From Reality, Not Ideals

Fr. Shay Cullen at Pinoypress gives a gut-wrenching depiction of helping the poor while working with Mother Teresa. And yet her explanation for poverty—the rich who don't give enough--is misplaced. Injustice doesn't thrive because "the rich refuse to put aside their greed and build a just society." People are greedy everywhere, but some countries are rich and some are poor.

It would be nice if other people were more chartable, but that's not the world we live in. One shouldn't make suggestions for a better society based on how people should be. That tends to do more harm than good. If I assume that I can fly, I might jump off of a cliff or push others off to show them they are deluded. Travesty would follow. It would be far more humane—though less ideal—for me to acknowledge my flightlessness and take the time to build an airplane.

Pay Your Enemy

James Miller at Overcoming Bias recently asked why people support imprisonment but not torture. One commenter suggested that because some people enjoy torturing others, it hampers their incentives to restrain its use. James replied: "This is a valid argument against torture but it is even a stronger argument against the use of fines as a form of punishment."

An excellent point: why should someone pay the state when they break the law? Not only does it give the government a powerful incentive to abuse its power (see recent Virgina speeding laws), it also assuages the deterrent effect to those with a great deal of faith in government. "Sure I have to pay $100 but at least that money will go to help people." It seems more reasonable to make people pay someone they don't like. Most, I suspect, would rather see $100 go to the state than $50 go to their enemy.I can think of three ways to pull this off, but none are ideal by any means.

1. Pay to a customized "bad guy." In theory, everyone has some person, organization, or idea they don't like. Greens hate oil companies. Free traders look down on protection-seeking unions. Catholics detest abortion clinics. When one group breaks the law, make them pay the other group. The problem is knowing who's who. Sure, there's a lot of information out there but firms may not be so willing to hand it over (and the government might actually prefer that information to money so we'll be right back where we started). And still, some information is hard to get: ex-lovers rarely get along but it'll be costly for the government to figure out who dated who.

2. Make the punishment fit the crime. The logistics of this are a lot easier: tailor each law to an organization that would probably be at odds with the accused. Hunt without a license? Donate to PETA. Drunk driver? Send money to AA. Of course the problem becomes how will these organizations respond when they find out they are being paid when other's break the law? How much will it take before Disabled American Veterans starts encouraging people to park in a handicap space?

3. Send to everyone's hate group. Virtually everyone in this country hates neo-Nazis and the KKK. Why not assemble a list of such groups and the accused must send money to one at random? This would certainly mitigate the problems in 2. But the issue becomes how many organizations like these are there? 100? Maybe 200? Even accounting for deterrence, that's hundreds of millions of dollars (maybe billions of dollars) sent to just a handful of organizations each year. What happens when the KKK has a billion dollar endowment? Forget possible terrorist attacks; think how many people would suddenly like to join, or even start their own hate group!

Clearly there are some tweaks to work out.

All Things Just Keep Getting Better

Today on NPR, labor economist Eric Hurst was on to debunk the common myth that Americans are working harder and harder. In truth, leisure time over the past fifty years have risen. Men are spending more time not working than their counterparts from half a century ago. Women are spending more time in the office, but they are working less in the home--housewives are no longer the standard. Indeed, Americans work little compared to other countries with 18% working more than 48 hours a week. Compare this with other countries, especially developing countries. In Peru, half of all surveyed work more than 48 hours a week.

Hurst chalked up this increase in productivity to modern inventions--dishwashers, microwaves, and so forth. All true. But one cannot ignore the role of a rising population and the division of labor. Housekeepers are no longer for the rich. Not only are people earning more, not only are they--on average--working less, there are now far more people earning more and working less. It astonishes me how people can be so pessimistic about the future.

Economics from a Billionaire

Via Gregg Easterbrook, billionaire Sam Zell makes economics videos. The main video now is on Sarbanes-Oxley. It describes its destructiveness, despite its good intentions, in song form. His 2003 Wired Exports also teaches a good lesson.

Business, Not Market, Failure

With the return of Real Time with Bill Maher this past Friday, Maher's tackled Chinese imports with a well-worn fallacy: bad business means a failed market. The two are rarely one in the same. When a business make a bad decision and they are punished for it (as Chinese manufacturers are experiencing) that's a success of market activity.

The costs of such sloppiness is exactly why we can trust markets to handle so many complicated problems. It is not perfect, but compare mistakes made by CEOs to those of politicians. In government, blame is more likely to be passed than shouldered; failure is more likely to persist than be purged.

Quote of the Day

From Radley Balko at Reason:

Imagine how this sounds to the average Iraqi. "America is fighting this war for your freedom and safety. Also, we're drawing all the world's worst terrorists into your backyard so they blow up your markets and police stations, and steer clear of ours."

Big Teacher

Panic creates a desire for protection, but that doesn't mean it has to be compulsory. Tonight on Kudlow and Company (I'm having a lot of Kudlow articles lately), former Labor Secretary Robert Reich debated Steve Moore from The Wall Street Journal editorial board on the topic of financial literacy.

Illinois recently passed a law that anyone taking out a loan must take a mandatory counseling. Reich smartly argued against the mandatory counseling but strangely argued in favor of banning "predatory loans." If Big Brother has no place in forcing adults to learn about options (and I don't think they do), then what a conclusion it is to claim the government does have a role in denying people options altogether.

Alienation of Economics

The sloppiness that appears in time of a change in the market continues to astound me. Tonight on Kudlow and Company Senior Market Strategist at Delta Global Advisors, Michael Pento, argued our economy is weakening because more and more foreigners are staking a claim to federal debt. Twin deficits (the budget deficit and the so-called trade deficit) are the poison of the economy.

I agree that the high level of government spending is a bad sign, but what difference does it make who's lending Congress the money? The best way to counteract this sloppy spending is to grow the economy with trade and technology, not by retreating to isolation at the expense of American people. That would be a double hit to the economy.

Weller On Incentives

Tonight on Kudlow and Company, Christian Weller, senior economist at the Center for American Progess, argued there would be no moral hazard problem if the government bailed out people's mortgages.

I'm not sure what's going through Weller's mind but when you pay for people's bad decisions, you don't create much of a reason for them to avoid mistakes in the future. And you certainly can't expect other borrowers (or lenders for that matter) to be cautious in the future after you proved there's a safety net just aching to spring up.

Making Plans Centralized

Today on NPR's Kojo Nnamdi Show, guest Lee Gutkind discussed his new book Almost Human: Making Robots Think. Partway through the interview, Gutkind proclaimed that society needs to figure out what we want robots to do in our economy. Arguing for a massive convention of various disciplines such as (doctors, roboticists, industrialists and so forth), he said this meeting could plan "once and for all" what robots will do.

Gutkind's desire for planning sounds nice but is strangely placed. There was no such meeting when the Internet first appeared and after an admittedly hectic discovery process, we have learned what works as an online business and what does not. Gutkind's flaw lies in believing there is no planning going on in the realm of applied robotics but in truth there is a great deal of design. But unlike the centralized organization of a few that Gutkind imagines, the planning that is going on now is echoed across millions of minds in thousands of companies the world over. Through the activity of the market, we will learn where robots work well and where they don't. It'll be messy, but it will work far better than a handful of people meeting at a Holiday Inn.

Welfare for Millionaires

Gregg Easterbrook at ESPN rants on handouts for our millionaire ex-presidents. I can't put it any better than he did (including his conclusion), so here it is.

Wealthy ex-presidents reach into your pockets: Recently, the Congressional Research Service announced the federal subsidies requested for the coming fiscal year by ex-presidents Jimmy Carter, George Herbert Walker Bush and Bill Clinton. Globe-trotting Carter asked for only $2,000 for travel; Bush and Clinton, both millionaires, wanted $50,000 from taxpayers for travel. Bush said he needed $69,000 for "equipment" and $13,000 for postage. Is Bush planning to mail 32,000 thank-you notes next year?

What's really offensive is that all three filed for the maximum presidential retirement payment of $191,000 annually. All these guys are wealthy, the elder George Bush having significant inherited wealth, yet all want taxpayers to hand them pensions seven times higher than the typical Social Security sum. This is extra galling because Carter and Clinton aren't even retired! Carter continues to write books that sell well; Clinton is active on the corporate speaking circuit, having earned an estimated $10 million speechifying in 2006. Clinton prattles on and on about the horrors of inequality, yet demands $191,000 in bonuses from taxpayers whose median household income is about 1/20th of his estimated $10 million. Why didn't the three ex-presidents request no pension at all? That would have been the dignified thing to do.

To top it off, Clinton requested $79,000 for telephone service. It is impossible, physically impossible, to spend $79,000 on telephones! If Clinton had a 10-cents-a-minute long-distance plan, he could talk long-distance 24 hours a day, 365 days per year -- and you can imagine Clinton doing this -- yet fail to burn through $79,000. The most expensive package offered by Verizon Wireless is an international super-phone with unlimited texting and four hours of talk time daily; this sells for about $3,000 per year. Clinton could purchase two dozen of the most expensive cell accounts available in the United States for the tax-subsidized telephone budget he requested. Is Clinton's $79,000 phone request fraud, or is Clinton planning to use the money to buy phones for staffers working on his private speaking business? An ex-president who had financial problems might legitimately turn to the taxpayer. For all three living ex-presidents to be quite wealthy yet demanding public subsidies is shameful -- to say nothing of a failure of leadership.

