge and incentive problems, more government generally means less efficiency.

4. Cutting the budget deficit now is more important than boosting the economy. I am sympathetic to this view. If we were at full employment, our budget problems would probably be solved. Not only would expenses go down, revenues would increase. It is not clear how we get to boosting the economy, however, but, in general, cutting government at least makes us more efficient.

5. Medicare and Medicaid are the major drivers of budget deficits. Reich blames rising health care costs, which supports the "lie" rather than contradicts it.

6. Social Security is a Ponzi scheme. Yeah, I wouldn't call it a Ponzi scheme, as those are inherently unsustainable, but it's certainly close to it due to demographics. And if it wasn't it's still quite wasteful due to perverse incentives and the opportunity cost of investment.

7. It’s unfair that lower-income Americans don’t pay income tax. I agree with Riech here, especially given the regressive taxes (tolls, fines, sales taxes, fees, etc). But "fairness" is a normative point. How can that be a lie? Normative is about opinion!

Where the Roads Are

A GAO report shows that for each dollar a state contributes in gasoline tax, that state gets more than a dollar in highway funding. That's pretty funny since the whole idea of the tax is a sort of user fee for the roads. Clearly, this Solyndra-style payment scheme isn't what it's cracked up to be.

Here's a chart showing how much each state gets in highway money for every dollar it sends.



Two territories stand out as getting more than $3 for every dollar they contribute. First is Alaska at $4.99 for each dollar (quite a bit more than $3, actually). What's the deal here? My guess is that there's even more space between all the spread out towns. They spend more money on roads than the average state; they have to in order to connect all its disperse pieces. Here the big winners are the rural areas.

The second is DC at an even higher $5.85(!) for each dollar they collect in taxes. My first guess is that it was the politicians making extra sure their roads are in good condition. But I've driven in DC and at that ratio, I'd expect roads which clear themselves of snow and traffic so light, you'd think you're in the country except for all the buildings. Neither are near the case.

No, what makes the most sense is that commuters fill their tanks up outside the city, where it's cheaper. Where Alaska has extra costs, DC has less revenue. Waaay less revenue. Here the big winners are the city folk who get to enjoy their roads 7 days a week even though they are being paid for by motorists who only come in during the weekdays and are gone by the evening.

So while the whole thing is muddled up and it's important not to read too much into this since all the money goes to a big federal pot anyway, it seems like the suburbs are consistently the biggest losers in this deal. They pay for rural areas which are road intensive and they pay for city streets which they use disproportionately less than the city dwellers.

Of course, the city dwellers tend not to have cars so maybe it just comes out in the wash.

HT: Yglesias

From Hope to Despair

Prepping for a lecture on economics and ethics, I stumbled upon this article by Drs. William Harmon and Francis Delmonico about organ transplants in Iran. Iran has a unique approach to organ donation: donors are paid, partly in cash and partly in the form of life-long health insurance. Unsurprisingly, 80% of donors are poor.

The Iranian model also makes evident what has long been anticipated would occur in a regulated market. There is a fundamental unethical construct that cannot be overlooked despite the attributes that we have cited regarding the Iranian system. It is the poor person who bears the burden of being the kidney source for transplantation. That exploitation becomes real in Iran (>80%) as it does in any other regulated market. The poor person is coerced to make this donation decision, as there are no other means available to obtain money for what becomes temporary personal or family support. This coercion violates the dignity of the human person who is used by those who are highly advantaged to undergo transplantation within the same society.

It takes an impressive amount of intellectual gymanstics to turn someone's best option into a source of their despair precisely because it is their best option.

The Indifference Principle

I hope my managerial economics students can answer the following:

14. Briefly describe the Indifference Principle, when the Principle doesn’t apply, and why it doesn’t apply under those circumstances. (In answering this last part, it might be helpful to explain why the Indifference Principle applies under normal circumstances.)

Favorite Jokes About Qwickster

Netflix's making a separate company to handle sending off DVDs called Qwickster. Twitter's all a flutter about the name:

hunterwalk Hunter Walk
If you work for Qwikster, does that make you a Qwikee?

Gartenberg Michael Gartenberg
Ugh. Who thinks up these names? Qwikster? Sounds like streaming chocolate milk.

RGA R/GA
I'll get behind Qwikster if they choose Apu from the 'Simpsons' as their spokesman. It's the logical choice, on many levels.

misterpatches Matt Patches
Elmo smoking a spliff is a fine logo for your new service

liliales Mer
Netflix is about as perfect a name as could have been created. But Qwikster sounds like a weight-loss powder sold by The Onion.

And my personal favorite:

developer Aaron Draczynski
Qwikster sounds like the name of a 24-hour convenience store. Or, a service performed in the alley next to a 24-hour convenience store.

Which State Has the Least Educated State Legislature?

New Hampshire, with 46.6% not having a Bachelor's degree and 20.5% having no college experience at all. However it's part-time legislature made many of the degrees difficult to determine.

Maine is the runner up for Bachelor's: 42% have no Bachelor's degree.
New Mexico's the runner up for no college: 16.2% have no college experience.

Interesting, Delware's one of the lower ones for less than a Bachelors (40.3%) but one of the higher ones for percent having a doctorate (8.1%).

More information here.

The Recording Is Worse Than The Disease

Whenever a doctor hospital bills your insurance, they describe services rendered as one of 18,000 codes.

Starting on October 1, 2013 a federal mandate will explode that number to 140,000.

