Worlds Within Worlds

Bill Maher fretted to Jeffery Sachs Friday that if all people of the world consumed like Americans we would need five Earths to supply the resources. Yet a hundred years ago, we could tell a similar story using Europe as a baseline instead of the States. How can I make this claim?

What Maher and Sachs are ignoring (as too many people do) is that if the people of the world used more resources, they would be able to produce more of them. More creativity, more inventions, more ideas, more productivity, more investment, more hands at work, more active minds. The history of the world is replete with scares of shortages and the panics never hold out to the adaptive world of free markets.

Increasing Returns and Life

A few days ago Arnold Kling applied the law of diminishing returns to everyday life. In other words, he explained how doing the same things get boring and where in our life can we avoid this trap.

According to Kling, people do it an awful lot. They read books by the same author. They stay forever in the same organization. They're hesitant to change jobs. On a personal note, the only fiction my mom seems to read are murder mysteries and I sometimes wonder if she ever gets bored with them or can guess the guilty sooner.

Yet we also have to recognize there are increasing returns. If what you experienced in initial consumption can be carried forth (in part) to future consumption, then the time time you engage in that activity, your change in satisfaction can higher than what it was before. For example, the first time you tell a joke won't be as good as the second time. The learning experience you gained from the first time enhances your telling for the next time. You might be a little bored of the joke because it's in your recent memory, but the smoothness of the execution of the punchline more than makes up for it. But it doesn't have to be educational in nature. A little bit of the drama carries from experience to experience. Similar experiences can enhance each other (which is why there are so many people who throw themselves into a TV show).

The same could be said in other areas people specialize in, such as their job, a discipline, or a sport. You can think of it as going to the same amusement park each day in a week. Each time you experience another part of it, but can also avoid the costs of constantly learning how to navigate its paths. Obviously, this can't last forever (not even academics think in terms of the discipline every waking hour) but it does suggest that dabblers may well be served to throw themselves into a discipline instead of constantly moving about. And perhaps it's worth it to visit the Louvre twice in the same visit to Paris--you're surely discover great things most people don't notice.

Earth Day Is Capitalism Day

On this Earth Day, George Mason University's Don Boudreaux celebrates what he calls Capitalism Day:

...far more than any other, has made human lives clean, safe, dignified, and culturally rich. Capitalism is also responsible for giving people the wealth and leisure to permit them to mis-perceive nature as loving and bountiful, and to enjoy nature in a way that few of our pre-industrial ancestors could ever have enjoyed it.

It is this latter point that is often ignored. A wealthier society is a gateway to all other things we value. Wealthier societies not only have more stuff (from Wiis to advanced medicine) and more options (for jobs, living areas, places to travel) they also give us the gift of time.

Time is our most precious resource. Our ability to save time (though greater productivity) is critical to our happiness. We spend time to enjoy the company of others, find love, seek enlightenment, discover our purpose in the world, and enjoy nature. In a lot ways, nature is a really nasty thing. It's a little strange we leave the safety of modern society to visit it. Nature is filled with bugs, dirt, and disease. The sun spews radiation. Some hiking trails are small and uneven, making it easy to get lost and then sprain an ankle. There is no plumbing, no Internet, and no one to gut and cook a fish for you. Poison ivy crops up in unexpected places. Water needs purification tablets and food needs to be hoisted in the air out of the reach of wild animals. Birds scream all the time. And this assumes it doesn't rain.

Few would ever want to live permanently in such a place and most that try don't last long. But all this "roughing it" can be fun if it's temporary; nature is best left as a tourist attraction. But only with the time capitalism awards us can we afford to "get away from it all" for days at a time. Visitors cut themselves off from the world that they rely on for everything they brought out to the wilderness to make sure they don't die. If there was no capitalism, if people were too busy to see how beautiful nature can be, we likely wouldn't have an Earth Day which celebrates the wilderness. Or, worse yet, we'd be out there all the time.

The Nature of Trade

Jeff Faux (Economic Policy Institute, founder) on the Diane Rehm Show argued against NAFTA today, arguing that globalization changed the nature of trade. It's no longer about exchanging goods but about US firms manufacturing abroad and importing back to the States. The trade deficit, he concludes, is a problem.

