Anger of the Majority

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

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

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

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

Which Public Figure Is This Describing?

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

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

Too Many Heads

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

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

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

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

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

Great Sentence on Development

Lant Pritchett at AidWatch:

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

Stranger in a Strange Hobby

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

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

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

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

New Smoking Bans

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

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

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

Cause and Effect

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

Take a close look. See what I see?

The graph is nonsense.

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

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

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

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

How do you increase X?

X=A-B

1. Increase A
2. Decrease B

It's both!

Update: Russ Roberts and Arnold Kling weigh in.

Quote of the Month

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

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

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

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

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

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

HT: Megan McArdle

Kling on Experts

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

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

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

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

Read the whole thing.

A Tale of Two Frances

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

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

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

Someone Should Have Gone to My Last Micro Lecture

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

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

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

It gets stranger from there.

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

The Government Reflex

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

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

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

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

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

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

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

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

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

The Fake Helium Crisis

From MR:

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

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

He notes:

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

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

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

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

Obama Is a Secret...Oh Who Cares?

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

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

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

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

Collaboration Brings Progress on Alzheimer’s

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

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

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

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

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

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

My Students On Opportunity Costs II

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

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

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

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

Other theories:

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

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

In Defense of Recalculation and Capitalism

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

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

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

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

The Shape of Things (Well, Just Taxes)

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

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

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

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

Krugman on Spending

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

All interesting stuff. But then it gets weird.

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

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

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

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

Free Riders?

I hope my micro students can answer the following:

True or False

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

Naturalist Questions

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

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

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

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

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

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

Oh The Things You Can Filibust!

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

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

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

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

James Surowiecki Forgets How To Do Marginal Analysis

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

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

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

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

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

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

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

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

States of Unhappiness

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

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

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

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

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

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

HT: Brian Hollar

The Perfect Is the Enemy of the Good

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

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

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

He goes on to conclude

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

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

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

Poor in Hong Kong

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

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

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

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

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

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

Good Sentence

From Thomas Friedman today:

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

[Insert Witticism Here]

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

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

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

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

Very Good Sentence

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

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

Where I Try to Disagree with Someone I Agree With

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

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

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

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

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

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

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

On that, I definitely agree.

Are Representations Ruining Advancement?

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

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

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

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

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

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

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

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

Rational Crime

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

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

Tax Rates in Economic Development

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

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

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

Breaking Bozeman

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

HT Frank Stephenson.

Very Good Sentences

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

From John Stossel.

Black Swans and Evolution

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

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

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

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

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

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

"Regulation lags innovation."

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

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

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

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

Happy Birthday Bastiat!

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

Inequality and Debt

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

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

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

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

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

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

I'll Start Voting When Politicians Start Being This Honest

HT: Michael Munger

In the Chipmunks Alvin Was the Leader...

In case you haven't been paying attention (or are more concerned about bigger news items), on June 8th the Democrats in South Carolina had their primary for the Senate campaign. To everyone's surprise, the winner was Alvin Greene: a man with no job, no campaign staff, and no known financial support.

When I first heard about Alvin Greene, my first thought was election manipulation. But as I learned more about it that seemed less likely. Polling places dropping the ball would need to be more systematic than is reasonably plausible and fraud on this scale would require massive resources. If Greene was behind it (perhaps using illicit resources the public doesn't know about) then his win would be more planned out. He'd at least have a website and be more eloquent when talking to reporters. Republicans simply don't have a motive to commit the fraud. DeMint, the Republican incumbent, won by nearly ten points and the Democratic party basically ignored the primary race. Remember, this is the state that tried to get the Confederate flag flown over its capital. It doesn't make sense that Republicans would pull such a desperate act (this also goes to the even stranger and less relevant accusation of a plant).

It's still very early to tell; perhaps various investigations will reveal an elaborate conspiracy. It's still a mystery how he got the filing fee. But right now my best guess is the following simple story:

Alvin Greene's life was in the toilet. He had no job, no prospects, no plan. Then he got a windfall: perhaps it was an inheritance, or from criminal activity. Maybe he really was saving (though longer than the claimed two years). Not sure what to do, he runs for Senator. Yeah, he probably would have been better off going to a technical school, but maybe he's a poor student or just didn't want to put up that much effort. He has a degree in political science, after all, and it hasn't seemed to have done him any good. But a senatorial candidate? That's easy and potentially very impressive on his résumé. In his mind, he didn't need to win; he just need to fill a gap in his employment history and make himself sound more impressive to potential employers. Yeah it sounds crazy, but I'm not the first person to question his mental health.