You'd everyone just grew several additional organs with an increase like that, but no. All the new codes come from a new level of detail. An astonishing level of detail. No, a ludicrous level. Here are some examples:

Code Y9272: Patient's injuries occurred near a chicken coop
Code Y92250: Or near an art gallery
Codes V00322A, V00322D, and V00322S: Snow-skier colliding with stationary object, initial encounter, subsequent encounter, and sequela (respectively)
Code Y93C1: Injury occurred while using a keyboard
Code E344: Ailment occurred due to being tall
Code E344: Bizarre personal appearance is covered by this code

It also covers that all-important difference from being "struck" and "pecked" by a chicken and seven ways to classify "mental retardation" (including "profound!").

Figuring out why we have new regulations means adhering to the time-old adage "follow the money." But here, it's not clear who benefits. Perhaps, fearing austerity measures, regulators can now point to all the additional stuff they have to keep track of?

Is Free Food Price Discrimination?

While preparing for my lecture on price discrimination, I stumbled upon this Yahoo! question: "Are free desserts for your birthday an example of price discrimination?" The answer appears to be "no." I disagree.

Price discrimination is when sellers charge different prices of the same good to different customers. This is often a way to take advantage of different sensitivities in price. For example, students have more free time than the average person so, with more time to shop around, companies offer them student discounts to entice them to patron their store.

In the case of the birthday dessert, if it's your birthday you generally get to decide where you and your friends will eat. You will probably also want a dessert. Even if you're not paying, you probably have some empathy for your friends's bank accounts. If you can get a good deal, you'll prefer it. And since it's your birthday, you have time to plan which means you are going to be more sensitive to prices (just like a student, who also has time to plan). Thus restaurants give out free desserts, lowering the price of the meal for people who are particularly sensitive to price.

If you need further convincing, note that there is a type restaurant where free desserts is not the case: fast food. These are also places where you are unlikely to insist on going for your birthday meal.

More People Means More Chickens

Apparently Bill Clinton switched to a vegan diet last year.
Apparently, in December of 2010, PETA applauded this decision, saying Clinton will save 200 animals a year.
Apparently PolitiFact recently checked this number and called it "Half True."
Apparently most PolitiFact readers were upset because the fact checker didn't consider sea creatures to be animals.

But, thankfully, at least one reader got it exactly right:

You completely missed the mark on this one. While you are correct about the shellfish, no farm-raised animals would be spared. At best they would never be born. Comercial farms do not spare any of the animals they have raised because somebody is a vegan. They only produce what will be consumeed as the marekt demands. It’s not as if a bunch of chickens and cows were freed because Bill Clinton stopped eating meat. Therefore, your explanation, and PETA's, is not well founded.

America's Secret Manufacturing Success (And Why It Doesn't Matter)

The Center for Economic and Policy Research argues America needs more manufacturing: it's really the only way to pay for the goods we import. Services, they say, won't cut it. It's amazing how many mistakes they make in five short paragraphs. Here's the full text.

The NYT devoted a major Sunday magazine piece to this question. It never raised the most fundamental question, if we buy all our manufactured goods from someone else, how are we going to pay for them?

Our goods deficit is currently running at annual rate of around $800 billion or 5.3 percent of GDP. We have a surplus on services of around $170 billion a year, less than 1.2 percent of GDP. If we lost all our manufacturing, then the deficit on goods would increase by about $1.2 trillion to more than 13 percent of GDP.

What services do we think that we will export to make up this gap? We are rapidly losing ground in many areas. For example in software and computer services we are already a big net importer from India. It is hard to see how this gets reversed any time soon. We do earn a lot of patent licensing fees, but these fees will always be vulnerable to a tide of free trade sentiment. Besides, it is very hard to imagine them rising beyond a couple of percent of GDP as a maximum.

One of our biggest surplus areas is tourism. This raises the prospect that the anti-manufacturing crowd thinks that we are too sophisticated to work in factories, but not to clean toilets and make beds. There is nothing wrong with latter (I have done it as a summer job), but it's not what most folks would consider upscale employment.

The bottom line is that unless we think someone is going to hand us trillions of dollars worth of manufactured goods for nothing indefinitely, then there is zero doubt that America needs manufacturing. It also needs people writing on economic issues who know arithmetic.

OK, let's start with what they got right. First, yes the net exports on services is much smaller than that of manufacturing: $170 billion on services and $800 billion on exports. And as more services go abroad, that first number is likely to get a lot smaller.

But basic arithmetic doesn't get you very far here; it's much more complicated than it seems. Trade deficits are arbitrary distinctions between net exports and capital flows. Every dime that flows out of the country is a dime that flows in. Sometimes it's as an import but more often it's an investment. In other words, Americans pay for imported goods by supplying investment opportunities for foreigners. Despite all that's happened in the past few years, the US is still a hub of promising entrepreneurial activity. But more on that in a second.

This relates to what the CEPR foolishly suggests: that the trade deficit generates debt. Thus the "need" to develop manufacturing jobs because there is no debt. None. Zero. Nada. No debt is generated from the trade deficit. When I buy something from Japan, my debt does not increase (unless I borrow to buy that thing I bought). I owe Japan nothing.

Now it's true that few Americans work in manufacturing, but it's not because of trade as the CEPR implies. It's technology. Americans produce about 20% of the world manufacturing output: that's equal to Brazil, Russia, India, and China combined. And the reason why so few Americans produce so much is because each American is so productive. Technology allows one person do to the work of ten or a hundred which is why productivity is high while the number of jobs is low.