Mr. Faux should know better. The trade deficit (aka the current account) is an arbitrary distinction between the net flow of goods and the net flow of investment (capital account). By definition, the two add up to zero (the balance of payments or BoP). Americans import goods and in exchange they spread the US dollars that give foreigners the ability to invest in the US economy. As a result, US citizens maintain a very low savings rate without losing the technological and economic progress that investment generates.

Here's a simple graph to drive home the point:

Keep Your Numbers Real

Today CNN commented on the Pope's visit to New York City, arguing it would bring $50 million to businesses in the Big Apple. They compared this to when Pope John Paul II visited the city in 1995 who spent $45 million. They then briefly commented why the Pope might be bringing in more and what's changed in the past twelve years.

But they didn't mention what's definitely changed: the price level. Usually when they bother to adjust for inflation, they mention it. But not today. A simple check reveals that the real value of the last Pope's visit was $62.2 million--over $12 million more. Say what you want about popularity or Pope expenses, but always check for inflation.

The Secret Safety Record of Nuclear Power

When it comes to the environment and electricity there are two basic schools of thought for clean energy: nuclear power versus wind/solar (and occasionally hydroelectric). Nuclear power has the advantage of being reliable (the weather doesn't effect it so it's great for base-line power) and cost effective. Its main problem is that it's scary.

There's only been two major accidents in nuclear power history--Chernobyl and Three Mile Island. Lots of other accidents involving isolated radiation leakage occur, but it's the disaster scenarios that people are scared of. It's very strange, much like how people are afraid of flying because there's been a few big accidents yet don't bat an eye at the thousands of car wrecks a year. If we want to truly judge the safety of nuclear power versus other sources, let's examine how many people die per terawatt-hour. Note these deaths can occur in many ways, such as accidents, pollution, construction and maintenance.

Coal: 32.6
Solar: 0.83
Wind: 0.4
Nuclear: 0.052

The solar rate are based largely on rooftop solar and most of it comes from the danger of installing it (roofing is one of the most dangerous occupations in the States). See this article for more information. I picked up the coal and nuclear numbers from this article.

Granted, it's difficult to tell how dangerous nuclear power is given the long-term effects of radiation and issues regarding nuclear waste. At the same time since nuclear power is so much cheaper its customers could afford other things that they couldn't otherwise such as healthier food or better medical care. The net effect is far from obvious but it seems unlikely to overcome the ten-fold increase in the death rate compared to its clean alternatives. Nuclear power is a lot safer than you think.

Contracts and Adultery

Contracts are great. They let us plan our life with confidence. They secure trust and obligation. Even when informal, they just make everything run smoother. Contracts, in all their forms, are at the heart of a well functioning society.

Marriage is a contract: "I give me life to you so long as you give your life to me" etc etc. Cheat on your spouse and you get what's coming to you. You made a promise; make sure you keep it. It all makes sense. But some have a very strange approach of cheating: they blame the cheating partner just as much as the one they cheated with. They call them home-wreckers, sluts, jerks, and monsters. Sometimes they are threatened with violence. Some are killed. Even if they're not married, they're called adulterers.

This is nonsense. Your spouse is clearly in the wrong, but the other party isn't (unless s/he's married, too), even if they knew about the marriage. They didn't break contract. They may have allowed your spouse to break it, but so did the hotel they stayed in. Third parties made no promises to break.

Suppose Ethan promises Steve to sell him a book for $10. Then James, knowledgeable of the contract, offers Ethan $20 for the book and Ethan takes the deal. It's hard to imagine Steve being angry at anyone other than Ethan, but yet the same logic doesn't apply to marriages. You might say these third parties aren't respecting marriages and that's their flaw, but you could say the same thing about James and contracts. And since marriages are contracts, that doesn't get us far. What's special about marriage?

I have yet to hear a good answer, though married people seem to loathe this position more than single ones. The best explanation I can come up with is that they just don't like the idea of someone they care about cheating on them and they'd rather blame someone other than the one they love. So the lesson today is that if your spouse (or girlfriend, or boyfriend) cheats on you, the problem lies with them and your relationship, not some random person you just want to be angry at.