Lou Dobbs Thinks I’m Dumb

Last year the Independent Institute issued a letter on immigration. The letter argued that immigration is not all bad for the country and in fact makes us better off as a whole. I signed the letter, agreeing with its premise. It was a short and simple, and now over a year later Lou Dobbs picked up on it. Economist Alex Tabarrok from George Mason University appeared on his show recently, and can be seen here. Dobbs took the arguments given by simply responding that the signers are "idiotic," "dumb," "jackasses," and "completely out of their minds." I can’t say I agree with Powell’s extreme open border position, but I still think more immigration will make America better, even if that makes me dumb.

Trade With Your Friends

James R. Lilley, et al. are urging Congress to pass a trade agreement with South Korea which would reduce various trade barriers between the two countries. Congress, if they dare to be consistent, should follow Lilley's advice.

Trade sanctions are readily imposed on the country's northern neighbor. If the legislature recognizes that less trade is detrimental to a country, then clearly they should understand more trade is beneficial to it. Congress must lower trade barriers to South Korea, unless they believe that this democratic country of 50 million is actually part of the axis of evil.

A New Record Looms

The English Wikipedia is looming on its two millionth article. Based on this information, I estimate that the new landmark will appear on approximately September 14 at 9:34 pm. (However, given that as one approaches the two millionth article, article creation is likely to increase, the time of creation might be much earlier, possibly in the early afternoon or late morning.

Capitalism 101

Tonight on The Daily Show John Oliver and Jon Stewart jokingly argued that China's use of lead paint in toys is an example of how "they do capitalism better than we do." Not bothering with oversight or quality control, the Chinese factories (and the American consumer) can save a great deal of money.

If only they knew how much they were joking. Contrary popular belief, capitalism is not merely about reducing costs but reducing costs while still providing people with something they want. And this is why capitalism works. It's not that bad decisions won't happen, it's that they won't be rewarded. And already we see capitalism working as Chinese factories become less popular and are put under pressure to raise their standards. It's a loss for the manufacturer, but yet another victory for markets.

Edwards Plans to Punish the Weak

John Edwards has been running all over Iowa lately promising a higher minimum wage, stricter work safety laws, and a crackdown on "predatory" lenders. These, strangely, are supposed to "reward hard work."

The minimum wage does not reward hard work. It does, however, reward people who deserve a raise but don't argue for one. It also punishes those who have the hardest time getting a job.

Safety laws do not allow hard work to be rewarded but make it more difficult for companies to pay their workers what they deserve. Looks like more people will have to take a larger chunk of their compensation in the form of additional handicap ramps.

Making a loan harder to get isn't going to help those who need a loan. Sub prime rates (loan deals offered to those with a poor credit rating and require a lot of collateral, usually a house) are options that people don't have to take. Here we see the free market offering a chance to those who need it most and Edwards wants to see that option ripped away.

Hustle and Woe

While driving home tonight DJs on a local radio station sparked a massive discussion on various "hustles," or ripoffs, people encounter in our daily lives. Listeners called in with example after example: cell phones, bottled water, condos, computers, cable/internet, parking, college tuition, stadium tickets, casinos. The great paradox is that even as people say these are ripoffs, they buy them. The DJs bemoaned the price of cable and internet, claiming cable in their age could be paid with a paper route. What they ignored is that such service included far fewer channels, no internet, and no On Demand service (the last of which one of the DJs praised).

These things are not really ripoffs, as evidence that people keep buying them. What sort of person buys somethings he knows he doesn't want? Most of these examples are really opportunities for people to wish stuff was cheaper, but that's nothing special.

Granted, some products are truly ripoffs--some things are not worth the price you pay for it. But such products don't hang around for long. Nobody called in claiming New Coke was a ripoff. The only true hustle out there are taxes, money that generally goes to those you don't know and probably don't care about it. The very fact that most of these groups can't make money through donations demonstrate that. And there's no way to opt out (short of leaving the country). If you don't buy a cell phone, your life is a little less easy. But if you don't pay your taxes, you go to jail. Woe is me.

Iowa Matters for Another 21 Weeks

There's been a lot of coverage lately on the Iowa Straw Poll, as meaningless as it is. For example, Mitt Romney just won it on the Republican side even though two major contenders (McCain and Giuliani) didn't attend the event. No matter--the caucus is still another five months away.

Here's the thing about Iowa. Many (especially candidates and news media) justify Iowa's early selection becayse Iowa is a wonderful cross section of the country. A lot of people know better. Sure, Iowa's typically a swing state but it's filled with farmers and very few cities (and zero metropolises). It has few immigrants and minorities. Educational scores are way above average. Incomes are way below average ($28,340 versus the national average of $40,000--though different costs of living distort this comparison somewhat).

Some say the reason we still have Iowa caucuses so early is so farmers can get candidates to support massive farm subsidies. That is certainly part of the reason. But most Iowans aren't farmers. Having grown up in Iowa, let me tell you the real reason we love being first: we like the attention.

Usually when Iowa makes the national news it's about the Mississippi flooding or another tornado showing up. There's little attention paid to the people of the state; all news has somber undertones. But once every four years, we matter. It has nothing to do with farming or our "amazing" representation of the country. It's all about seeing Wolf Blitzer reporting from Davenport or candidates debating at the University of Iowa. We like it when the state is mentioned in the same sentence not containing a reference to a disaster or corn. It's all about feeling special. This is why some of us get so angry when important states like California complain, even if it is justified. But at least we'll always have James Kirk.

The New Oedipal Complex

Bryan Caplan's new book has an interesting analogy:

Oedipus wanted to marry Jocasta. Jocasta was Oedipus' mother. But Oedipus did not want to marry his mother: He put out his own eyes when he found he had. Similarly: The median voter wants protection. Protection makes the median voter worse off. But the median voter does not want to be worse off. The efforts of both Oedipus and the median voter backfire due to their false beliefs. For Oedipus, the false believe is the Jocasta is not his mother; for the median voter, the false belief is that protectionism is good for the economy.

Tariff Changes

I hope my micro students can answer the following:

In 1828, the US Congress passed the “Tariff of Abominations.” The law established various very high tariffs on imported manufactured products to protect northern factories. However it pained southern states who bought much of their manufactured goods from either the north or abroad. Five southern states—lead by South Carolina—refused to collect the tariff and forced a compromise with the US government. The average tariff dropped from 50% to 15%. Illustrate the effect of this drop in the tariff on the market for boots. (Use the average tariff rates for the tariff rates on boots if you wish or need to.) Be sure to indicate changes in deadweight loss, tax revenue, producer surplus, and consumer surplus.

Diddy On Asymmetric Information

I've heard that P. Diddy (or just "Diddy" if you are up on the culture) recently put a wanted ad for a new assistant on You Tube. After getting countless responses he's had to make people be aware of other requirements, among them a college degree.

The casual observer might wonder why an assistant to a rap mogule would ever need a college degree--what does Shakespearean literature or chemical theory have to do with getting cheesecake at three in the morning? But my students would know better. Diddy is making use of both screening and signalling.

A college degree is a signal to others that the holder is smart, mature, and dedicated (as well as possessing Diddy's lofty requirements of being able to read and write). Knowing that such a degree genuinely conveys this critical information, Diddy has decided to screen out anyone who doesn't have a degree. It is not that someone who doesn't have a degree isn't automatically smart, mature, and dedicated (and literate). Indeed, he is surely excluding valuable people by making this requirement. But his time is scarce and a degree requirement is an easy way to eliminate a great number of candidates.

The other screening he does (watching all the video applications, later phone interviews, etc) will be made much easier. And as the number of candidates narrow, the signals that they must send will become much more potent than being able to read. But these two common strategies to combat adverse selection will surely play a prominent role in Diddy's search.

Don't Panic

Yesterday on NPR I heard an interview with an author (I didn't hear the name) about his new book (I didn't hear the title, either). What caught my attention was that the author implored listeners and readers to reduce the amount of resources people use. That grocery stores give away plastic bags for free should be a crime, he said. Most economists have a different view: don't panic.

For example, one should ask why do stores give away plastic bags? They certainly didn't get them for free--why give them away? The answer is pretty obvious (customers demand it) but the lesson is not. Plastic bags are clearly cheap (if they costed a dollar each, I'm sure most stores wouldn't give them away) and because they are so inexpensive the resources that made them are relatively abundent. (Plastics take very little oil to make and tend to be made out of the part of crude oil that's low quality.) If some component of plastic bags becomes more scarce, the price of bags rises and people adapt. Stores might charge people for bags, creating an incentive for customers to bring in their own cloth one (something this author suggested everyone do even though this scarcity is not yet occuring).