But even if you ignore all of that, trade deficit statistics suffer a fundamental accounting problem. A $600 iPhone imported from China increases the trade deficit to China by $600. But only a small fraction of that money goes to Chinese workers. Most of it (60%) goes to American workers for design, engineering, marketing, and profit. Adjusted for valued added, a new paper argues that the US's trade deficit with China (about $133 billion) isn't a deficit at all but a surplus at about $32.25 billion.

In other words, the US manufactures A LOT: they're called ideas.

The Secret to Apple's Success

New York Times has a nice article over-viewing various patents which bear Steve Job's name (there are 313 total though I'm not sure the Times has them all indicated). Many relate to iconic Apple products. But many are just design patents including the casing for desktop computers, packaging for the iPhone, and the design layout for the iPod.

So Apple's secret seems to be claiming a monopoly on things people find cute. What's next? Patents on adorable kitten videos?

The Future of Higher Education

In about an hour, I'll have my first class as an assistant professor. Lo and behold I stumble upon two articles about the future of high education. The first is this article by econ prof James Miller who warns that increasing technological sophistication will eventually render flesh-and-blood professors obsolete. He advises new faculty to "get out while you can."

In contrast, the Chronicle of Higher Education reports a study of community college students who use online courses. They, in general, do worse than ones who go to a physical class. I can think of several sources of selection bias (those more likely to use online courses have less time to study, for example) but the basic theory that a lack of structure and community inhibit performance is believable as well.

I don't know what the future will hold but, in general, when technology makes things easier people favor to make up that difference with more leisure, not productivity.
Still, there's no doubt that, survive or die, online learning will be a critical skill for educators.

Interestingly, if both of these articles are to be taken seriously then this spells danger for the professors at the country's best schools since such are most likely to have (a) the funds needed to purchase the inevitably expensive super computers to run these automated classes and (b) the driven students who are the best position to take advantage of virtual learning. One must wonder how employers will read letters of recommendations from PROFESSORBOT-5000.

The Price of Patents

Google spent $400,000 per patent when it bought Motorola Mobility. Microsoft spent $510,204 per patent when it bought Novell. When Nortel Networks was bought, they got $750,000 per patent.

More here about the increasingly problematic patent war.

HT: Keith Pham

The More They Spend, The More Things Stay the Same

Matthew Yglesias and Matthew Cameron are upset how Amtrak is over-paying for trains that will be obsolete. They are so upset, they think Amtrak should have more money. Wait, what?

Yglesias:

I don’t particularly want Amtrak to do more with less. I’d like it to do much more with more.

Cameron:

Matt made a good point over the weekend about the need for Amtrak to put its unfortunately meager budget to wiser use than purchasing expensive, soon-to-be-outdated locomotives.

"With more?" "Meager budget?" Perhaps instead of assuming Amtrak is underfunded while operating in this stifling bureaucracy (Cameron blames the Transportation Department for forcing Amtrak to spend the way it does), let's get the incentives right. If an organization's stupidly spending money, the answer is not to give them more. More money under a failed system is just more waste.

No Philip, There Are Rational Expectations

Philip Pilkington at Naked Capitalism has an article which might as well be titled "Watch Me Confuse Theory with Reality." The complaints are familiar: neoclassical economists assume people are perfectly rational and they have all the needed information to make a decision but its possible to think of times when that's not true so the whole idea is stupid. Advertising is often used as a counterpoint and this article is no more original in that regard. It also has particular problems with rational expectations which predicts that people will try to minimize their error when they are trying to forecast the future.

The fundamental point here is that people – be they consumers or producers, investors or forecasters – often act in an almost wholly irrational manner; one that is quite open to manipulation. And once we allow for this the very premise upon which rational expectations theory rests upon falls to pieces.

I like to keep my blog posts short so let me set aside a few issues: the area of imperfect information is a big field in economics, neoclassical or otherwise; advertising has useful functions such as signalling quality (you spend more on ads to demonstrate you're putting a lot behind a product) and conveying information; and rationality in economics is a very low bar (you do what makes you happiest given your constraints and desires).

More fundamentally, rationality is a general guideline which explains the vast majority of the average person's behavior very well. Precisely because it works so well, we don't notice it because errors are more memorable than successes (and for good reason since making an error suggests we need to re-evaluate how we make a decision in that sphere of our life). For example, today I bought a bagel sandwich for breakfast. I've bought such sandwiches many times in my life and enjoyed them so I rationally believed I would enjoy this one. I was right. I also bought it on a banana nut bagel. I've never had such a bagel before but I like bananas, nuts, and the combination of banana and nut so I believed, again recalling my previous experiences, that I would like this. I was right. I also bought a Diet Coke with my bagel sandwich, a drink I've consumed many, many times before. Again, it was enjoyable. Had I not read Naked Capitalism's article, I never would have given my purchases today a second thought.

Do me a favor and think of all the things you bought today. I'm not just talking about your morning coffee or the toll you might have had to pay to get to work. What about the water that came out of your shower? Electricity? Gas? Trash bags? Internet service? Phone service? Netflix account? (Note some of these things you bought earlier so you could use them later, including today.) Most of these things you don't think about and you probably don't know the price for many of them off the top of your head. You might say this violates rationality and that if people behaved like economists say they do, The Price Is Right would be a very easy game show. You'd be wrong.

We don't know these prices, or think about the purchases, precisely because we are rational. For the vast majority of us, what we are willing to pay (our reservation price) is far greater than what these things cost to purchase (the market price). In other words, there is no question we want to buy them. If there is no benefit to contemplating something but a definite cost (as there is contemplating how happy we are with our phone service or the precise price of water), we don't do it. And that leads us to forget how rational we are.