But then he won, mostly because no one paid attention to the race. Being listed before his opponent and sharing a name with a famous singer surely helped two. Cameras descended on Greene, especially after people learned about the felony charges. In his heart of hearts, Greene knows he doesn't deserve this. But admitting that would require him to take a hard look at himself and come to terms that not everything happens for reason. It's hard to recognize that you got something you didn't earn so Greene tells people he wasn't surprised by the results (really!?) and insists he went all over the state campaigning, though he can't remember any towns he went to.

Whatever the reason, this is a vivid example of what happens when a lot of people see their vote as cheap talk. Stampedes only happen when the entire herd runs to Greene pastures.

Reporters Will Be Reporters

An interesting article at The Atlantic by Hanna Rosin puts a lot of emphasis on a claim that more people want girls over boys.

Polling data on American sex preference is sparse, and does not show a clear preference for girls. But the picture from the doctor’s office unambiguously does. A newer method for sperm selection, called MicroSort, is currently completing Food and Drug Administration clinical trials. The girl requests for that method run at about 75 percent.

So there are scientific polls which conclude that people have equal preference for boys and girls but Rosin relies on the sperm clinic survey method instead. But that's a non-random sample: a fatal mistake (and disturbingly common for reporters, especially when shows tout their online polls). What these clinics are really saying is that people who can afford to try to control the sex of their child prefers girls. Rich people like girls.

Rosin might claim that this makes sense: wealthy people prefer girls because wealthy people have the resources to see where the global trends are going. They know a girl will, on average, be more successful than a boy. But that doesn't fix the problem of the scientific surveys: if wealthy people preferred girls and everyone else were indifferent, then you'd still see a slight preference for girls on the aggregate. If everyone else preferred boys, you'd see a preference for boys because there's a lot more non-rich people than rich people. It would be a pretty amazing coincidence if it all evened out nicely. (I don't know if these studies controlled for income, which would be interesting to see.)

There's a better explanation. Without trying, wealthy people tend to have more boys and poor people tend to have more girls. Wealthy people are just using the clinics to balance out these natural tendency to have more boys. Their preference of girls at the clinic is evidence of their equal preference at the nursery.

Back to Basics

Brilliant.

Public Choice and Police Videos

Here's an excellent piece on video-taping police while they do their jobs.

In at least three states, it is now illegal to record any on-duty police officer...The legal justification for arresting the "shooter" rests on existing wiretapping or eavesdropping laws, with statutes against obstructing law enforcement sometimes cited. Illinois, Massachusetts, and Maryland are among the 12 states in which all parties must consent for a recording to be legal unless, as with TV news crews, it is obvious to all that recording is underway...When the police act as though cameras were the equivalent of guns pointed at them, there is a sense in which they are correct. Cameras have become the most effective weapon that ordinary people have to protect against and to expose police abuse. And the police want it to stop...As journalist Radley Balko declares, "State legislatures should consider passing laws explicitly making it legal to record on-duty law enforcement officials."

Balko's advice, sadly, will probably not be followed. Polices officers are unionized and not getting their support easily translates into the deadly "soft on crime" label during an election. The public, in contrast, has a generally high opinion of police officers so painting yourself as questioning their honesty doesn't help you much.

So Many Things...

The authority does not have authority to do whatever they want to do.

That's Jackie Jeter, president of Local 689: Washington's Metro system's union workers. That, by the way, is the comment she issued on two employees being reinstated after the Metro system fired them. One was fired for being involved in a fatal car crash. It's up for debate if the driver was responsible for it (Metro believes he ran a red light). The other driver punched an off duty cop dressed as the McGruff the Crime Dog. That's not as bad a fatal car accident, but there's no doubt that it was his fault.

"Yes, he made a stupid mistake," Jeter said. "Should he have lost the job he had been on for eight years because of a silly mistake?"

Yes!

Where Was This Picture Taken?

Answer in the comments.

Great Words On Macroeconomics

It's not clear that you can write down a consistent model in which this works, but it is not clear the world behaves according to a consistent model.

That's Brad DeLong commenting on fiscal austerity translating into greater confidence in the stability of the economy of the government in question, thus heralding a recovery. But while the model's elusive the empirical evidence is hopeful.

Rent Seeking in Everything

It turns out more people like Wal-Mart than I thought. A Wall Street Journal article yesterday exposes that many of the "grassroots" campaigns trying to block local Wal-Marts are actually backed by their competitors. This isn't really a surprise; what's news is that these competitors organize and/or expand the campaigns through a company called Saint Consulting Group, a firm which specializes in making the astrotruf seem genuine.