People have a very hard time understanding that as long as people have an incentive to innovate, we will always be able to solve new resource problems that come our way. That has been the great trend of human history. Every time doomsayers claim we've reached a limit to technology, they've always been proven wrong. The author noted that all animals when they've used up their resources start dying out. He proposed that since humans are no different more countries should start exploring a one child policy to reduce "overpopulation." But people are fundamentally different than animals. We have the capacity to create (farm, invent, etc) the resources we need for our survival. This fundamental difference insures us against ourselves. Mandating we all conserve now takes away from that capacity and diminishes the incentive (fewer inventors and less profit opportunity). The best thing you can do for the environment and the future of humanity is, in the words of a great book, Don't Panic.

US Government Sends Sheep to Death

The U.S. Fish and Wildlife Service might be setting aside 400,000 acres of habitat for the endangered Sierra Nevada bighorn sheep. The land will be a de facto commons--officially protected but in practice much too hard to enforce. I'd wager that this graceful animal is in for a rough time: with only a handful of rangers protecting it and legions of men with guns wanting to kill it before their competition does, it appears the US government is setting up a classic tragedy of the commons.

But this historically disastrous set up is not the only problem the sheep faces. One of the reasons it's numbers fell was because the herds would intermingle with domestic sheep and disease would pass from the farm animals to the wild ones, causing mass deaths. With nobody owning the bighorns, nobody was there to care what the sheep did to them (though there was certainly those that were watching their domesticated herd for signs of problems). In this case, the sheep farmers were externalizing a cost onto the wild. But nobody owned the wild so nobody noticed. Not until it was too late.

Instead of preventing the average person from wanting to protect these animals, the US government should look into allowing to own, kill, and profit from them. That way there will be legions of those making sure the bighorn stays around for a long time, instead of legions trying to beat each other to the last one.

Socially Optimal

Ever since the green revolution there's been a great deal of talk about the need for firms to be "socially responsible." I'm honestly not sure what that means and I'd venture most people don't, either. Perhaps it means that companies should not pursue only profits but also, say, protect the environment even if it's very costly. That might make conventional environmentalists feel good inside but not the rest of society, who has to shoulder those costs. What people often don't recognize is that pursuing profits can protect the environment; one just needs to adjust the incentives.

The Star Online, for example, applauds the growing trend that electronic companies are adding recycling programs to reduce waste. But what is strangely missing from the article is the fact that firms have reasons to recycle beyond making their customers feel good or in the pursuit of some good feelings/PR. The real issue is that often people (and this usually extends to firms, at least in my experience) are charged a flat rate (or no rate) every month or year to throw all their garbage away. Sending three tons a month to the dumpster costs exactly the same as sending one ton (my students would recognize this as a fixed cost). It costs essentially nothing for a firm to send those two tons to the landfill. But recycling those two tons is expensive--sorting, cleaning, and special trips is costly. Is it any wonder that widespread corporate recycling is newsworthy?

Instead of municipal dumps charging a flat rate for throwing things away, why not charge per ton? This landfill in Salinas Valley does (though it notably charges nothing for electronics, what the article in the Star focuses on). That way when a landfill becomes crowded, the price will go up and people will recycle more. But when a landfill is mostly empty, the price will be low and we can avoid those costly activities recycling demands (such as the second or third truck that has to drive around the city). But no matter what, we can depend on firms being socially responsible.

Below the Minimum Logic

During the YouTube debate for the Democratic candidates a woman asked if the candidates support a higher minimum wage. At the same time, most of them strangely agreed that they would work for the minimum wage.

What escapes most people that support such legislation is that the minimum wage hurts poor people. Let me say that again: the minimum wage makes it more expensive for employers to hire those that have few skills. The argument seems absurd at first until you realize that firms want to make money. Those that have the hardest time getting a job will not be helped by a law making it more expensive to hire them. Those that need the most help in our society--the very people that minimum wage seeks to help--are those most harmed by it.

Monopolies and Economies of Scale

A student asked me Saturday about the difference of economies of scale and high fixed costs concerning the justification of monopolies. Monopolies originate in many ways and two of those ways--costs decrease as output increases for the entire market (also known as a natural monopoly) and requiring a lot of investment to get started--seemed completely entangled to him. I sympathize--it's hard to imagine an industry that has economies of scale but low fixed costs. Aren't they really the same thing?

In truth, they are distinct, though subtly so. A natural monopoly can provide for the whole of the economy at decreasing costs. Even if a firm could overtake the fixed costs of entry, the existing firm could undercut the challenger. And even if we assume that the reason the existing firm has economies to scale for the whole market is open to anyone, competition will not last. The demand is simply not large enough to support more than one firm and eventually only one company will remain. True, under rare circumstances it may not be the monopoly that existed beforehand. But a monopoly will naturally appear.

Restricted Trade Talks Continue

According to a U.S. trade official, the Malaysia-U.S. free trade talks are now expected to be completed in June of 2008. No, that's not a typo. These talks--already over a year old--could go on for another year. That's how we know these talks really aren't about free trade.

Free trade--or the absence of government restrictions on international exchange--does not require two years to negotiate. It doesn't require two minutes of negotiation. But each government's interest in avoiding true free trade drags these talks on for years.

It's all so wasteful. Eliminating barriers to trade not only enhances the well-being of whom you trade with, but it helps you as well. It is rightly very easy for New York City to trade with Los Angeles. Why shouldn't the Big Apple trade as easily with Malaysia?

Broken Chairs

I hope my micro students can answer the following:

Suppose a deli owner values a $20 chair at $100 and plans to buy a $20 pair of boots which he values at $50. Now suppose a child breaks the chair and the owner must replace it. Calculate society’s economic profit of the incident, indicating if it was better for society or not that the child broke the chair.

The Surplus That Surrounds Us

I've noticed that people (in general) have a strange bias when they measure wealth. They tend to count only physical objects. This is not an inherently bad way to count happiness (it's certainly better than counting just currency). But merely counting objects runs the danger of missing another aspect of wealth: utility (aka satisfaction or happiness). If two people each own the same computer, but one enjoys it much more than the other, one is wealthier than the other, even though they have the same amount of stuff.

In my class's first homework assignment, I asked them to indicate a time when they experienced what economists call consumer surplus, or utility minus the cost of getting a good. The point is we experience consumer surplus all the time--most goods we buy are ones we would have been willing to pay more for, but didn't have to. Rarely is the price we pay our maximum price.

Measuring wealth is a very difficult thing to do. Wages is a convenient quick and dirty way to do it and works pretty well until people start thinking countries should stock pile gold bricks instead of importing cars. Stuff/cargo/consumer goods is generally how economists define wealth. But in rare cases, such as the computer example, people focus only on stuff and ignore consumer surplus. Two things you sort of want is not strictly better than one thing you really want. The mechanism of the free market tends to sort out such preferences and make sure everyone gets the most consumer surplus they can. But it's worth pointing out that everyday we are surrounded by wealth we cannot see or touch.

Insecure Incentives

Political agents have a notoriously hard time admitting they've made a bad decision. The basic incentives they face mean honesty is punished if it ruins a perception. Companies sometimes face this world--they are often fearing for the integrity of their brand--but it usually takes a back seat to the truth. Customers aren't stupid and bad have to be temporary. The political world has no such profit motive and thus no such reality check.

Enter a recent test by federal inspectors revealed TSA a dismal failure in security.

In one test, TSA inspectors hid the components of a fake bomb in carry-on luggage that also contained a bottle of water. Passengers are prohibited from carrying containers holding more than three ounces of liquids, gels or aerosols through airport checkpoints.

The screeners at Albany International confiscated the water bottle but missed the bomb. In all, the inspectors slipped four banned items through the main checkpoint during the test, sources said.

On the release of these failures Ann Davis, a TSA spokeswoman, defended the organization

We don't discuss the results because they tend to paint an inaccurate picture of the competency of our work force. The tests are designed to be incredibly difficult and TSA does anticipate a fair level of failure.

Which is sort of like Google saying "Well, the test we have to ensure the security of our information are hard so it's ok if we don't pass. It's not like hackers are smart."

I know I'd feel safer.

HT: Mike Mills

The Civilization of Wal-Mart

San Diego's looking to keep Wal-Mart out of its--er--small town, to be holding a ballot next year. According to an editorial by Gerry Braun, some have suggested that the ballot read: "Would you undermine civilization as we know it in exchange for some cheap groceries?" One must wonder what those voices propose for other ballots.

There is no doubt that the presence of a Wal-Mart changes a community. Some stores disappear. Other stores take their place. But undermine civilization? It certainly changes civilization, but the same can be said for cars, the Internet, and cell phones. "Undermines" suggests something sinister. Now you might complain that the changes are undesirable (as Robert Putnam claims changes in technology are), but one must wonder: if the result is so awful, why are people voluntarily making that change happen?