The advertising argument deserves special mention, since I hear it so often. It is the stock response to the rationality skeptic. Let's consider it carefully. If it were true that people are constantly misled by advertising, if we waste billions each year mindlessly pursuing images of sex and stature, then there would be no product development. Indeed, there would be no products. Everything we buy would be empty boxes with pretty pictures on them. Yes, this is absurd but pointing out the logical extreme highlights just how far away we are from this. Advertising takes up a small portion of a company's budget. Macy's spends 5% of its sales on advertising and that's quite a bit for retail. Wal-Mart spends closer to 0.4% and, of course, Wal-Mart's much larger than Macy's. Packaged goods (whatever that means) can get as high as 10%. Product design and development easily hit the same percent in sales (here's some numbers from Canadian companies) with some sectors such as aerospace and computers reaching well over 15%.

Remember, history's awashed with failed products that had lots of advertising. Several blockbusters and dozens more TV shows utterly fail each year. New Coke also comes to mind. One estimate claims 65% of new products fail (some estimates put it as high as 95% but those tend to come from "how to improve your product" websites so take that with a grain of salt). Yes, many of those products suffered from a lack of advertising but some of them were just bad. Let's not forget Borders recently shut down.

Again, our brain can fool us on such minor issues: we remember the purchases we regret (and by no means does neoclassical econ suggest people make zero mistakes) but there are many, many products we see ads for but don't succumb to. I was in Abercrombie and Finch the other day. Its walls were covered with half naked models. Its aisle filled with attractive salespeople. Its shelved filled with $80 pants. As usual, I bought nothing.

Moon Walking

The Times has a short article on the Google Lunar Prize: $20 million to the first team to land a spacecraft on the moon and explore 500 meters. The article's largely about the very different approaches people have, not in getting there but how they intend to make money beyond the prize. One wants to sell cargo space to the Moon, another wants to do lunar mining, another wants to send American Idol contestant there (I'm for that) by transmitting the sound waves of their voices through the lunar surface and see who sounds best (oh, never mind).

This really highlights how far we've gone since 2004, when the Ansari X Prize awarded $10 million to the first private group that could get to space. It was all about how they are going to get their. I remember hearing very little about the post-Prize business plan.

But the biggest obstacle of all still looms: funding. Still, a lot of these guys are backed by a member of the super-rich. It reminds me one of the under appreciated benefits of having a bunch of very, very wealthy folks: they are willing to pay god-awful amounts of money for high-tech gizmos, allowing them to be affordable for the rest of us just years, rather than decades, later.

Oil Companies As Profitable As Newspapers

According to Yahoo! Finance, both oil companies (Major Integrated Oil and Gas) have the same profit margin as newspapers (Publishing-Newspapers): 6.5% (for each dollar in sales, 6.5 cents is profit).

I'd still rather have stock in Exxon than The New York Times.

When to Worry About Debt

Did you know Greece and the US are in roughly the same financial condition? I didn't either but last night's Daily Show taught me that since Greece's debt per capita is roughly the same as the United States' ($44,000 and $45,000, respectively), we're in the same boat. Yes, yes, it's a comedy show and this interpretation leads to funny conclusions. But it's still a sloppy interpretation; population doesn't matter. Wealth does. A single person can take on the whole of Greece's debt and still be solvent if the are wealthy enough.

So let's instead look at public debt as a percent of GDP. The US's public debt is 92.7% (yes this includes states' debt). Greece's is 130.2%. The US's debt is less than its GDP; Greece's debt is 30% more than its GDP. In other words, entirely different.

So perhaps it's not surprising that Daily Show viewers are sometimes very poorly informed about world events.

The Difficulty of Following Wealth

After checking out PolitiFact's audit of Jon Stewart's "ignorant FOX viewer" claim, I found myself on this fact check of Steve Moore from February of 2011. In the 1980s, he claimed that "The lowest income people had the biggest gains."

PolitiFact ruled this as incorrect. According to the economist they talked to, Gary Burtless, "Incomes rose in the bottom, middle, and top portions of the income distribution as Mr. Moore stated, although the income gains were certainly bigger at the top compared with the bottom." Interesting fact, but that's not what Mr. Moore said. Moore said, if you were poor in, say, 1980, by, say, 1990 you had the biggest wealth gain of anyone else. In other words, you're not poor anymore. Comparing the lowest quartile in one period with the lowest quartile in the later period tells you nothing since the people who composed those quartiles aren't constant.

Ideally, we would track families and see where they are year-to-year. Data on this isn't consistently available but economist Steve Horwitz took the time to gather some up some of this data from 1975 to 1991. Here's how you read the table. The left hand column indicates various quintiles in 1975. The rows tells us what percent of that quintile is in what quintile in 1991. For example, 0.9% of the top 20% in 1975 were in the bottom 20% in 1991.

	Bottom 20% (1991)	Fourth 20%	Middle 20%	Second 20%	Top 20%
Bottom 20% (1975)	5.1	14.6	21.0	30.3	29.0
Fourth 20%	4.2	23.5	20.3	25.2	26.8
Middle 20%	3.3	19.3	28.3	30.1	19.0
Second 20%	1.9	9.3	18.8	32.6	37.4
Top 20%	0.9	2.8	10.2	23.6	62.5

Almost 95% of the poorest 1971 Americans rose at least one quintile by 1991. About 60% were in the top two quintiles! This is a radically different story than what PolitiFact suggests, but Horwitz goes farther by looking at the average gains. On average, 1975 families at the bottom quintile had incomes $27,745 higher in 1991. This gain is larger than any other quintile following the same span of years. Contrary to PolitiFact's claims, Mr. Moore's state actually appears to be... .