For the typical anti-Wal-Mart assignment, a Saint manager will drop into town using an assumed name to create or take control of local opposition, according to former Saint employees. They flood local politicians with calls, using multiple phones to make it appear that the calls are coming from different people, the former employees say.

Brad DeLong Channels His Inner Shopaholic

Addressing Tyler Cowen's take on the crisis, Brad DeLong writes

So I don't see how Tyler then gets to:

But even if that fiscal policy is a good idea...

Where does the "but even" come from? I see no "but even" earlier in the market: the cost of borrowing for the government has fallen--the market value troday [sic] of future cash tax flow earmarked for debt repayment has gone way, way up--therefore we should dedicate more future cash flow to debt repayment by borrowing more. There is no "but even." Expansionary fiscal policy is a good idea,

Just because something's cheap doesn't mean you should buy it.

To DeLong's credit he acknowledges that the low interest rate means fiscal policy passes various cost-benefit tests. However many economists question the fundamental effectiveness of expansionary fiscal policy; indeed, this is exactly what Cowen was addressing. That then puts into question every cost-benefit test you can cite. I don't care how pretty the dress is. If it turns out to have a big hole in it, the sale doesn't matter. Not unless they pay you to take it. (And a negative interest rate is the only condition I'd like to see the government borrow at this point.)

Governance Is Not the Same Thing As Action

In response to Sen. Hatch's stanch opposition to any tax increases in Obama's announcement to reduce the deficit, Ali Frick asks

How is it that fundamentally unserious people — people who do not want to govern and have no business governing — keep running for and winning governing office?

Because the constituents know he's governing; he's just not governing the way you want him to. And since they're right-wing and you're left-wing, that's exactly why they re-elect him. Reducing the deficit almost certainly means increasing taxes but battling another branch of the government, even if it means to stone wall, is a political tactic. And such tactics are used to manage the Union, even if management means preventing harmful policy. Especially if it means preventing harmful policy.

The Mbaiki Witch Trials

His principal advice to clients, he said, was to act normally and refrain from casting any spells in the courtroom.

That's from this article about witch trials in the Central African Republic.

By some estimates, about 40 percent of the cases in the Central African court system are witchcraft prosecutions. (Drug offenses in the U.S., by contrast, account for just 12 percent of arrests.) In Mbaiki—where Pygmies, who are known for bewitching each other, make up about a tenth of the population—witchcraft prosecutions exceed 50 percent of the case load, meaning that most alleged criminals there are suspected of doing things that Westerners generally regard as impossible.

But how does the court determine if someone's a witch? Surely it can't be as sloppy as just arbitrarily declaring yes or no just by looking at them.

I asked how one determined guilt in cases where the alleged witches denied the charges. “The judge will look at them and see if they act like witches,"

Wow. Well surely this witchcraft law is actively trying to be repealed by local groups and international NGOs alike. I can't imagine any reason to keep this law on the books.

[an Italian group called COOPI that exists to promote human rights and the rule of law] supported keeping the laws on the books, for pragmatic reasons: if people thought witches could hex with impunity, mobs would simply seize the alleged offenders, bring them to a pit, and bury them alive.

Drat.

HT: Alex Tabarrok

Yglesias on Paul on Civil Rights

I enjoy reading Matthew Yglesias and more often than not, I learn something new. But when it comes to politics his brain seems to fall out of his head:

....Rand Paul let the cat out of the bag and admitted that under his brand of libertarian conservatism he can’t support the 1964 Civil Rights Act or other non-discrimination legislation as applied to private businesses. He goes out of his way to explain that he doesn’t actually favor segregated lunch counters, he just thinks it would be wrong to do anything about them.

No, no he doesn't. Not supporting the law is not the same thing as being indifferent to the injustices of Jim Crow unless you're foolish enough to think that the only instrument of good in this world is government. This isn't to say that the 1964 bill wasn't a good idea but it wasn't the only possible way to eliminate segregation.

Costs and Benefits of Virtual Federalism

Arnold Kling and Tyler Cowen argue for virtual federalism (VF) to solve the Middle East conflict. Arnold Kling explains

I would like to have a different sovereign, but without having to move. Under virtual federalism (as proposed in the widely-unread Unchecked and Unbalanced), we would unbundle the services that the County provides. I could then contract with another provider for trash collection, snow removal, fire protection, or other services.

My initial thought is that this results in lots of important questions related to geographically-derived economies of scale. If several people have different sovereigns, then you've created a mix match of territory a government has to cover. With trash collection, this isn't a huge deal--workers just has to drive around everywhere, probably with an on board computer, and collect from customers. Kind of like UPS but in reverse.