At its core, economics is the study of choice. That study requires that we recognize people do not choose simply between the ideal and the imperfect. It is not a matter of either utopia without Wal-Mart or an apocalypse with it. Otherwise, no one would shop at Wal-Mart. Clearly there is something to gain. The continued success of the company (as well as the continued attempts to remove it as an option) suggests people like the civilization it creates more than the one they would otherwise have. The only thing truly undermining civilization is the misguided thinking that what people actively pursue shouldn't be allowed if others don't want it.

Supreme Elasticity

Today in microeconomics we discussed how people respond to price changes. The recent Supreme Court ruling on if manufacturers could sell to retailers on the condition the retailers sell at that price. We could not, however, exactly recall what the existing law was. And we were confused why a manufacturer would want to rob a particular retailer of flexibility.

As it turns out, the court overturned the existing rule that retailers could not be locked into a price. (I mistakenly thought the reverse was happening.) The case was brought by Leegin Creative Leather Products who wanted to establish a minimum price on its goods sold. These seems to confirm one of the more plausible arguments mentioned in class concerning why a maker would want high prices: to maintain the brand. I doubt it would look good for a maker of "creative leather products" if that creativity saw its way to the discount bin.

And yet we should remember that most goods are elastic: manufacturers generally want to keep prices low because the increase in quantity demanded more than makes up for the lower price. Revenue increases. Let us also remember that this is an option, not a universal decree. Manufacturers don't have to set a retail price. I doubt many will because retailers would be less inclined to buy goods where they have to agree on such a control. (I imagine only high-end quality manufactures will be truly upset if their high end goods hit clearance.) If those leather products aren't selling, the store has to throw them away to make room in the warehouse. They can't cut losses and would be much less willing to take a chance.

The laws were originally couched in anti-trust logic. One cannot allowed one company to have pricing influence over the other, contract or no. Consumer groups are worried by the ruling and think the price on all goods will immediately rise. Such conclusions might have a bit of truth to them but they forget the basic substitute that all goods have: you don't have to get it and that includes the retailer.

HT: Matt Huber

Tell Me the Secret of the Hurricane

Tonight during my introductory economics class, I made mention of the story of Hurricane Fran after it swept through Raleigh, NC in 1996. In the aftermath of Fran, power was out, trees were down, and the heat was devastating.

In nearby Goldsboro four guys decided to rent a refrigerator truck, loaded it with ice and chain-sawed their way to the city center. Once there, they charged the locals $12 a bag--more than 10 times what it cost them to buy it. Anti-gouging laws took effect and the police arrested the men. (The trucks were impounded and turned off. The ice melted.)

We discussed how the pricing mechanism will sort out those who want ice for cold drinks and those who want it for their insulin or to ward off heat stroke. Prices do that. They are not perfect, but it is far better than a first-come-first-serve basis, where the fast or the healthy or the merely well placed get ice, leaving nothing for those that need it.

But the most powerful element of the pricing mechanism is that it creates the incentive to increase the supply and bid it down. At $12 a bag, others in Goldsboro have a reason to send more ice there and sell it for $11 or $10. Still, that's a high price and encourages yet more to come: $9, $8, $7. Lower, and lower. It's a strange paradox in economics: The only way to guarantee low prices is to allow sellers to charge high prices. But when you understand the role and power of incentives, it makes perfect sense.

For the full and deeper story, see this EconTalk.

China Heads for Europe

Firms flock to the Chinese mainland because production are so tremendously low. The astonishing growth of the world's most populous country has lifted tens of millions of people out of poverty. The Chinese government, for some reason, thinks this is a bad thing.

China is adopting new and restrictive labor laws--no doubt bowing to the communist mentality that still lingers there. The laws, among other things, requires "that employers must submit proposed workplace rules or changes concerning pay, work allotment, hours, insurance, safety and holidays to the workers' congress for discussion." In other words, companies all over the country will be forced to swap flexibility for stability. Costs could (and probably will) also rise. Naturally, some businessmen are getting concerned.

No one seriously expected that China would throw off all its communist roots. Like the US and the countries of Europe, China would transform into a mixed economy. But if there was any question if China would be more like the US, as a freer market, or Europe, as a more restrictive one, this latest development suggests it's leaning towards the Continent.

The Capitalist Soul

With the media press and growing attention of Michael Moore's Sicko, I can't help but remind myself of enduring truths about various ways used to govern an economy. This is particularly reinforced with the testimony of Che Guevara's daughter (who appears in the movie) concerning the evils of capitalism and the virtues of centralization.

Under communism, penning a well-written book critical of communism means death.

Under fascism, penning a well-written book critical of fascism means execution.

Under absolute monarchies, penning a well-written book critical of the king means extermination. Tn any of these, the best one can hope for is censorship or a confiscation of materials.

But under capitalism, penning a well-written book critical of private ownership means becoming a millionaire.

Say what you want about the evils of free markets. Rare is the institution that rewards-or even tolerates-those who challenge it. That alone should earn capitalism a lot of respect.

Sicko, Reviewed

Mike sent me this excellent review of Sicko, noting Moore's unsurprisingly sloppy presentation of the facts. Worth a good read, though after it I'm confused why the author suggested one should pay to go see it.

The review is notably in a Canadian newspaper, the same place of the implied ideal health system.

Impoverished Logic

Maude Hurd, President of Acorn (an antipoverty organization), needs to check her economics. In a letter to the New York Times, she defended John Edward's work in raising the minimum wage. To her, "his efforts were both sincere and a very effective way to fight poverty."

I fail to understand how making it more expensive to hire those that have the hardest time finding employment eases their burden. For those that are good enough to not be fired, they could have gained a raise on their own. Perhaps Hurd's organization should have helped with their negotiation skills instead of raising their wages at the expense of the most downtrodden.

Salads Do Not Melt

The Supremes ruled against allowing public schools to use race as a factor to determine where children went to school. The ruling, which a lifetime ago would have made conservative white folks very angry, now is making liberal black folks very angry. The ruling declares "racial balancing" as unconstitutional.

This technique, used by countless school districts the country over, attempts to create an equal balance of races in all the schools they reign over. This has not only had the nasty unintended consequence of denying a better student because they weren't the right race but making sure a student doesn't leave because they were the right race. In other words, it's forced integration.

Maybe it can be a good thing: people can learn through diversity. But all schools shouldn't be forced to comply with that particular strategy. At the same time, the Supremes shouldn't outlaw the practice, either.

I am surprised to hear that few talk about why schools are segregated, indeed communities in general. We have Chinatowns, black and white neighborhoods, and Little Tokyos. Yes, some of this is based on income, but people seem to prefer to hang out with people like them. They self-segregate. The melting pot seems like a fine idea in the abstract but in practice, most reveal they are happy with salad bowls, despite the possible benefits. Why force it any other way?

A Clean Environment is a Luxury Good

Despite the blame on America for massive pollution, the 10 Cities with the Worst Air Pollution are all in developing countries. The richer people are, they can demand more that their environment be cleaner.

Cairo, Egypt: 11.1 million
Delhi, India: 15 million
Kolkata, India: 14.3 million
Tianjin, China: 7 million
Chongqing, China: 6.4 million
Kanpur, India: 3 million
Lucknow, India: 2.6 million
Jakarta, Indonesia: 13.2 million
Shenyang, China: 4.7 million
Zhengzhou, China: 2.6 million

Moore Reading, Not Less Health Care

Micheal Moore went to the Daily Show tonight promoting his new movie, Sicko, a work promoting national health care. Moore is tremendously upset because people don't have the health insurance he wants. In fact, he doesn't think private health insurance should exist it all.

If it turns out the health insurance people get doesn't cover something they think it should, why not instead encourage people to read contracts before they sign them? Then they would know what's covered and what isn't and then they could decide if they want to purchase the product. I'm sure people sign a lot of things without reading it. It's a problem. But telling people they shouldn't be expected to read things they sign isn't helpful.

But Moore doesn't merely think that people should read less, he thinks we should throw out the very contracts they should read. Moore told Stewart that it's awful companies provide insurance because they are in it to make profit. Thus, they look to not pay off claims. What Moore ignores is that if they never paid off claims, they wouldn't make any money, either. Nobody would want to buy such insurance.

Unless, of course, no one bothered reading the contracts.

Gbrands

Germany's looking to pass a new law requring all email service providers to collect and store information on its users. It would also ban anonymous accounts. If the law is passed Google announced that it would no longer offer the country Gmail (called Google Mail over there thanks to a trademark dispute).

One can imagine such a law would be burdensome to Google. Not only is that a lot of data to keep track of, fewer people would be willing to use their services. If not, email in general. Those who travel to Germany and use Gmail (as an avid Gmail user who's undergone some recent globe-hopping, having an email I can access anywhere is a godsend) would also be subject to the law.

But Google doesn't seem as concerned about that (Germany, after all, is still one of the largest economies in Europe). Their global privacy counsel, who announced the possiblity that Gmail won't be in Germany focused on a different reason.