Regional Inflation

Since I'll be moving from DC to West Virginia, I've become very keen on differences of cost of living, or what I think of as regional inflation (as opposed to the more common temporal inflation, or just inflation). The reason why I refer to it as a type of inflation is (a) it is a type of inflation (an increase in the price level) and (b) it reminds us we should adjust for it as it's just as important as conventional inflation.

For example, Matthew Yglesias argues Houston is growing isn't because they are wealthier but because they have room to build new houses. Here's his chart showing that a place like Boston, which is crowded, has a higher average income. If it's higher, why aren't people moving there (captured as more new housing)? "These days most people work providing services to other people, so it’s generally advantageous to be providing those services someplace where incomes are high. But people can’t move to Boston, on net, if it’s not possible to build houses in the Boston area." says Yglesias.



No, not that simple at all. Fundamentally, average wages in Houston are higher than in Boston. You have to adjust for cost of living. And the cost of living is 43% higher in Boston than in Houston (I can't get a permanent link to my inputs; I use Houston-Sugar Land-Baytown TX Metro - Houston TX as my comparison metro area but each of the three choices gives you about the same result). In the above graph, Boston has an average income of about $53,000. Houston's income's about $44,000, but in Boston terms (i.e. you move from Houston to Boston and your standard of living is the same), it's $63,224. Adjusted for cost of living, Houston's 18.9% wealthier than Boston.

Houston has more housing starts than Boston because it's growing. And it's growing (I'd wager) because it's wealthier than Boston.

Selection Bias From the Economist

Mingling with other cosmopolitans on multiple continents may fool them into thinking that the world consists largely of people like themselves. It does not.

From this week's Schumpeter.

The Value of Marketing

Latest in health care debate is this opinion in the Economist proclaiming the private sector waste from marketing expenses. Let's ignore that this is just guesswork. Yes, we know private companies spend more on marketing than public companies. But the data on this kind of thing isn't public and many other explanations for the cost difference (private companies spend much more on fraud protection, for example). Moreover these are the same century-old arguments which condemned the waste from competition without considering the waste from monopoly. But that's not what I want to talk about.

It's true that advertising has zero-sum components and when a lot of people think of the most honest ad, this is it. Some ads, notably ones for product about conveying style (I'm cool because I buy this) are just about one side trying to be cooler than the other. We'd all be better off if everyone halved their advertising costs. But ads are more than Coke yelling "Coke!" and Pepsi yelling "Pepsi!" For more practical products, for the ones where there is virtually no cool factor (air conditioners, cleaning supplies, and insurance), ads have to do something different: they have to inform you.

Yes, lots of ads are repetition (that's how we learn) but with each repetition, there's information on a new product or deal. People save money, learn what they like, and discover a product which suits them best. Save the post office, federal agencies don't advertise. That's not just because they get their revenue from taxes, but they don't have any reason to come up with anything new. It's very confusion why some think stagnation is the answer to health care costs.

Update: Administration and advertising (fund raising) expenses positively correlated with effectiveness (for charities).

Some Years It's Just Windy

Bill McKibben credits climate change for the recent series of tornadoes decimating the Mid-West. This might be climate change related. On the other hand, it might just be random. I don't have the background to answer this question definitively, but nerdy curiosity led me to gather some data from the Tornado History Project.

THP keeps track of every single recorded tornado in the United States since 1950: where it was, its intensity, and even the path it took. I gathered tornado data from the past sixty years to see if the number of tornadoes have been trending upward.

"But wait!" you might say, "What if the number of tornadoes is the same but they are getting more intense? You can't just look at the number of tornadoes." Indeed I cannot. The way THP records tornado intensity is with the Fujita scale, ranging from F0 (min 40 mph) and F5 (min 261 mph). So I created an alternative time series of total tornadoes weighted by intensity. Admittedly, this approach is very simple but sufficient. Each F0 counts as one tornado; F1s each count as 2 two tornadoes, etc. Then I added them together. For example, in 1955 there were 116 F0s, 200 F1s, 163 F2s, 29 F3s, 8 F4s, and 2 F5s, or 518 total tornadoes and 1,173 weighted tornadoes. Below is the graph Excel spit out for me:



There's a pretty clear upward trend in that diagram, consistent with concerns over global warming. BUT this is assuming that we're just as good detecting tornadoes today as we were in the 1950s. If an F5 came through, I doubt that would get past anyone's radar regardless of where it touched down. But an F1 or F0 (i.e. the ones that are barely tornadoes) could slip past undetected without satellite imagery or other modern equipment. So what do the graphs look like without the small tornadoes? Much less frightening. Here's total tornadoes only counting at various thresholds of intensity:



And here's weighted tornadoes with the same thresholds:



The F0s seems to be doing most of the work, which does not fit with the global warming story. For completeness, here's the F0s over time. Most of the jump occurs in the early 1990s; I'm not sure why.



Again, this doesn't mean that the GW explanation isn't true, but it doesn't suggest it either. This data tells us that tornado activity varies widely. The ten-year low for all intensities is 934 tornadoes (2002) and the high is almost twice that: 1817 (2004, just two years later!).

Local Taxes Should Go To Flower Gardens Instead of Schools

I got into a short discussion the other day about taxes to fund local schools. A friend complained about individuals who resent paying such taxes when they have no kids. "Well, shouldn't they resent that?" I asked. "No," he said and argued that education is a public good. We all benefit when more people go to school.

There's a long list of things wrong about this claim.

1. A public good does not mean "good for the public." It has a very specific definition: a good where you usually can't exclude people from using and each additional user doesn't diminish the value of the good. National defense is an example. Education is not.