Listen to Your Mother

I have vivid memories of my mother insisting I wash my hands before dinner. I remember thinking: "What on earth does she think I've been doing that would justify all this hand-washing? I'm eating pasta, not performing surgery." But insist she did and the rule has (somewhat) stuck. I live a pretty quiet life--academia isn't exactly a dirty job.

Doctors are a different story. They expose themselves to dirt and disease with every patient they visit. But for some reason, they rarely wash their hands. Even though washing between each patient is time consuming, using ultraviolet germicidal irradiation (and wearing rubber gloves to mitigate the dangers associated with constant exposure) would cut that time down to a negligible value.

We talked about this issue and others (interns work for 24+ hours, doctors wear "sterile" scrubs to the cafeteria, aspirin before a heart attack is rarely used) during law and economics today. The existence of these deficiencies is a puzzle. They are very easy and effective ways to save lives yet in the avalanche of medical malpractice suits they are rarely employed. More puzzling, they are rarely cited as a cause of negligence--a lack of this or that test is more common.

The latter seems to explain the former (hospital's aren't willing to accommodate because no one's complaining) but that only makes the latter more puzzling. Most people who file a suit don't have a legitimate claim of harm, but surely they could secure a victory if they point out the doctor/hospital didn't take simple steps for avoiding harming. Why are doctors being sued for not ordering an obscure and expensive test and not being sued for being less hygienic than the seventeen-year-old at McDonald's?

My best guess is that people don't want to believe doctors could be so careless. This doesn't quite explain it since you'd think the possibility of infection or death would encourage people to think more carefully (rational irrationality doesn't get us far). Still it is consistent with the fact that of the people who have a legitimate case against their doctor, only about 2% sue. What a strange world we live in.

The Canadian Giant

When Americans think of Canada, a handful of quaint images usually run through our heads. Lumberjacks. Mounties. Maple syrup. It might seem backwards, rugged, or even primitive. But Canada is America's largest trading partner, greater than even China or India. There are virtually no tariffs put on items exchanged between the two countries--about as close as I've ever seen of actual free trade. It's a wonder Lou Dobbs doesn't focus his wrath on America's northern neighbor.

On the most recent Southpark episode, Canada becomes so angered by their lack of respect worldwide that they strike. After an unknown course of time (several die during the strike due to hunger and fatigue), it's revealed that Canada lost $10.4 million in lost production as a result of the strike.

I suppose the writers felt this was a high sum or knew it wasn't and used to to poke fun at Canada. But in all honesty, for a country of 33 million people, that adds up to less than fifty cents a person. The Canadian economy is actually quite robust (no doubt in part due to trade with the US and other countries), with a GDP per capita on par with the United States ($38,200 versus America's $43,594).

To capture how small the number is, understand that we can use it to estimate the length of the strike. Canada's GDP is $1.274 trillion. That means the strike lasted for 0.00000816 years, or, ignoring weekends and assuming an eight hour work day, 1.02 minutes. (I use USD here; note that if you switch to Canadian dollars it changes nothing since you'd be multiplying the numerator and the denominator by the same constant.)

The world economy is huge. Mind blowingly, fantastically huge. It is so large, Americans scarcely notice a nearby one trillion dollar economy and the toil and effort of a population the size of California. How great we have become, and how small each of us are.

The Paradox of Control

Eliezer Yudkowsky at Overcoming Bias explained scarcity as psychologists think of it: as something becomes less attainable, you value it more. It's not clear how widely this applies but I can see it function in many areas such as dating, fads, and fashion. While Yudkowsky explains the phenomenon with evolutionary psychology (our ancestors had to grab what was scarce or they'd die out) we can also see it as signaling. If you have something that's hard to get, it suggests you're important, hip, or otherwise exceptional in some way.

Contrast this with Robin Hanson's theory of regulation. If a regulator can require something of a person but doesn't, the person will likely conclude doing what the regulator wants isn't all the important. If you can ban something but don't, then it's not all that dangerous. If you can require something but don't, then it's not all that helpful. A lack of regulation is a signal that tells people that if they made a bad decision, they'd still be alright.