Many users around the globe make use of this anonymity to defend themselves from spam, or government repression of free speech. If the Web community won’t trust us with handling their data with great care, we’ll go down in no time.

Anti-free marketers often point to corporate brands as leading to monopolies and heartless decision-making. This is an example of how brands are quite good: companies will go the extra mile to do the right thing because a hit to their brand is a hit to everything they sell.

Slicing Subsidies

AEI published a short essay yesterday arguing for the elimination of subsidies to US farmers. As much as one should support cutting off free handouts at the expense of taxpayers, AEI argued that such a change won't really harm the industry. This sadly suggests that if the supports are keeping farmers around, they are justified.

If the government funds an industry, it's a problem even if many firms would otherwise go under. Especially if they would otherwise go under. Subsidizing a profitable firm means you have a few more people working on something that doesn't need working on. Subsidizing an unprofitable firm means you have a whole company doing a wasteful job. Such supports pass a tipping point from loss to profit. Successful companies are not at a tipping point so subsidies (while still undesirable) only waste at the margin.

Don't be afraid to deregulate a firm--or even an industry--into destitution. Such times are when we can often do the most good.

Supporting the Phantom Film Industry

Last I checked, Spain doesn't grow many cacao beans (for chocolate). This shouldn't surprise anyone--Spain isn't a good place to make quality beans. I suppose they could get around that by constructing vast greenhouses and use vast amounts of energy to simulate the needed climate. Doing so would, of course, be a needless and tremendous burden on their economy. Thankfully, no one (to my knowledge) is suggesting they do that.

For whatever reason Spain--indeed Europe in general--isn't a good place to make films either. Most people over there prefer American movies. But that doesn't stop the Spanish government from forging a new law requiring cinemas to show one European movie for every three non-European ones. It would be like requiring 25% of the chocolate in stores be made from cacao beans grown in New England.

The politics of it is, of course, to support the local film industry. But cinemas all over the country scream in protest, even engaging in a 24 hour strike on Monday (93% participated). They know their customers want foreign films, not films from a local industry so poorly executed it has to force people to sell them.

Has America Strayed?

A lot of people would say yes, including myself. Once a haven of small and decentralized government, the state has become a major influence in social and economic affairs.

Joel S. Hirschhorn agrees with me, at least with the "yes" part. Hirschhorn feels as though our country is too interested in consumer products and other bread and circuses to care about the horror that the US government bears down on us. He supports a national convention (as allowed by Article V of the Constitution) so "the people" can propose amendments. Knowing that Amendments can help (freedom of speech) as well as hurt (Prohibition) the country, adding another Congress-like body even for a while hardly seems like a recipe for success.

I think Hirschhorn wouldn't be so concerned if he knew that things aren't nearly as bad as he says. Yes, the government is much harsher now. But people are richer, healthier, and more educated than they've ever been. Never in the history of the world has so many options been open for so many people. Hirschhorn laments that most people don't seem to care about the inner-workings of the government and most don't vote. But that can be a good sign, as it is here. The countries where people are really angry about their government, where people take to the streets and vote in massive droves, are not good places to live. People only pay attention when things get really bad, especially when it threatens the "mindless entertainment" that supposedly is the cause of inactivity.

The state of the government is certainly cause for attention and anger. But it's not nearly as bad as the doomsday Hirschhorn paints it as. Winds? Yes. Hurricanes? No.

NJ Congress Encourages Students to Not Think

For many Americans, college is the place where kids become adults. They learn to manage their own schedule. They learn to live by themselves. They learn to interact on a more professional basis. Many take jobs.

But the New Jersey Senate thinks they are growing up too fast. Earlier today they passed the Codey/Lesniak bill which, among other things, the exchange of gifts from lenders to educational institutions in exchange for preferred lending status. According to Sen. Lesniak:

The only reason a lending institution should get a college’s stamp of approval over a competitor is because it offers students a better deal for their money.

In other words, students and their parents shouldn't be bothered with understanding the requirements of a student loan. All the thinking they should have to do is check the college's list of suggested lenders and then mindlessly act accordingly.

The students may be the ones who will suffer the most. Not only is the Senate discouraging thinking, they are also discouraging companies from donating the very buildings and equipment that often draw students to a particular college and teach them when they arrive.

Lost in the Black

Last night I happened to have caught Lewis Black's stand up on Comedy Central. He argued that creating economic growth is easy: just get the government to build a big thing in a state that needs economic growth (he suggested Mississippi). Then people will say "I have to go see the big thing!" and then travel to Mississippi. Presto! we have growth.

It's hard to tell if Black was kidding or not (I suspect he wasn't) but it's worth pointing out why this is a bad strategy. Similar plans often pop up in government circles, candidate speeches, and various interest groups.

To illustrate where Black went wrong, let me propose a similar plan: to save money, instead of making a new big incredible thing people want to see, move an existing one. Let's pick up the Statue of Liberty and move it to Mississippi. That would create a lot of growth right? After all, we know people will travel far and wide to see it. It's a proven project and cheaper than starting from scratch.

But wait: what about all those New York businesses that depend on the tourism that the Statue brings? They would go under or move to Mississippi, which is why Black's plan won't work. Similarly, there are those who would go see the new amazing thing and thus forgo doing other things, like going to New York to see the Statue and patron local business. Black's just shuffling wealth. Net gain is zero (actually it's negative because we had to pay to get nothing).

Surface Trade, Not Deep Research

Over a mile below the surface South Dakota toils.

The state is looking to win an NSF bid for the construction of a "Deep Underground Science and Engineering Laboratory." It has spent $2.1 million so far this year prepping an old gold mine.

If approved for funding, this will be the country's first DUSEL, with others existing in Russia, Japan, and Italy. Naturally, the fact that we don't have one was a cited reason for making it. On NPR today, I heard talk of needing to "catch up" with the rest of the world because the new science can be so powerful.

I have a much cheaper idea than spending $116 million to make a lab at least three other countries already have. Just do what we usually do when someone creates new technology we don't have: trade for it. We are, after all, "way behind" in Wii technology but we still have them.

Tyler Cowen’s New Book and Secret Blog

Today Tyler Cowen has an interesting offer: order his forthcoming book Discover Your Inner Economist: Use Incentives to Fall in Love, Survive Your Next Meeting, and Motivate Your Dentist and he’ll send you the link to his secret blog.

I have been looking forward to this book for quite a while now. I did some editing and looked up random facts for Dr. Cowen last year for this book and have been waiting to see the final version. It reads kind of like his blog, but contains much more. It was an enjoyable read and I learned a bit and it got me thinking about things I hadn’t thought about before. I recommend it, even without the bonus of learning about his secret blog.

Showing That You Care

Hillary Clinton recently spoke out against the restraints on federally-funded stem cell research. Her sentiment is in the right place. Why should a culture of cells much of the country doesn't even think is alive take precedent over those no one can deny are suffering?

And yet her perceptions are askew. At an event she said there are millions of families left

...waiting and wondering whether their government is really on the side of helping and saving the lives of their loved ones. Where we are now is, we're going backward. We're not just stalled. We're going backward.

The government may be going backwards, but despite what Clinton suggests it is not the only source of technology. Industry is far more effective at invention and innovation than government scientists. Congressional funding is fickle and oversight often oppressive.

Instead of engaging in the abortion battle, Clinton should encourage tax cuts for private research firms. Not only would that get past Mr. Bush, it would run counter to her platform. It would demonstrate that this really is about the sick and dying and not about playing politics with people's lives.

In Defense of Amnesty

Lou Dobbs Tonight once again referred to the immigration bill in the Senate as "amnesty" in spite of the rest of CNN calling it something else. A lot of people are upset about Lou Dobbs. I am not.

Amnesty--or a general pardon of offenses--is exactly what we need for illegal immigrants. Yes, they broke they law but they didn't do anything wrong. They shouldn't be treated like criminals.

The word, however, has a negative connotation (which is good reason to be mad at Dobbs and is probably why it appeared on his show). But it shouldn't, at least not all the time. People get arrested for all kinds of dumb reasons. Suggesting that they didn't do anything wrong (by making them innocent people) is something we should see more of.

No Green, No Green.

Libby Rosenthal at the NYT noted with disgust that "going green" seems to be solely focused on making money. Instead, we should focus on taking care of the environment because "it is the right thing to do." In fact, the economic benefits may be exaggerated.

The strange thing about the article is that the author just gave every reader a reason to not go green. Good feeling and a guilty conscience only gets one so far. But the pursuit of wealth, as Julian Simon pointed out, is the most reliable motivator to ensure humanity does not strip it down to nothing.

Why oh Why Can’t We Have a Better Press Corps? (Autism Edition)

According to the AP:

The court is being asked to decide whether there is a link between autism and childhood vaccines.

The court doesn’t decide if there is a link or not. If there is a link and the court rules there isn’t, that doesn’t mean that the existing link suddenly disappears. If there is no link and the court rules that there is, autism won’t suddenly be transmitted via vaccines. The court is being asked to examine the evidence and come to a conclusion the best that it can.