2. Even if there are some social benefits to education, the gains from education are largely internalized. If local funding for schools dried up tomorrow, schooling would not cease, not by a long shot. Parents would pay for their kids to go to school. They already do, even though they are also paying for it through taxes. Schooling's so important, they pay for it twice.


3. Private education is not strictly for the wealthy. In the poorest parts of the world, the poorest people pay to send their kids to privately run schools.


4. Even if the social value of education is high, it also had a negative value. Education (especially higher education) is great for demonstrating intelligence, hard work, and other qualities difficult to observe. Having a high school or college degree shows employers you have those qualities. But when everyone has a degree, then employers can't tell the smarties from the stoners. A dumb person's degree pollutes the value of a smart person's degree.


5. Somewhat related, the whole notion of tying education to where you live is bizarre and a recipe for ineptness. Imagine that all haircuts were free, that barbers were paid with local taxes, that legal restrictions made it difficult/impossible to establish new barber shops, and that you could only get your hair cut within a 5 mile radius of where you work.

It is far more logical to send those taxes dollars to flower gardens. These gardens are a public good (it's impractical to exclude people from viewing them, assuming they are in the front yard or other public space; and me enjoying the flowers doesn't prevent you from enjoying them...unless you pick them). The social benefits are high (the person maintaining them receives just a small fraction of the total enjoyment they create), the social costs are low (all I can think of is allergies, and that's a very small addition considering what's already there). And since it's non-excludable, you can't tie a community to a pre-approved set of flower gardens.

False Dichotomy

Talk about why the price of oil is raising now seems to be framed as a mixture of genuine supply and demand forces and of speculators causing the price to raise. First, let me joyfully acknowledge that supply and demand are not being seriously considered by mainstream media--a definite improvement over previous discussions which focused on "how greedy/evil are oil companies?" But the current debate isn't much of an improvement.

Asking how much of the increase is due to supply and demand and how much is due to speculation is like asking "is my car not running because there's something wrong with it or because the engine's broken?" One is a subset of the other. Speculators, like other economic actors, respond to supply and demand forces. The only difference between them and us is that they are responding to future supply and demand. But it's still all about the fundamentals.

Here's Mark Perry on speculation.

The Female Premium

Mark Perry has an excellent take on a NYT editorial advocating regulation to close the pay gap between men and women. Because women get 88 cents for every dollar men get, clearly there is an unjustice to correct. Or so the story goes (Perry's alterations are in bold)...

Women Men now make up almost more than half of the American work force, but, according to data compiled by the Census Bureau, James Chung of Reach Advisors, who has spent more than a year analyzing data from the Census Bureau's American Community Survey, single, unmarried, childless full-time female employees still make, on average, only 77 cents $1.08 for every $1 earned by men in America's largest cities.

A large part of the pay gap originates from biology and social norms concerning children. When a female employee becomes pregnant, the company she works must find and train a replacement. When such employees have children, they are more likely to be spending time away from work caring for them in case of illness or unexpected conflicts (e.g. the nanny is ill). When there is no child and when the possibility of pregnancy is small (the female employee is single), that pay gap turns into a pay premium.

Chung's work is just one study, of course, but it's not the only one which comes to this conclusion. Thomas Sowell's Economic Facts and Fallacies reports a similar result from a different study, also finding a wage premium. The one cited in Sowell (I don't have the book handy at the moment) controlled for the nature of the job as women also tend to go to low paying occupations (e.g. administrative assistants). I assume Chung's research did this as well. Those concerned about the supposed pay gap rarely acknowledge this other important fact.

Net Neutrality Hurts Poor People

The more I hear about net neutrality, the more skeptical I become. From the National Journal:

"The FCC's mobile broadband loopholes adopted in its December Net Neutrality order are already leading to anti-competitive, anti-consumer practices," said Free Press policy counsel Chris Riley. "The agency must act quickly to investigate MetroPCS's service plans before similar blocking and content-based discrimination on wireless networks becomes an industry-wide problem."

According to the six-page letter, MetroPCS has introduced a tiered system under which customers are changed more for accessing high-usage sites such as Netflix and Skype.

In other words, some people want to be able to watch videos on their smartphones. But videos eat up a lot of bandwidth so the company offers a premium service to cover the costs. But that violates net neutrality so if this complaint goes through, then MetroPCS would have to make this service available to everyone, regardless if they wanted it or not. Cellphone bills would increase, and yes, I can see this spreading to other carriers.

The very poor, the ones who can't afford nor desire such options, would be completely shut off from this avenue. In pursuit of making the Internet accessible to everyone, you make it accessible to fewer people. This is a good object lesson in unintended consequences.

Here's HuffPo's op-ed on the subject.

HT: Alex Tabarrok

Robert Reich on the Learned Hand Rule

Reasonable precaution means spending as much on safety as the probability of a particular disaster occurring, multiplied by its likely harm to human beings and the environment if it does occur.

That's Robert Reich today using the Learned Hand rule to slam corporations. Citing GE's questionable Mark 1 boiler reactor (the same used in TEPCO's Fukushima Daiichi plant), Reich argues in favor of more regulation.

Profit-making corporations have every incentive to underestimate these probabilities and lowball the likely harms.

I'm not really sure why he thinks regulators have the all the right incentives. After all, they're not getting paid very much compared to private sector workers so they should be pretty easy to bribe.