But the logistics of snow removal get absurd. Trucks would have to lift their plows when they pass an outsider's home, which keep banks of snow that your neighbors have to navigate around. If you live in a cul-de-sac and two guys on either side of the street at the mouth of the dead end get their snow removal from someone far away, and the snow is bad enough, those on the inside get snowed in even though the snow plows have already passed. And since any local government would focus on the areas with the highest concentration of customers (which will probably be the neighborhood nearest the snowplows), those on the inside of the cul-de-sac could wait for a while.

Okay, so you could say that a path's made to link trapped areas with everything else, but how do you handle fires? A fire in one house can spread to another depending on wind. If the fire department for the home on fire is located farther away than the department for the neighbors, you'd get fire fighters arriving to contain (but not put out) the fire while someone might be inside suffocating. It seems remarkably inefficient.

But it still could be optimal--I don't know how much waste fire departments would eliminate in response to competition nor do I know how much people will opt to go for the closer department simply because it's closer (which would mitigate the impact of the first issue). But I suspect that time-sensitive services will be less efficient than than services that are not time-sensitive.

You don't really care when your trash is picked up, as long as it is picked up sometime that day. But the local governments want their trash route to be all in the same general area to makes it cheaper to pick it up. So trash services will be pretty good: they will make recycling easy for you, they take a large variety of trash (furniture, e-waste, yard waste). They know you'd easily change to a farther away government (because you don't really care) and the costs of many people leaving is high relative to the benefit, so they will work hard to keep you.

Time-sensitive services like fire fighting, snow removal, and water pipe repair will get worse because governments know it will be more expensive for you to go to a farther away competitor. If the plows nicks your car, you might let it slide because you're not willing to switch allegiance to a distant competitor where you'd have to wait an extra hour or two while he takes care of people who are close by.

Competition is not immune to waste and I'm not sure if this system has less of it. But VF buys peace in Jerusalem, then I'm sure it's worth it. But for us? Seems cheaper just to move.

The House of Econometrics

Last week Russ Roberts interviewed Ed Learner about econometrics. They noted, quite correctly, that any given econometric study has a lot of arbitrariness of it. the author of any work can jiggle the model until s/he gets the desired results. This is a problem and every economist knows it. And because we know it, it takes a lot of studies saying the same thing to be convinced of anything. A brick is too small to build up a house, so we get a lot of bricks. A single study is too precarious to hang a major conclusion on, so you get a lot of studies.

This is crucial because Roberts often points out that whenever he asks another economist to point to an econometric study which changed their opinion on economics, he doesn't get an answer. Of course he doesn't get an answer; no study is good enough! It's like asking which brick of a house holds its roof up. All of them do. But unless you've specialized in the field, you can't remember all of the studies. You probably haven't read them all (hence it appears that studies just confirm people's belief).

Which is why Roberts' question is a bit of a red herring. Intellectual houses are built over decades--it takes that long to get enough studies done. That's why the process of adoption is so slow and why it looks like it doesn't convince anyone. Yesterday's studies convince tomorrow's economist.

There Ought To Be a Law

I'm not too fond of new laws but new CBO estimates for the health care bill tack on an additional $115 billion (silly them; they forgot to consider administration costs and other spending). Each new bill (or bill for which the CBO makes estimates for), should include a clause that if it turns out the bill is much more expensive than originally estimated, it should be automatically repealed and put to a re-vote. A lot of people defended this bill because it would help with the deficit; now those costs undo most of that (and you can be sure these costs will only go up). Those supporters have been duped and a re-vote seems to be the only fair way to fix the wildly inaccurate estimation.

But I guess Congress is too busy blaming banks for misleading customers.

Update: Most of that increase is the continuation of existing programs and isn't really part of the bill. Still, there ought to be a law.

Flying the Quiet Skies

Christopher Elliot has a nice piece on loud children on planes, suggesting planes ban parents who have proven to let their children scream. Elliot admits that after his first plane trip with his three kids, he realized he couldn't control them and grounded his family. That's a wonderful sentiment and I wished more families were as concerned about their externalized costs as Elliot is. But it's just not a practical solution. Suppose a family emergency necessitated speedy travel: would he still refuse to fly? I doubt it. Therefore, the optimal solution isn't a corner solution.

Instead, we could use a Coasean solution (well, Coase-like since transaction costs are too high for full bargaining and we're not focusing on the least cost avoider). Airlines would amend the agreement when you buy the ticket (which already includes clauses about when you can cancel the reservation, etc) to include a provision that if the stewardesses feel your child is too loud (perhaps in part based on customer complaints), they charge some additional price based on the length of the flight. To prevent the company from saying anything is too loud and to compensate those suffering from the screaming child, the airline then reallocates that money to those in the seats nearest the screaming child.