Why oh Why Can’t We Have a Better Press Corps?

A recent article in the NY Times gave the statistic that the pretax income for the top 1 percent of American households rose 7 percent, to 16; while the income share to the bottom four quintiles fell 7 percent. And then this sentence:

It’s as if every household in that bottom 80 percent is writing a check for $7,000 every year and sending it to the top 1 percent.

That’s not even a remotely true statement. The first problem is the oft quoted “They aren’t the same people.” Those in the bottom quintile in 1979 are not the exact same people there today. I would be willing to bet that the majority of people in the bottom quintile today weren’t even in the labor force in 1979. Furthermore, all quintiles have gotten richer since 1979, but the rate of growth for the quintiles has been different. Just because the top 1 percent has risen faster, doesn’t imply that the bottom 80 percent are sending checks in the mail to them from their helpless exploited state. It could be (there’s really no way of knowing for sure one way or the other) that if the top 1 percent didn’t increase as much the bottom quintiles would have grown slower.

On a somewhat related note, Don Boudreaux directs us to Steve Landsburg.

Give Us This Day Our Daily Shootout

For some strange reason the Church of England is angry that people are going to their Winchester Cathedral. Well, they're not really going there but they are in a video game. And no, it's not in some religious expansion for The Sims. It's to kill people in Sony's PS3 game "Resistance -- Fall of Man."

Granted, I'm not surprised that they are upset.

I wasn't really sure what side of this debate I sympathized with. After all, the Church owns the building. Don't they have a right to say how it's depicted? But the bricks of the building are not the same thing as images of the building. Suppose I take a picture of the Cathedral and I make it look like it's on fire. Or being crushed by an 80-foot tall Jesus. Or placing Pauly Shore in front of it. All of these things depict the Cathedral in a negative way. If I put them on the web, does the Church of England have a right to make me take them down (free speech arguments aside)? After all, don't I own those pictures?

You might say that because the subject didn't consent, I don't have that right. Let's ignore the fact that the subject is a building and cannot consent. I'm talking about the nature of private property. The Church of England allows people to take pictures of the Cathedral (granted, I don't know this for sure but I think it's a reasonable assumption). If they wanted to control its image so much, why don't they ban such photography?

It's a question worth thinking about, not just if the Church has a right under private property but if it's socially optimal to extend private property that far. Again, I'm siding with Sony and not just because I think it would be fun.

Monopoly Lesson

Any fledging economics student should know that a monopoly is the sole entity that sells a particular product. By definition, monopolies have no competitors.

Why this is important is that sometimes one company will claim its competition is a monopoly--a contradiction in terms. But Google doesn't think so. It's talking to anti-trust officials concerning a built-in search tool in Windows Vista.

For those of you who haven't used Vista, when you bring up the Start menu there's a little input box at the bottom where you can type a search query. I don't use it. In fact I often forget it's there. But Google wants it to be easy to shut it off.

Some people shoot back that Microsoft is using its so-call "unfair" advantage as a popular OS to challenge other markets. But so what? Celebrities use their popularity to pose as spokespeople for products that are not the movie they star in or sport they play. Wegman's turned its egg business into a chain of major grocery stores that sell everything from corn to cooking pots. McDonald's now sells salads. Game consoles often double as DVD players.

And oh yeah, Google turned its popular search engine to place where you can also get maps, e-mail, and news. Let's not forget that all those services are free to boot. Talk about unfair.

TV Online

When I was home a friend pointed me in the direction of TV Links. Check it out, especially when you just have to watch TV.

WiTric Boogaloo

MIT scientists are demonstrating once again the importance of scientific independence. Sick of forgetting to plug in his cell phone to a charger, Marin Soljacic and his team of researchers have developed "WiTricity" or wireless electricity. So far they can only power a light bulb from about seven feet away but they are putting the fledging technology up for sale to be developed further.

Imagine never having to worry about the battery life of a cell phone or laptop. Imagine having fewer cords behind your entertainment center. Imagine maintaining power after--or even during--a hurricane. It's a wild idea and there still is a lot of work to be done but the technology is easily worth billions.

Some people say that new technology comes from tinkerers, and that's partly true. But widespread revolutionary technology comes from profit-seeking. And all of them essentially come from fulfilling a need consumers demand.

FrankenKeynes

Lately I've been reading Thomas K. McCraw's Prophet of Innovation, the biography of Joseph Schumpeter. Schumpeter was a famous economist in the early and mid 1900s. He was as famous as Keynes, if not more so. Around the time of the Great Depression, he published Business Cycles but it was not received well. There were some legitimate concerns but the most common critique was that it had no policy suggestions. Keynes' General Theory, however, did. In 1939, Schumpeter organized a seminar to discuss his book. But as McCraw describes

....it became evident that almost no one had read the text. Afterward, several students said that they had never before seen Schumpeter genuinely furious, as he was on that occasion. One of them recalled that 'in the discussion everyone talked about Keynes and not about [Schumpeter's] work.'

Arnold Kling tells a similar story concerning the reaction to Keynes's work. Roosevelt misinterpreted General Theory to mean that one must restrict output to save the economy (as part of the New Deal, crops were burned, pigs were prematurely slaughtered, and "too much" production was made illegal). Keynes' book became a Frankenstein's monster--most of this critical ideas in understanding the nature of the Great Depression were ignored.

When disaster hits, people love to embrace a policy suggestion. Any suggestion, no matter how twisted or vague. Extreme scenarios and strong emotion are the realms where government expands most often and most dangerously. It is also, notably, where con artists thrive.

Pricing the Waves

Today in the NYT Ralph Nader called for the broadcasting companies to be charged for their use of the public airwaves. I applaud Mr. Nader's interest in establishing a pricing mechanism for the use of a scarce resource. But this is not the same as a price. Prices emerge out of market interaction, not political processes. If Mr. Nader really wanted broadcasters to pay for their airwaves, why not sell it to them--or whoever will pay--outright? That way we can eliminate the existing regulation that's used to govern this current public good while at the same time making people pay for what they use.

Well Meaning Environmental Effort from the 1970s

In the 1970s there was a well intended project that put about two million tires off the coast of Florida to create an artificial reef. The result? They didn’t support sea life and have been destroying coral. Now the state is spending $2 million to remove 700,000 of the tires to fix the problem.

The law of unintended consequences is something to keep in mind for any legislation, especially with something as complicated and intricate as the environment.

The New Scientific Method

Recently I’ve been reading The Chilling Stars. It is about Henrik Svensmark’s and others new theory on climate change. The theory, in extreme brevity:

[Svensmark] saw from compilations of weather satellite data that cloudiness varies according to how many atomic particles are coming in from exploded stars. More cosmic rays, more clouds. The sun’s magnetic field bats away many of the cosmic rays, and its intensification during the 20th century meant fewer cosmic rays, fewer clouds, and a warmer world. On the other hand the Little Ice Age was chilly because the lazy sun let in more cosmic rays, leaving the world cloudier and gloomier.

This theory implies that carbon dioxide and other greenhouse gases play a small role (if any) in climate change. His colleagues’ reaction to the new theory was complete rejection. One called it “extremely naïve and irresponsible.” Svensmark was invited to a dinner with other Nordic scientists. He was invited so others could mock him, which they did, and labeled his work as “dangerous.”

The government was reluctant to give him funding, and when he got a grant from the Carlsberg Foundation a government scientist wrote to the foundation urging them to cancel the funding. Svensmark won Danish prizes for his discovery: the Knud Hojgaard Anniversary Research Prize and the Energy-E2 Research Prize, but he was still scandalized in the press.

Apparently the scientific method that I learned is now outdated. Theories don’t have to be proven wrong or invalidated. Hypothoses don’t have to be tested. New theories can simply be derided and have the funding cut if they don’t conform to your priors so you can keep believing whatever you want.

My Politics

On this political test (via Greg Mankiw) I scored about the same as Milton Friedman.

Criminal Survival

Alvaro Vargas Llosa has a wonderful piece at Tech Central Station concerning the obsession with calling undocumented workers "criminals." So what if they broke laws? That does not make them immoral (no more than it made Prohibition-era alcoholics immoral). Why is it wrong for someone to enter the country so they can have a better life for themselves? Why is it immoral for one person to hire another?

Even if we assume that immigrants really do "take our jobs" (and Llosa reasonably argues they do not), why are not anti-immigration activists destroying factory robots and other high-tech machines? When Alberto replaces Paul, the job still goes to someone. But when an assembly line replaces Paul, people call it progress (as they should).

The immigration debate isn't really about the economy. It's about statism. It's about xenophobia. It's about crimminalizing survival.

A Fistful of Laws

The UK will be instituting a series of new laws bent on cracking down on "cowboy traders." From the best I can tell, a cowboy trader is someone who engages in "unfair" trading practices, ranging from "bogus closing down sales" to what Americans would call con-artists (those folks that promise you one thing but deliver another).

