Efficiency Wages Are Not Free Lunches

President Obama visited a CostCo today to champion the wages they pay their workers and boost support for increasing the minimum wage. Other businesses should follow suit, he said, as a higher wage “helps build a strong workforce and profitability over the long run.” And he's right: the main motivation for CostCo's wages is because it builds employee loyalty. Henry Ford knew this well. One hundred years ago he offered twice as much as other employers which led to boosted productivity and low turnover. But that logic does not translate to the larger economy. To use it as a justification for increasing the minimum wage is completely backwards.

Economists call the strategy an "efficiency wage." It's a wage purposely set above the market wage so they improve the pool of job candidates, retain good workers, and encourage productivity. Because it's above market wage, this high wage will attract the best workers. Because it will be hard to find a comparable wage elsewhere, they are less likely to quit and more likely to work hard.

But if everyone has a higher wage, many of these benefits disappear. It becomes an expectation, not a perk, and because everyone offers it, fewer workers will be particularly motivated by it.

If politicians think companies should embrace raising the minimum wage because it will increase their profits then they should remember that these companies don't need government permission to increase them. If they're not doing it on their own, one can only conclude it's not the free lunch the President is telling us.

Wages Are Not Special Prices

Americans are calling for an increase in the minimum wage and the airwaves and internet are filled with commentators claiming increasing the minimum wage won't have any unemployment effects, or any ill effects at all.

The problem with studies which claim there's no immediate employment effect is that they don't or can't examine other reactions to price controls. Employers could respond by cutting worker hours or hiring less (which would play out over the course of several years). They could raise prices, effectively reducing the wages of their customers. They could cut wages or raises from higher-paid workers which could hurt the underlying functionality of the business as these employees work less hard or quit. Indeed, many studies point to a real and negative unemployment effect to the minimum wage.

We know legally fixing prices make a mess of things. Pegging gas prices artificially low back in the 1970s created huge lines and massive shortages. Capping bread prices caused Washington's army to starve at Valley Forge. FDR and Hoover encouraged high prices during the Depression (on the theory that it would increase wages and employment), which helped transformed the 1930s into America's worst economic crisis in history.

Wages are prices for labor. Proponents of increasing the minimum wage are so willing to overturn over two centuries of economic thought, yet have no explanation why this particular price control won't have well-documented unintended consequences. The demand curve slopes down.

Mythbusters: Economics Edition

Robert Atkinson and Michael Lind posted a terribly foolish article on introductory economics yesterday at Salon. They claim economists tell a series of ten myths but fail at every turn. Let's look at each "myth" in turn.

Myth 1: Economics is a science. They claim that since there is disagreement in economics--citing a survey reporting 40% of economists agree increasing the minimum wage would make it harder for people to find jobs and 40% disagree--economics cannot claim to be a science.

Right off the bat, the survey they cite actually ask respondents if raising the minimum wage would make it noticeably harder for people to find work. "Noticeable" means different things to different people (hardly a scientific question) so you're going to get disagreement. Better wording yields 79% agreement.

But fundamentally, economics is a science. You might see economists disagree a lot because we like to talk about things we disagree about. Discussing points of consensus is boring, like two astrophysicists arguing if the earth revolves around the sun or the sun revolves around the earth...no one will take the latter argument. Sure, as a social science economics has more give than the physical sciences. But we still test our hypotheses and make accurate predictions.

Myth 2: The goal of economic policy is maximizing efficiency. They claim the actual goal is to create disruptive innovation which, in turn, causes inefficiency. The right allocation isn't the goal.

This is really just a misunderstanding between the short and the long run. In the short run, R&D spending might seem inefficient (and it is at some level; too much on R&D means you don't have income coming in to fund it). It's a payment without a benefit. But in the long run, it's worth it. It's an investment and smart investments result in greater efficiency.

Myth 3: The economy is a market. They claim that a great deal of economic activity takes place in governments, households, and nonprofits.