Again, it's not clear how widely this framework applies but we can imagine quite a bit of overlap. Drugs come to mind first. If you ban drugs, people will want to do them more to either suggest they're hip or to get them while they can. If you don't ban drugs, people (possibly the same group, possibly different) will then conclude they're aren't a big deal and use them. In other words, if you don't want anyone in a society to use drugs, there's nothing you can do about it.

What About the Rest of Us?

There's a Breast Cancer Protection Act currently circulating in Congress to require health insurance companies to cover a minimum 48-hour hospital stay for mastectomy patients. Makes sense that women wouldn't want to be forced out of bed right after surgery, but what's that going to do to the rest of our premiums?

Is Wal-Mart A Collective Action Problem?

Wal-Mart gets a lot of criticism from a long list of groups from environmental to protectionist to labor union. People complain it destroys jobs and runs local stores out of business. None of these arguments hold water (environmentalism is about private property, free trade emboldens economies, Wal-Mart only works because people choose to go there, etc) and I have yet to hear the rara avis: an anti-Wal-Mart argument that makes economic sense. On a theoretical level, I think I have one.

Consider a small town. Each of these people value two things: their downtown mom-and-pop stores (that small town feel) and low prices (everyone likes a bargain). Let us also suppose that each person values the small town atmosphere over the prices--in other words they are willing to pay a premium to keep the charm of the hamlet.

Now suppose a Wal-Mart comes to town. Each resident has a choice between shopping downtown (and thus supporting it) or shopping at Wal-Mart (and thus get the lower prices). Since the downtown won't go away if one person "defects" to Wal-Mart, that defector can enjoy low prices and still have that small town feel they love so much. It's strictly better. (Note enjoying that small town feel does not require actually trading with them--they simply walk along Main Street and breathe in the atmosphere.)

Naturally everyone has an incentive to do this, thus everyone goes to Wal-Mart (or a lot do) and the downtown disappears. (Set aside any arguments of downtown revival because people can now afford more stuff.) As an individual, you can choose to end your defection and go downtown, but you, lone patron, will not save the stores. It will only work if everyone (or a lot) of people will work with you. But their personal incentives doesn't lend them to that so no one does. It's a collective action problem.

The downtown atmosphere is what economists call a positive externality--people who aren't paying for it still are able to enjoy it. The town could solve this issue by walling off the downtown and charge a small fee to those who wish to visit it. Taxes to the stores could be reduced by a proportional amount (who could then decrease their prices slightly) and the only difference ends up being that free riders can no longer ride for free. Naturally, the town could also ban Wal-Mart if it turns out internalizing these externalities prove too costly (which it very well might be).

Anti-Wal-Mart groups who wish to use this argument should exercise caution. The assumptions are rather strong (nobody is willing to swap low prices for their downtown) and demonstrating they apply to a given community is difficult. Moreover, the establishment of this argument can quickly be applied to areas the group may not desire. If one can ban Wal-Mart on the grounds that low prices are too expensive, then one can ban Internet access, delivery services, resident mobility, and a host of other options on the grounds that people cannot be tempted by alternatives lest the downtown is abandoned. The line between preventing a collective action problem and outright tyranny is a thin one indeed.

Gaps In the Logic

A lot of dirt is being thrown at financial institutions lately and lot of it's nonsense. Near the top of that nonsense list are the accusations of racism. True, blacks have a harder time getting a loan; no one is denying that. But gaps in outcome does not imply discrimination. As Thomas Sowell points out in his new book,

[In two studies in the early nineties] whites were denied conventional home mortgages loans more often than Asian Americans. The same reasoning that led to the conclusion that blacks were being discriminated against in favor of whites would lead to the very questionable conclusion that whites were being discriminated against in favor of Asian Americans. But however questionable that conclusion, we cannot simply accept empirical evidence when it supports our preconceptions and reject that same evidence when it goes against those preconceptions...A later study showed that Asian Americans took out expensive subprime loans less frequently than whites did--but again the media focus was on black-white differences in the use of costly subprime loans and again the conclusion was that racial discrimination in access to conventional loans explained the difference.

Reality is always a bit more complicated than we'd like it to be or even expect. In the social sciences controlled experiments dwell past the edge of ethics so we have to rely on the observed data with all its chaos and imperfections. With that in mind, we must then look at as much of it as possible so we can parcel out the truth from the nonsense derived from our preconceptions.