If companies are taking too many risks (and to be sure it would be the company which bought and used the reactor who's taking too many risks, not the company which sold it), then it sounds like they are not internalizing the costs of their recklessness. Maybe regulators are the way to go, maybe stronger negligence rules are. Maybe nothing is needed at all since nuclear accidents are incredibly rare and it took a major earthquake to create one. Just because the most recent natural disaster caused problems doesn't mean companies are under-estimating the probability of the problem.

Update The size of the earthquake was completely unprecedented. Hard to blame the Japanese power company for not predicting the future.

Social Insurance and aSTG

Lately I've been reading William Rosen's The Most Powerful Idea in the World, about the history of the steam engine. But that's not the most powerful idea: the notion that people have a right to profit from their invention is. (At the dawn of the Industrial Revolution, this was a new idea.)

Rosen takes the time to explain the biology of how we get invention. In other words, when people have that eureka moment, what happening in the brain? The key, researchers Mark Jung-Beeman and John Kounios, found is that when there's a flash of insight, blood flows to the anterior Superior Temporal Gyrus (aSTG) in the right hemisphere. When you daydream, this is part of the brain that's responsible. Most of the time, the brain works to inhibit the flow of blood to this region. This makes evolutionary sense: daydreaming gets you killed because blood flowing to aSTG is blood that's not flowing to the parts of your brain which will tell you there's a lion about to kill you. This is also why you get flashes of insight when you're relaxing (taking a walk, in the shower).

So far, so good. But what does this have to do with social insurance? It occurs to me that if you are constantly concerned about survival, you have no time for flashes of insight (note to get these eureka moments, you also have to know the material...daydreaming is not a substitute for reading). I see this as a potential barrier for income mobility. If there's a safety net loose enough to encourage hard work but strong enough to allow people to relax everyone once in a while, then you're more likely to get new ideas (not just inventions, but things from small business ideas to solving everyday problems).

It should be stressed that this can easily be justification for more aid to the developing world and I tepidly agree. All things being equal, yes. But I must return to the thesis of Rosen's book: allow people to profit from their ideas. In the developing world, where it is nearly impossible to start a (legal) business, secure a loan, etc, having great ideas isn't enough to pull a country out of poverty.

But it's a start.

The Listeners of What Is This Person Referring to?

Since then, I've grown to hate these listeners. Oh, I hate them, hate them, hate them. Every time one of their narrow-minded, classist letters makes it on the air, I contemplate burning my tote bag in protest.

Answer here.

Top Ten Reasons Sex Sells

Actually, I find top ten lists annoying. Well, that's not really true. Only some are annoying and they're the ones that aren't really top ten lists because each item is really previous items restated. Inspired by this list about how Sport Illustrated disrespects women. (While published over two years ago, it came up in my blog rolls recently.) Observe:

4. Sports Illustrated disrespects women by numbing men to women's humanity.

3. Sports Illustrated disrespects women by exhibiting women to men as the "other"--as if women were a different species from the "real" athletes who are men.

2. Sports Illustrated disrespects women by sending a message to girls and young women that no matter how much they excel in athletics, all that matters is how they look to men.

It's not possible to do #3 without doing #4 nor can do you accomplish #2 without #4. Read their whole list. Their "top ten reasons" (there are more?) are really two reasons: "SI disrespects women by publishing too many photos of them as sex objects" and "SI disrespects women by publishing too few photos of them as athletes."

So why did Feminist Truths publish this as a "top ten" list? Just because you have "just" two points doesn't mean they are not worthy points. Even having two things to be concerned with can be too many (most great reporting focuses on one issue). It's because top ten lists get attention. They might depict the subject in a superficial or over-simplified way, lacking nuance and practicality, but that's largely harmless because it's up to the viewer to look deeper or, at the least, recognize it as harmless fun. But in the end, Feminist Truths are giving people what they want.

They're really no different than Sports Illustrated.

What's With the NYT?

Specifically their automated hyperlink system. The Times has a program (I assume) which runs through their articles and turns various words and phrases into links to other web resources. Sounds cool? Depends on the link because sometimes that program is dumb.

Consider this article about Pixar hoping Toy Story 3 will get best picture. Some links make sense: "Tom Hanks," "Toy Story," " the top-grossing film of the year." But consider this sentence from the article:

On a visit to the Pixar campus here, in an old canning factory a short drive from San Francisco, I got a brief lesson in the laborious art of animation.

Which word or phrase should be made into a link? Pixar? San Francisco? Nope; it was canning (click on the link for more articles about canning!) But that's not the worst one. At the end, the interviewer jokingly asks Toy Story 3 director Lee Unkrich if he has an animated version of himself.

"No," he said. "That would be really creepy. No, thank you."

Don't think that sentence deserves a link? The Times disagreed. Clearly, people want to know more about the word, "no," especially the 1998 Canadian comedy.

The thing is, I find it equally likely that the Times does this on purpose in an attempt to be cute. Is it cute? No.

Recombinant Growth

I'm going to do something I normally hate doing and that's comment on something I haven't read.

Tyler Cowen has an e-book out arguing American technological progress has plateaued. From the description:

In a figurative sense, the American economy has enjoyed lots of low-hanging fruit since at least the seventeenth century: free land; immigrant labor; and powerful new technologies. Yet during the last forty years, that low-hanging fruit started disappearing and we started pretending it was still there. We have failed to recognize that we are at a technological plateau and the trees are barer than we would like to think.

Arnold Kling notes the irony that an argument about plateaued grow is coming in the form of a digital book for only $4. Of course you could argue that this constitutes "cutting edge" is a point in favor of Cowen's argument.

Based on my educated guess, Cowen's making an increasing marginal cost claim: as you pick the low hanging fruit, you're forced to climb the tree and go after the stuff that's harder to get. I use the same analogy when I teach principles. It works great for basic stuff like picking apples. But new technology is another story.