Let's be clear: a "market" is a gathering of people who engage in exchange. Conventional markets are an excellent (clean) way to illustrate how the economy works, but governments, nonprofits, and even households illustrate market activity, too. Government actors swap favors and votes. Bureaus and nonprofits compete for funds. Even households engage in specialization and exchange ("Who's turn is it to do the dishes?)

But all of this is really a minor point because the purpose of this "myth" in econ 101 is to discuss how this sort of activity plays out. Buying and selling (and producing!) in a conventional sense is clean world for students to discuss and understand. We set aside complexities for much the same reason you ignore air pressure when calculating how long it takes something to fall 30 meters in physics.

Myth 4: Prices reflect value. They point out sometimes prices don't reflect value, such as in stock markets bubbles.

This is why every econ 101 class covers externalities (when prices don't reflect value). The flaws of the Efficient Market Hypothesis is good to discuss in finance (I sometimes cover it in introductory but ultimately decided other things were more important). But the EMH is useful: most of the time, prices really do reflect value. If they didn't economists could play the stock market and be billionaires overnight. But, as any investor will tell you, beating the stock market is really, really, really hard. The EMH explains why.

Myth 5:  All profitable activities are good for the economy. They claim some profitable activities, like crony-capitalism (profits that come from political connections) and stock market manipulation, aren't good for the economy.

Again, this is why we cover externalities and monopolies and taxes and subsidies. No econ 101 course would claim all profitable activities are good for the economy.

Myth 6:  Monopolies and oligopolies are always bad because they distort prices. They claim that having a few producers can be good because of economies of scale and innovation creation.

Beyond the obvious contradiction between this myth and the previous two, most monopolies really are bad. But econ 101 covers the idea of economies of scale and it's connection to monopoly (called a natural monopoly). The value of monopolies (incentive to invent) is something I cover in my class and admittedly, I think it should be a larger part of the conversation.

Myth 7: Low wages are good for the economy. They claim high wages are good because you get workers with high productivity.

And they would be right, but ultimately wrong, because no economist claims wages should be high or low. Economists just want wages (like all prices) to be correct. See item #4.

Myth 8: “Industrial policy” is bad. They argue industrial policy can be good because governments can encourage firms to shift money to R&D and other activities with a high rate of return.

It's not that industrial policy is "bad" (again, economists argue subsidies and tariffs are useful policy tools) but that it's dangerous (because, again, crony-capitalism/corruption can get in the way of good policy). A handful of people (government agents) guiding the economy will be more corruptible and less informed than a hundreds or thousands of firms being paid for being right.

Myth 9: The best tax code is one that doesn't pick winners. An ideal tax code would encourage efficient innovation (e.g. R&D tax credit).

But most tax codes distortions are really undesirable and it is just as dangerous to invest too much in R&D than it is to invest too little. There is good reason to start with the idea of zero favoritism. To claim 101 students should consider all the nuances to slight modifications along this line is a waste of time; if students are in a position to influence policy, they can call an expert for advice and ask him/her about the devil which lives in the details. Besides, this general idea is covered in 101 anyway: in externalities.

Myth 10: Trade is always win-win. Industrial policy is the ultimate driver of what determines what a country is best at producing, not comparative advantage. "Koreans and Japanese are not good at making flat panel displays because they have a lot of sand"

I quoted that last bit because it is particularly unbelievable. The source of a country's comparative advantage isn't limited to natural resource but labor force skills and size, location, compatible industries, trade port quality, natural of government, etc. Governments and firms can foster comparative advantage in one direction or another (risky, for reasons mentioned above) but it really is all about comparative advantage.

What all this has to do with trade nor always being win-win is unclear but it's worth noting (in a nod to item #1) that economists really do have wide consensus on the virtues of free trade.

Much like any discipline, economics is a complex subject; the important stuff doesn't stop at the introductory level. If the authors feel econ 101 could use more nuance, they should remember a sizable portion of classroom time is taken up correcting the nonsense students enter the course with, nonsense reinforced by articles foolish journalists write.

In Praise of Unpaid Internships

Companies, of course, want cheap labor. It's hard to get cheaper than free so some firms will let people work for nothing. Why would anyone take this deal? Seems bizarre to be willing to work well, well, below minimum wage.

