Law, Legislation, and Lunacy

How a Progressive Consumption Tax Works

2012-01-30T08:48:00.004-05:00

Yesterday Gary Becker proposed switching to a consumption tax, one which could be made progressive. Since a progressive tax has higher rates for higher incomes, it's a bit hard to think how this is possible. If I buy milk, how will the government (or the store for that matter) know how much I make?

A progressive sales tax is progressive in an indirect way. We know that wealthy people tend to buy certain goods (superior good), middle-class people buy certain goods (normal goods), and poor people buy certain goods (inferior goods). Note in this case, an inferior good is not a good of poor quality. It's just one where people buy more of it when their income falls. College is an example (few wealthy people go to college).

Under progressive consumption taxes, restaurant food should be at a high tax rate, fast food at a moderate level, and little-to-no tax on food bought in a grocery store. Concerts should have a high tax and board games a low rate. The internet should be moderately taxed or not taxed at all.

The only issue with this kind of tax is its implementation. As you can guess, cataloging all these different goods would be incredibly time consuming. It's tempting to divide goods into large segments but selecting something as broad as "cars" becomes problematic. There are luxury cars and basic cars. In some places (e.g. NYC), many low income people don't have cars since public transportation is sufficient to meet their needs. In rural areas or in western states, this is less the case. It gets even more complicated considering some low income people need their car to operate a small business, regardless where they live.

Of course, we will have to accept some imperfections in a progressive consumption tax system. Imperfections are inevitable. But it's worth thinking about how it might work in practice.

Everyone Fires People. Every Day.

2012-01-09T21:52:00.004-05:00

Mitt Romney's been under criticism for talking about his love of firing people:

At a breakfast event in Nashua, Romney told an audience that his health care plan would allow them to dismiss insurers and health care providers. "If you don't like what they do, you can fire them," he said. "I like being able to fire people who provide services to me."

Why is this so controversial? Because his critics use it to paint him as a Gatsby-like 1%er, firing his maid or butler just to watch them cry. But he's actually describing how average he is.

We fire people all the time. We do it so much, we don't even think about it. Today I went to Cakelove and had a cupcake. It cost over $3, but it was not worth $3, so I fired them: I won't go there again.

Then I fired the local AFI movie theater. I was going to go see Tinker, Tailor, Solider, Spy there but I kept reading reviews about how confusing it was if you haven't read the books. Not for me. I'll get it on Netflix so I can re-watch scenes, thank you very much.

For lunch I fired Einstein Bagels and Panera Bread. I usually grab something to eat at either of those places but I've grown tired of the limited number of things I like on their menu. Craving something new, I went to Baja Fresh. Will I fire them tomorrow? Probably; I'm thinking about making lunch in-house.

How many times have you fired someone today?

In Praise of AP Credit

2012-01-04T19:27:00.004-05:00

Prof. Michael Mendillo doesn't like that high school AP classes can count to general requirements for college.

Lost to these nonscience students is an exposure to cutting-edge science and the methods of science taught by professors active on a daily basis in their exploration of nature. In how many AP classes in high school does the physics instructor say, "At the last American Physical Society meeting, one of my students presented a paper on this very topic"? Or, in an astronomy class, "My upcoming observations using the Hubble Space Telescope will address this dark-energy issue"? Identical scenarios exist, of course, for science and engineering students who miss out on university-level introductions to the humanities and social sciences taught by active scholars in those areas.

From what I remember of all of my introductory courses in college, there was very little "cutting edge" research discussed. And thank goodness for that! It's an introductory course. When I teaching introductory econ I rarely mention any new research and if I do, it is illustrative of some larger point (say an empirical paper on a price control). You don't want to overwhelm the students and, precisely because it's advanced, they probably won't understand it anyway. Imagine having a long discussion of the Higgs boson in Physics 101 when you're still trying to wrap your mind around Newton's Three Laws of Motion.

OK so you stick to offhanded references, not in depth discussions. Big deal. Admittedly, mentioning something cutting edge is cool to do and it can get your students interested in the introductory topic or illustrate where the puzzles in your discipline remain. Disallowing AP credit for college would generate these additional benefits but they are small. They come at a cost of the student not taking a course that's completely new or paying tuition for the semester that can no longer be avoided.

I had a student in introductory econ who didn't have to take my class: he had AP credit. He took it anyway since he'll be taking future courses from me, but I can't help but think that it was largely a waste of his time.

Fall 2010 Grade Distribution

2012-01-04T14:07:00.004-05:00

Finally got around to do this. It's a distribution of all grades I handed out in the Fall of 2010, treating pluses and minuses as one category of the same grade. I'm 99% sure I removed all the students who dropped. N=64

Grades followed a rough normal distribution, but the low number of Bs is notable. I'm not yet sure what to make of this: could be random, could be that my assessment material is decisive, could be the ability of Bethany students is bimodal and that's reflected here. But the graph is interesting nontheless.

Quote of the Day

2012-01-03T18:10:00.001-05:00

Alastair Smith on political tyranny:

But what if you really are trying to work for the common good? Is there no way of doing that?

None. If you’re working for the common good you didn’t come to power in the first place. If you’re not willing to cheat, steal, murder and bribe then you don’t come to power.