In a great 1998 paper, Martin Weitzman argues that knowledge causes "recombinant growth," or growth that builds on itself as ideas combine with other ideas. "The paper's main theme is that the ultimate limits to growth lie not so much in our ability to generate new ideas as in our ability to process an abundance of potentially new ideas into usable form."

It's not that we make technology, enjoy the benefits, and start again where we were. If it was, then we would have fallen back into gut-wrenching poverty long ago. The ideas we gain (not to mention the immigrants who help make those ideas) stay with use, which we use to make yet more ideas. These ideas combine with other ideas and make cutting edge stuff easier to achieve than our ancestors ever thought possible. High-hanging fruit doesn't seem high hanging. It's as if the fruit we pick not only nourished us but cause us to grow larger and provided seeds for new trees to boot.

Ignore CBO Estimates

We often hear that the estimates from the Congressional Budget Office (the folks which tell us how much laws cost or save the government) are non-partisan.

The final cost estimate produced by the non-partisan CBO -- that the health care measure would cost $940 billion over 10 years, and bring down the deficit over that same time period. [Source]

The $800 billion federal stimulus bill has boosted employment by 1 million to 2.1 million and helped the economy grow about 1.5% to 3.5% larger than it would have without the stimulus, the nonpartisan Congressional Budget Office said Tuesday. [Source]

The Congressional Budget Office, a nonpartisan watchdog, forecasts that the US will post deficits in excess of a trillion dollars in each of the next 10 years. [Source]

Even the more reasonable Matthew Yglesias will cite their scoring without ever questioning them.

While the CBO is supposed to be neutral, it doesn't take much thought to realize how naive that is. Since its creation in 1975 (thanks to some 1974 legislation), the CBO director's appointed by the mutual agreement of the Senate pro tempore and the Speaker of the House after considering the recommendations of their respective budget offices (though by tradition each chamber alternate this responsibility). In addition, either chamber may fire the director by resolution. So you'd think that if you're the CBO director, you have a pretty strong incentive to be partisan.

If I'm right, then when both chambers are of one party, the director should be that party as well (or at least sympathetic to it). This is somewhat easy to check. CBO directors aren't politicians and don't wear their affiliation on their sleeves, but thanks to some Googling and checking Wikipedia, I estimated the party affiliation of each director (excluding acting directors, which are covered by the white spaces). Here's the list of past CBO directors. The size of the blocks under the CBO heading is the length of that person as the director. If the director changed mid-year, I counted the full year if that person was more than halfway through the year and not in the year at all if he or she left before the halfway mark.


Even if you complain that so-and-so isn't partisan, or so-and-so isn't the party I assigned it, the correlation's strong enough that any single change doesn't change the overall pattern.

The chart above is not to be the definitive data which proves the CBO's partisanship, just an illustration that this neutrality everyone talks about is just hopeful thinking. And I'm first to admit my categorization isn't perfect. For example, the only reason I put Douglas W. Elmendorf as a Democrat is that he was a senior fellow at Brookings, which leans left if it leans any direction at all. The more important point is that of incentives: even if Elmendorf is non-partisan, that he can be fired by Democrats (and only Democrats) gives him plenty of reason not to be.

An Example of Good Regulation

New York Times has a great article about the growing importance of electronics in the stock market. Of particular interest is high frequency trading.

They use algorithms to zip in and out of markets, often changing orders and strategies within seconds. They make a living by being the first to react to events, dashing past slower investors — a category that includes most investors — to take advantage of mispricing between stocks, for example, or differences in prices quoted across exchanges.

High-frequency traders are “the reason for the massive infrastructure,” Mr. McPartland says. “Everyone realizes you have to attract the high-speed traders.”

These trades occur mind-bogglingly fast, with speeds measuring in the milliseconds, or millionths of a second. As various trading platforms (besides the NYSE and NASDAQ, there are about two dozen smaller ones) compete for the high-frequency traders, the bill to stay in the game skyrockets.

One such project is a 428,000-square-foot data center in the western suburbs of Chicago opened by the CME Group, which owns the Chicago Mercantile Exchange. It houses the exchange’s Globex electronic futures and options trading platform and space for traders to install computers next to the exchange’s machines, a practice known as co-location — at a cost of about $25,000 a month per rack of computers.

This is a pure arms race, where value is zero sum and purely relative. At this computing level, doubling the speeds adds nothing to our wealth but costs society billions. If everyone would half their speed, we'd loss nothing (or almost nothing) as a whole AND we'd won't have to spend so much money on these damn super-super-super computers.

The SEC chairwoman, Mary L.Sharpio, has raised the idea of limiting the speeds machines can trade at and I applaud this direction. It depends on the speed that's set, of course, but the efficiency gains between 50 milliseconds and 90 milliseconds is basically zero.

Two caveats. First, it's unclear what the spillover gains from this computing technology is. Firms are expanding the limits of technology to deliver pure speed to Wall Street(s). Such computers might add little to trade efficiency but could be useful elsewhere, say medical areas, especially in the areas of genetics and nanotechnology. Getting this technology faster could save lives.

The second is the unintended consequences. These firms compete on speed: take that away (assuming there are no loopholes) and what will they compete on instead? It could encourage better customer service, but it could also encourage accounting fraud.

But in light of these two issues, I still favor a speed cap. I doubt cutting out these customers for high end computers is going to significantly reduce the investment in high speed computer technology. The second issue I'm a little bit more nervous but I suspect there's plenty of room for honest improvement to compete on.