Like all developed economies, the UK has laws against fraud. But these laws aren't really about fraud. They are about people who's job other people don't like. Granted some of it seems reasonable (refusing to leave a customer's home when asked to do so; making persistent and unwanted telephone calls) but really those can be addressed under existing laws (trespassing and harassment).

But others are perfectly absurd. The UK wants to stop people from selling the elderly burglar alarms. Forget how to enforce the law, why is it bad if some of someone buys something that mitigates a well justified fear?

The law against faux closing sale ads is an interesting one as well. Technically, when a firm says it's shutting down but doesn't, that's fraud. But who cares? The only reason companies say they are going out of business is to signal that these prices are particularly low. Why does it matter if they actually go out of business? While we could imagine some people feeling cheated (though I have no idea why; it is not as if the company is asking for more money), this is hardly worthy justification to bother policing.

Con-artists are bad--I'll give you that. But thse anti-cowboy trader laws are more about kicking up a lot of dust than helping real folks.

Are People Stupid?

Yesterday I had lunch with Jon, an old friend from high school. Like myself, Jon majored in economics at a small liberal arts college (his was Grinnell). Unlike myself, Jon's first rule of economics is "people are stupid." This of course generates a great deal of debate between us.

I asked Jon what his evidence is and he went on to cite common actions that do not match with incentives. People smoke. People don't excercise. People acrue debt. People are lazy. I pointed out that he's making normative statements--just because he thinks the costs of smoking outweigh the benefits doesn't mean it does for the smoker. I also reminded him that mistakes are not the same as stupidity. If so, we are all morons.

Strange as it sounds, I'd venture to say people think everyone else is dumb because everyone is actually smart. Because people are clever, we rarely think twice of it when they act as such. We don't bat an eye when people hunt down good prices or flock to sales. We are more angry than amazed when people play office politics to get a promotion. We say nothing when fast food employees optimize their productivity in a way we never before considered. We are not suprised when crimminals outsmart detectives. We shrugged our shoulders when people all over the world took advantage of Napster. And we're not astounded when those same people stopped using it the moment you had to pay for it.

People are smart in the same way lawns are green. Every so often there's a patch, nay a leaf, of brown grass. It's obvious even to the causal passerby. But it would be a mistake to focus on that one instance and then conclude the whole lawn is dead.

Sony Slides and Wii Don't Care

The Bank of America announced today that Sony's $100 price cut in the PS3 won't do enough to help their bottom line. Nintendo's Wii is doing so well, Sony would have to have a $200 price cut to make a dent. The Bank doesn't see that happening.

At first, it seems strange that Sony won't respond more to demand pressures (though it is a wonderful example on how cheating people in a free market is quite difficult). But then it becomes quite clear.

For decades, graphics sold games. The common public just couldn't get enough. But as graphics improved, each additional improvement became less important. And thus by comparison, other things became more important--such as innovative game play. Sony is having a hard time accepting that the marginal utility of good graphics is so much lower than the marginal utility of doing something other than siting on the couch and mashing buttons.

Wordplay

My brother recently directed me to an article about McDonald's (and others) looking to change the defintion of McJob as it appears in the Oxford English Dictionary.

For the record, here's how it stands:

an unstimulating, low-paid job with few prospects, esp. one created by the expansion of the service sector

And here's what McDonald's would like it to be:

to reflect a job that is stimulating, rewarding and offers genuine opportunities for career progression

The exact opposite defintion.

Frankly the OED seems much more related to how people would use it, but that's not a reason for McDonald's to not try to influence the definition. The OED is not god and do not have a monopoly of what a word is. Words, remember, are not products of governments or companies or even societies. They emerge from the interaction of all these entities (along with many others).

"McJob" is a very new word, but socially established enough that people have pretty good idea what it means. That's why McDonald's efforts don't really bother me: no one's going to buy it. They'd have much better luck arguing that McJobs tend to be entry-level. That at least works with everyone else's established conceptions.

Intelligent Ignorants

Tom Deering of my home paper (the Quad City Times) wrote earlier this month concerning the low percent of people who explain the origin of life solely through evolution. He said

The results of this survey, if accurate, convey a clear lack of education. I venture to suggest that a future study would find that the more education an individual has received, the more likely he or she would be to support evolution.

Let's suppose he's right: more education translates into a better understanding of evolution. It wouldn't completely surprise me. Evolution is a complicated theory and very counter-intuitive. But Deering sees this lack of faith (is that the right word?) in Darwin's work as a sign of a stupid country.

I see this all the time. People note some fact most people don't believe or know about and then conclude that people are stupid. It's really quite silly. Who cares if my roofer thinks God created the universe? Does it mean he won't know how to lay shingle? Only fools would think so.

People are rationally ignorant. There's a lot of information out there and most of it has zero impact on your life if you take the time to learn it. It makes sense that so many people haven't gone through the trouble of learning evolution. I actually prefer it. What would you rather have: a roofer who's read the Origin of the Species or a roofer who knows how to waterproof your ceiling?

The Future Is Slippery

Last night on The Daily Show, Jon Stewart mentioned the rise of the price of oil during the Memorial Day weekend. To paraphrase, he asked why, on this most predictable of demand increases, don't oil companies increase production to compensate? Implying, of course, that they are colluding to restrict supply on purpose.

First, oil prices are actually slipping as the Memorial Day weekend approaches. But this could just be a strange fluctuation. It could also be overcome in the US by American demand. What else is going on?

The second point is much more subtle. It takes months for any oil company to respond to a change in demand. That means to prepare for this weekend's surge in gas use, companies have to estimate today's increase in gas consumption back in winter. Not only could a lot happen in the mean time (as it always does), it's very easy to get the initial estimate wrong. So to play it safe and compensate for the cost they must bare by trying to predict the future, they sometimes get it wrong. It's not that they aren't adjusting to the prices, they just aren't doing it perfectly. But that hardly means they are colluding. It just means they are human.

Micro Monopolies

People love telling me that Microsoft (specifically with regards to the Windows operating system) is a monopoly. Their evidence usually amounts to something along the lines of "everyone I know has a PC" and "Microsoft has such-and-such share of the market."

People don't say that nearly as much as they used it.

Part of the reason is the rise of the Mac. With countless commercials detailing why Macs are better than a PC, more people are making the switch each year. Now a new contender is becoming the standard: Dell's starting to use Linux-based Ubuntu 7.04 for the operating system of some computers.

Most economists agree monopolies are inefficient: they can charge a high price (or sell as a low standard) and make what we call "monopoly profits." But what the past years are teaching us is that even if Microsoft was some sort of monopoly, it doesn't really matter. As long as people are able to enter the market, new firms will rise up to grab a bit of those monopoly profits for themselves.

If the attraction of such profits is a major motivator of innovation (and I think it is), then maybe a monopoly isn't so bad. As long as people are able to get those extra profits and others are allowed to try to bid them away with their own inventiveness, we get a constant stream of better products. Things keep getting better.

Texas Holdup

Since I am back in Iowa visiting the folks, my blogging has been very sparse lately. However, when I saw this new Texas law going through the legislature, I had to comment.

The Texas government plans to start taxing patrons of strip clubs five dollars to fund sexual assault prevention programs. Their logic is that people who frequent such establishments are more likely to go on to attack women. If that's true--and it may or may not be--I'm not sure why the state wants to discourage them from going there. If, for example, murderers liked to hang out in pool halls then we'd expect police officers to also go to pool halls to find crimminals. They certainly wouldn't want to shut them down.

It's not that the government wants to prevent sexual assualts, they just don't like strip clubs. Oh they cloak such selfishness in nice motivations like "helping battered women" but what they really care about is getting rid of the things they, personally, don't like. Sen. Dan Patrick said it all:

I don't want the fact that the government is making money from them to make them harder to close. I would rather see the businesses close down,

Yes, Senator, because it's really all about you.

Wrongful Abandonment

Ignoring contractual obligations, a person can quit for whatever reason they wish. They can quit because they found a new job, or their commute is too long, or their boss smells funny, or they think the janitor's ugly. To my knowledge, there are no rules conducting conditions of quitting beyond the aforementioned contracts.

But there are those of firing. There's even a name for it: "wrongful termination." If you fire a janitor because they smell funny or are ugly, you can get sued. If you quit because your boss is ugly or smelly, you can't. Why does a boss get less discretion, flexibility, and freedom than their employees? If there's wrongful termination, shouldn't there be wrongful abandonment?

Last night I had a long conversation with a friend's neighbor at a party and this was one of the challenges I presented to him. He argued that an employer has more leverage than employees. I'm not sure how he reached this conclusion. If an employee suddenly quits that creates more work for the other employees, productively suffers, and the the company has to bear the costs of finding and training someone new. If this person was sufficiently specialized or quit at the right time, it could prove disastrous for the firm.

The bottom line is employers are not doing employees a favor by giving them a job. It's a mutually benefiting arrangement. Employers get some sort of productivity and employees get a paycheck. If one party can terminate this relationship for whatever (contractually viable) reason they wish, why can't the other?