Read the whole thing; short and sweet.

Toil and Trouble

2011-12-22T13:34:00.005-05:00

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

2011-12-15T22:51:00.003-05:00

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

2011-12-14T09:52:00.004-05:00

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

2011-12-12T14:31:00.002-05:00

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

2011-12-01T22:59:00.003-05:00

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

2011-11-15T00:52:00.004-05:00

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

2011-11-07T11:10:00.001-05:00

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

2011-10-30T16:43:00.003-04:00

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

2011-10-26T14:50:00.003-04:00

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

2011-10-21T11:16:00.002-04:00

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

2011-10-21T09:13:00.002-04:00

HT: Fail Blog

Myths Are Simple

2011-10-18T08:35:00.002-04:00

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

2011-10-13T23:28:00.003-04:00

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

2011-09-30T09:15:00.004-04:00

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

2011-09-19T21:24:00.002-04:00

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

2011-09-19T10:19:00.003-04:00

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?

2011-09-19T09:46:00.005-04:00

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

2011-09-15T22:00:00.004-04:00

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?

2011-09-14T10:02:00.003-04:00

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

2011-09-05T21:06:00.004-04:00

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)

2011-08-29T10:14:00.004-04:00

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

2011-08-25T09:04:00.004-04:00

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

2011-08-22T11:11:00.005-04:00

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

2011-08-22T09:53:00.002-04:00

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

2011-07-25T21:14:00.007-04:00

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

2011-07-25T09:31:00.007-04:00

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

2011-07-21T10:27:00.003-04:00

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

2011-07-08T16:42:00.005-04:00

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

2011-06-23T10:53:00.003-04:00

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

2011-06-22T10:14:00.003-04:00

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

2011-06-14T19:57:00.003-04:00

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

2011-06-14T18:21:00.001-04:00

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

2011-06-11T22:33:00.003-04:00

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

2011-05-26T14:43:00.006-04:00

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

2011-05-25T11:53:00.006-04:00

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.

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.

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.

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.

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.

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

2011-05-01T12:37:00.002-04:00

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

2011-04-22T10:19:00.004-04:00

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

2011-04-10T12:42:00.004-04:00

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

2011-03-16T14:06:00.004-04:00

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

2011-03-15T15:49:00.005-04:00

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?

2011-03-02T13:41:00.002-05:00

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

2011-02-20T14:17:00.003-05:00

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?

2011-02-09T21:48:00.004-05:00

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

2011-01-20T15:55:00.003-05:00

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

2011-01-08T23:27:00.010-05:00

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

2011-01-02T18:28:00.003-05:00

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.

Congress COMPETES

2010-12-31T13:10:00.002-05:00

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

2010-12-25T22:10:00.004-05:00

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

2010-12-13T21:04:00.003-05:00

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

2010-12-02T20:19:00.004-05:00

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

2010-11-17T15:33:00.005-05:00

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

2010-11-11T21:42:00.007-05:00

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

2010-11-10T18:09:00.005-05:00

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

2010-11-10T10:38:00.002-05:00

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

2010-11-10T10:04:00.004-05:00

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

2010-11-08T12:51:00.003-05:00

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

2010-10-25T18:39:00.004-04:00

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

2010-10-14T12:23:00.006-04:00

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

2010-10-13T21:43:00.002-04:00

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

2010-10-13T20:46:00.001-04:00

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

Latest on the Minimum Wage Studies

2010-10-12T09:07:00.005-04:00

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

2010-10-03T18:29:00.004-04:00

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

2010-10-01T19:45:00.004-04:00

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?

2010-09-29T16:04:00.001-04:00

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

2010-09-28T00:13:00.003-04:00

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

2010-09-27T22:54:00.001-04:00

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

2010-09-24T10:37:00.003-04:00

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

2010-09-17T14:30:00.003-04:00

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

2010-09-17T00:50:00.008-04:00

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

2010-09-13T13:33:00.001-04:00

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

2010-09-12T19:54:00.002-04:00

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

2010-09-05T22:36:00.006-04:00

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

2010-09-01T21:44:00.003-04:00

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

2010-08-23T12:09:00.004-04:00

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

2010-08-21T12:55:00.003-04:00

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?

2010-08-20T14:32:00.003-04:00

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

2010-08-15T12:12:00.003-04:00

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

2010-08-13T09:01:00.007-04:00

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

2010-08-10T17:08:00.004-04:00

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)

2010-08-10T12:34:00.004-04:00

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

2010-08-07T14:51:00.006-04:00

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?

2010-08-01T11:49:00.003-04:00

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

2010-08-01T11:38:00.003-04:00

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!

2010-07-30T00:24:00.002-04:00

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

2010-07-26T15:01:00.004-04:00

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

2010-07-23T15:12:00.007-04:00

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

2010-07-20T09:59:00.003-04:00

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

2010-07-18T16:07:00.008-04:00

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

2010-07-18T10:03:00.001-04:00

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]

2010-07-17T21:20:00.007-04:00

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

2010-07-16T08:58:00.002-04:00

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

2010-07-15T21:31:00.004-04:00

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?

2010-07-15T19:12:00.008-04:00

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

2010-07-14T16:07:00.003-04:00

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

2010-07-11T14:32:00.004-04:00

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.