Rick and Uncertainty

I hope my money and banking students can answer the following:

T/F and explain.

If a payoff is uncertain (not merely risky), then you cannot calculate its expected value.

Evolutionary Progress

Among the first lesson I teach my money and banking class is Joseph Schumpeter's insight on economic change: creative destruction. It's a strange term but economics is strange itself and sometimes requires language that on the surface doesn't make sense.

Schumpeter understood that economies grow by creating new ideas while simultaneously destroying others. It is not a stationary process but one of constant change. Creating many ideas means society has many options and thus many good innovations. But destruction is equally important. It allows the market process to move resources from bad or obsolete ideas and move them to desirable ones. We not only get the good stuff, we get a lot of it. But that means destroying the bad--or just not as good--options.

People generally recognize the importance of creation. The role of destruction is much harder to grasp. And so it was today when Lou Dobbs once again expressed concern for a loss of manufacturing jobs. He was confused how officials from the U.S. military could defend free trade and building equipment abroad while these jobs are destroyed. But employees are fired, not murdered, and they will go on to do other things. It is from this destruction that breathes new life into the economy and allows the world reinvents itself once more, as it has done before anyone alive today walked the earth.

"No Lye" but a Lot of "Tomfoolery"

I recently picked up a copy of Tulani Kinard's No Lye, a book promoting "natural hair care" for African American women. Surprise, surprise! State regulation was advocated in the same breath as upholding tradition!

Kinard's argument is straightforward: Age-old African hair care methods are safer, healthier, and self-esteem building. In keeping with these traditions, black women today should braid, loc, and twist their hair.

"Now for the clencher": Increased demand for these traditional hairstyles require legal definitions for the techniques and certified professionals to do them.

Gee, these techniques supposedly survive today because of hundreds of years preservation by women who weren't certified. Why change all of the sudden now?

Yea, Governator!

I was appalled when I heard about this recent ruling against California's homeschooling families. Considering that many homeschooling parents - like my own - are better educated than our credentialed public school teachers, requiring the former to submit themselves to special training is ridiculous! I'm really happy that the Governor has made a statement against this ruling and the Home School Legal Defense Association (HSLDA) petition has racked up thousands of signers. I'd encourage Californians to contact their state legislators and House representatives about the issue.

First Kentucky and Now Egypt

When I saw this, I nearly fell over laughing. Copyright the pyramids? Ridiculous! The fact that every little kid is amazed by pictures of pyramids in history books is probably the only reason why they later visit Egypt and spend gobs of American money there as tourists. Please tell me that their copyright laws won't hold up here in the US.

Reward Those Who Know

Rep. Patrick McHenry (R-North Carolina) asked CEOs dragged into Congress today of Paulson Credit Opportunities Fund, which made billions betting the housing market would plummet. McHenry spoke in distaste of this success.

The congressman should think before he speaks. If Paulson has a unique insight in the housing market, don't we want his firm to act on it? By rewarding people who act on accurate information, countless others have a reason to search for problems before they become disasters. Offers of $1,000 for every mistake found leads to very accurate textbooks.

Dump The Dumping Laws

Right now, an old friend of mine is awash with paperwork. He works for a company in the Midwest, importing steel from China. Last month his firm received a notice from the Department of Commerce (which insists on call itself "the Department" while abbreviating virtually everything else). They received a petition that my friend's firm (along with several others) are importing at an unfair price. An investigation is now underway.

First the department required that they spend dozens of hours filling out forms that summarize the company's activities with China (which basically means all their business). Then the department used that information and did acomparison study with India to determine their prices were "too low." The report reads why this is a problem:

The Petitioners contend that the industry's injured condition is illustrated by reduced market share, lost sales, reduced production, reduced capacity utilization rate, reduced shipments, underselling and price depressing and suppressing effects, lost revenue, reduced employment, decline in financial performance, and an increase in import penetration.

These are better known as the effects of competition.

The importer must now spend hundreds of man-hours demonstrating they operate in a free market or be hit with massive fines. People often complain that in an unregulated free market, corporations will set prices too high. Strangely, they now
argue that prices are too low because this company isn't in that same uncontrolled environment.