On Their Terms, Not Theirs

When some people approach illegal immigration, they demand that the people coming into this country do so on "our terms, not theirs." So were the words I heard one politician (I can't remember who) speak on my way home from work. Today Sen. Edward Kennedy, et al announced new immigration legislation. The Senate has drafted a bi-partisan bill which would make it not as difficult for illegal immigrants to become citizens. They would "pay a fine, pass a background check, and learn to speak English. Then, after a probationary period that could be as long as eight years, they would be eligible for a green card."

These are not "our" terms. These are the terms of politicians and their handful of supporters. They do not speak for everyone and certainly not for me. The items I listed in the bill are awful requirements. Living in a free society is not a privilege to be earned but a right to be recognized. Forget that immigrants improve our economy. Forget that if we made it easier to enter the country, we could avoid the underground economy. Forget that it would combat worker abuse as well. People who dwell in this country have the right to be here. Everyone has the right to escape tyranny, bloodshed and poverty. Our immigration policy should reflect the reality that most of the world is a horror to live in and everyone is damn lucky to have places to escape to. Those are my terms.

Bouncing Against the Mold

Warren and I have a mutual interest in the economics and politics of science. Robert Higgs at the Independent Institute addressed such a topic last week, with a particular emphasis on global warming.

It's a lovely reminder that nothing forged by men is sacred. Every human institution, including peer reviews and scientific journals, are subject to politics over facts. Indeed, the great paradox that Higgs alludes to is that even though most people have a great deal of faith in the scientific process (with good reason), it is far more subject to distortion than other institutions. I hate quoting at length but his writing is just too good:

Science is an odd undertaking: everybody strives to make the next breakthrough, yet when someone does, he is often greeted as if he were carrying the ebola virus. Too many people have too much invested in the reigning ideas; for those people an acknowledgment of their own idea’s bankruptcy is tantamount to an admission that they have wasted their lives...Research worlds, in their upper reaches, are pretty small. Leading researchers know all the major players and what everybody else is doing...The whole setup is tremendously incestuous; the interconnections are numerous, tight, and close.

Higgs wrote also of what the alliance between politicians and scientists (the former hands out grants and the latter raises faux concern to make it easier to get earmarks) as well as emphasizing that scientists should know their place (saying X, Y, and Z will happen is one thing, making normative statements on importance and urgency is another). What he did not emphasize, however, is the role of the media, which is the great megaphone for all these concern. When it's cheap to scare people and those holding the microphones want you to scare people, people get scared a lot and with little justification. And with no one capable of silencing the hysteria getting a fair say, is it any wonder why so much of the population is scared all the time?

Curse Against the Machine

What do you think of when you think of road rage? I imagine people so angry and frustrated at traffic that they ram into other cars, driving on sidewalks and other pedestrian zones or even taking out a gun and shooting people. That's rage.

But AutoVantage thinks rage is something else: rudeness. It's not just "bad" driving but tailgating and swearing all count as "rage." Really? Tailgating's annoying and no one likes being sworn at but since when has stalking and name calling been anything even remotely close to "rage?"

There's a strange "conventional wisdom" that our world is flying apart at the seams. Already I can hear the calls for government regulation to "control the anger." But it's not on the verge of collapse, it's just a bunch a people think rude people are simply irrational. Has anyone ever stopped to think that some drivers deserved being sworn at?

Mother's Day Price Hike

This Monday, the day after Mother's Day, the postal service will be hiking the price of a stamp to forty-one cents (from thirty-nine). A lot people probably don't care--e-mail and cell phones are a much cheaper and convenient way to communicate, but some will, especially those that sell bulk mail.

People tell me that even though there's a monopoly on postage, the price isn't too high. I'm constantly confused how anyone could know that. While most communication is a fine substitute for using the post office, bills, greeting cards, and other communiques are don't work that way (for most people). Most importantly, no one is allowed to offer an alternative to something close enough to what people demand. There's a very important part of the market where there's only one producer-how do we know if we're getting a good deal?

Competition works because it allows people to shop and compare, offering a check for those who try to price too high. If you were only legally allowed to buy cards from one store, you'd probably think you were being ripped off. Same goes for here.

A Gutierrez Gaffe

Carlos Gutierrez was on Kudlow tonight discussing various trade-restricting bills floating around Congress. While he defended the importance of free trade, he also made the mistake in claiming the US has free trade. Not even close.

The point that stuck out the most was when he mentioned the value of anti-dumping laws. According to Gutierrez, this is consistent with free trade. Indeed, the WTO approves anti-dumping law to counter "unfair" prices (whatever that means) and government subsidies. But this is not free trade, no matter what the law says.

Free trade is the absence of government regulation concerning international exchange. Anti-dumping laws don't "cancel" subsidies and it certainly doesn't add to free trade. Their only saving grace is a threat: stop creating barriers or we'll create more. But this might not work and one legal distortion is better for both sides than two.

Subsidizing Dropping Out of High School?

Gary Becker and Kevin Murphy have an interesting article on income inequality. They go through various stats, discussing how returns to education is driving the increase in inequality. Then they bring up the political desire to create an increasing progressive tax code to reduce the inequality. They offer this as a rebuttal:

For many, the solution to an increase in inequality is to make the tax structure more progressive-raise taxes on high-income households and reduce taxes on low-income households. While this may sound sensible, it is not. Would these same individuals advocate a tax on going to college and a subsidy for dropping out of high school in response to the increased importance of education? We think not. Yet shifting the tax structure has exactly this effect.

HT Greg Mankiw

Capitalism, By Definition

Over the past couple of days I've been in a debate with "Red Deathy" on Wikipedia. The debate began because I noticed an obvious contradiction in the criticisms section. The entry (correctly) says that capitalism is based on voluntary transactions. (That part of the entry has since been removed by Red Deathy, but as I point out, it's really still there.) However, the criticism section notes that "unfree labor" (ie slaves and serfs) is consistent with capitalism. This doesn't make any sense.

Red Deathy disagrees, arguing sometimes people are faced with a series of bad choices and thus they are forced to take a job or buy a product. I, however, maintain that this is not force. The company that hires the destitute did not make them destitute. They only gave them an opportunity; no force was involved. This is a common confusion.

When the state demands tax dollars, it presents a choice: give me money or I arrest you. If a firm tried to do the same thing (work for me or I'll arrest you), then it would be violating private property and thus it would not be capitalism. Capitalism and coercion are inconsistent.

Improving the workplace: Bulgarian train edition

Bulgarian trains have been equipped with rotating chairs so drivers can urinate out the window without having to stop.

Barack Obama, Central Planner

Barack Obama visited Detroit today with a plan to revive the American automotive industry. While foreign firms invested in fuel efficiency, he said, American companies didn't. Rising to this challenge is how the American auto industry will return with force.

Despite their obvious incentive to increase profits, Obama thinks he should force them to engage in his idea. AP reported that his plan "...would require automakers to invest half of their health care savings into technology to produce those vehicles." I suppose Mr. Obama thinks American automotive firms are too stupid to invest in technology that, by his own admission, will save them. They have to be forced to do what is so clearly (in Obama's eyes) is The One Best Way.

If what he said was true--that the people really want fuel efficient cars and digging into health savings is the best way to get them--then the government doesn't need to force them to do anything. But if Obama is wrong--which would explain why the firms aren't doing these things--then his plan will be disasterous for the very industry he claims to cherish.

Wanting to be Fooled

Fred Thompson at AEI wrote this essay concerning Cuban health care. It seems that Michael Moore is escorting ill poor to this socialist island for free health care, criticizing America's lack of a similar system.

Defenders of Moore will probably point to Cuba's medical meccas like those seen in Die Another Day, implying that these are somehow standard for everyone. Students of socialism know better: companies often have staging facilities for media purposes and the bureaucratic elite. (The USSR often manufactured grocery stores filled with food and maintained to the press that these were the Soviet standard.) In Cuba, medicine is no different. Thompson writes "Castro keeps 'show' clinics equipped with the best medicines and technologies available. It was almost certainly one of these that Moore went to, if the stories in the New York Post and the New York Daily News are true."

Only the sickest of us like to see others suffer, which is why free health care is so tempting. But don't be so drawn into the possibility of the perfect that you get lost in the romance of the ruse.

Governing Trends

Tonight on Kudlow and Company, Larry Kudlow and a legion of commentators discussed the 2008 election. One of them, John Fund from the Wall Street Journal, expressed concern that many voters haven't experienced a true economic downturn (only corrections and short-run recessions). Thus, they are more likely to vote Democratic.

It makes a lot of sense because it's easy to forget that good times won't last forever and more government can undo economic growth in an instant. Democrats, who are more likely to grow the government than Republicans (especially with a Democratic Congress) can hamper the very growth that got them elected.

I've often said that from the mind of the voter, government is a luxury good. All things being equal, a wealthy society is more interested in growing the government than a poor society. While wars and other crises confound this rule, in general people are much more willing to see the government grow when they are making a lot of money themselves. It's a dangerous trend because it's easy to get trapped in: governments are easy to grow and difficult to shrink.