This system punishes those parents who don't control their child (generating the incentive for them to be better parents or avoiding flying altogether) while still allowing them to fly if they feel circumstances warrant it. The costs to the airline would be small since so much passenger information, including credit card numbers, is in their database anyway. But it's not zero, so there's an incentive to not report every little scream as a violation.

The Housing "Crisis" Was in the Past

On the housing crisis John Stossel asks of real estate lobbyists "why is the price drop a crisis? Sellers are hurt, but buyers benefit." True enough, if oil prices fell as fast as housing prices, the only ones who would call that a crisis are environmentalists. So why are falling prices a crisis? They're not. They are a sign we were in a crisis. It only seems like a problem because the cure is more painful than the disease even though it is less fatal.

Falling prices mean we over-invested in housing. That was a mistake in the past; had there been less investment in home building, there would have been more investment elsewhere and, since housing prices fell so much, we can confidently say that the "elsewhere" would have been much more productive.

Falling prices means people were over-dependent on the value of their homes when they used it to back a loan. This is particularly bad for banks who collect these homes when people defaulted. If housing prices were lower (as they should have been), banks would have demanded more collateral, which would have reduced today's defaults and today's cost of defaults. There's an element of the financial problems in this as well and certainly the housing mis-allocation contributed to it.

The inflated housing prices in the past is like a bad relationship. The break up might be messy, but the problems were in the past.

The Apartment that Simon Built

It was Julian Simon who wrote in the Ultimate Resource 2 (p12):

Greater consumption due to increase in population and growth of income heightens scarcity and induces price run-ups. A higher price represents an opportunity that leads inventors and businesspeople to seek new ways to satisfy the shortages. Some fail, at cost to themselves. A few succeed, and the final result is that we end up better off than if the original shortage problems had never arisen.

In Hong Kong, population density means space is at a premium. Responding to high rents and tight quarters, architect Gary Chang found a way to fit 24 rooms into one.



The narrator calls the house "a technological marvel" but there's nothing in inherent the idea which prevents it from being implemented 10, 20, or 50 years ago (and to lesser degrees, such an idea has been used before). What's important is that all this amazing apartment took was hard work and some creativity, effort that might not have been worth the time if Hong Kong had fewer people in it.

Matthew Yglesias Is Hoarding the Internet

Matthew Yglesias, in a two (or more?) part series (I here; II here) calls high salaries inherently immoral:

It’s greedy, absurd, and morally indefensible for talented people born in favorable circumstances to be dedicating their lives to accumulating huge sums of money in order to engage in lavish consumption....While I was writing this post, I took a break from waxing indignant about multi-millionaires buying their third houses to donate some money to UNICEF.

If, like me, you're a regular reader of Yglesias's blog, you might know he posts more often than the prolific Tyler Cowen, often scooping people who could have posted on items he already posted on. Just as the wealthy hoard money, Yglesias is hoarding blog posts. With so many struggling blogs out there, he should take his own advice e-mail their bloggers with his latest discoveries so they have a chance to be well read as well. To paraphrase Yglesias, becoming obscenely knowledgeable in the Internet world and then hoarding your information is, itself, morally wrong.

Show Me the Broccoli (Ads)!

Matthew Yglesias asks, "Where are the Broccoli Ads?"

Why is it that nobody’s marketing broccoli and bananas? This stuff is sold in stores, in exchange for money. Presumably there are for-profit enterprises out there with a vested interest in selling more.

In contrast to candy bars and potato chips, most fruits and vegetables have no packaging and thus no easily identifiable brand name. An ad for Bob's Broccoli will probably help Betty's Broccoli sales since it's not clear which is which. Advertising for healthy foods becomes a public good and, thus, under-provided. Note that some vegetables do advertise--Express Salad Mixes keep popping up--but these vegetables have packaging.

Couldn't all fruits and vegetables have packaging? In theory, sure, but such foods spoil more easily (they are often sprayed with water to keep them crisp, something packaging would prevent). Note that Express salad mix is a mix, not just a head of lettuce in bag so there's good reason to give up a bit of freshness for the convenience (their ads also underline how fresh their mix is). Many customers like to investigate such foods before buying them. If you package your food, that makes it harder to inspect and customers might think you're hiding something.

So why don't we see ads brought to us by broccoli farmers? I've seen ads for why natural gas is so great and high fructose corn syrup isn't as bad as we think it is. Surely there's a national association of broccoli growers out there to wanting to get people off the sugar stuff.

And there is (unfortunately I couldn't embed the video).