But millions take these jobs, better known as unpaid internships. In fact, more than half of all college-level interns weren't paid. And that doesn't include post-college internships.

Why so much interest? Being in an internship--paid or not--demonstrates a level of legitimacy to future employers, signals responsibility and professionalism, unlocks networking opportunities, opens the door to one or more professional references, and may even lead to a full time position. Of course, many of these things may not happen but you can say the same thing of going to graduate school (another way to stand out in a crowded job market). And graduate school takes a lot longer and is a lot more expensive.

So here we have a system of mutually benefiting participants. Interns get experience and networking. Companies get free labor. They would be willing to pay more if they knew the interns were worth the extra cost, but they don't...that's why interns are willing to work for free. It's their chance to prove themselves. Why would anyone have a problem with this?

Enter Eric Glatt, the Black Swan intern-turned-law-student who sued for wages. To be clear, he knew the position was unpaid. He knew it could lead nowhere (or was foolishly optimistic). But he sued for something that was never ethically owed him anyway. (Granted, he was probably right on the law but as a matter of justice and fairness, the company owed him nothing.) Last month, the court ruled in his favor.

Glatt recently appeared on Q on NPR advocating and end to minimum wage internships. Virtually none of what he said made sense. Most of what he says isn't worth repeating as it's ignoring the logic of why people eagerly take unpaid internships.

But of note he claims "interns who do get paid...get better paying jobs when they finish their degree than those who did unpaid internships. Some studies even show that people who did unpaid internships have a lower starting salary than people who did no internships at all."

Great workers are hard to come by so companies are willing to pay them more to make sure those workers work for them. Interns who do get paid are probably very talented compared to those who don't and thus will naturally go on to higher paying jobs. But internships aren't the only way to stand out in a competitive job market: those who do no internship at all might not because they have particularly impressive grades, extracurricular activities, or recommendations. Causation is not as clear-cut as Glatt implies.

There is nothing immoral about offering an unpaid internship and nothing foolish about taking one.

The Economics of Bigotry

Conventionally, profit-seeking and bigotry are contradictions in terms. A company that constrains who can be an employee interferes with the ability to get the best employee and thus interferes with profits. A company which limits its customer base affects its bottom line. The same logic can be applied to personal relationships: if you refuse to make friends with people of different ethnicity, genders, religions, sexual orientations, etc, then you limit the pool of potential friends. Since people are so diverse in their interests, bigotry can make you very lonely. Incentives discourage bigotry.

If it was that simple, the Supreme Court ruling on the Voting Rights Act would be inconsequential and we could safely say anti-discrimination laws have no place in a libertarian government. Economic incentives (which we know are very powerful) would discourage bigotry so much, such laws would serve no purpose. But it is not so simple.

The person who hires is not always the same as the person who profits from that hiring. In fact, it is very common that the manager is not the owner of the store she manages. While a manager's salary and job security are tied to the division he manages, it's an indirect tie. The likelihood he'll get full credit for good performance diminishes the farther the manager is removed from the owner(s). Knowing this, a manager (particularly a low-level manager) faces a very low cost to be a bigot. She gives up little (a small, small chance to get credit for good sales) compared to the owner so she indulges in bigotry more than the owner would. The demand curve slopes down.

This is a real concern for owners who naturally want the very best performers, but it is virtually impossible to get around. Refusing to hire the best person due to bigotry is hard to detect; there is no obvious error the owner can point to (unlike hiring a stupid or lazy person, where there is a record of complaints and poor performance).

What makes matters worse is that sometimes the best performers (or customers) are bigots themselves. Even if a manager isn't a bigot, he may be encouraged to avoid certain traits others  unjustly find offensive. This concern, real or imagined, might be more prominent than we may be willing to admit: the desire to be around people who look like you is a strong one, one probably hard-wired into our DNA.

This instinct increases the benefits of bigotry. In the FX series Justified, the main character is a deputy U.S. Marshal in eastern Kentucky. While not a racist himself, he's found it advantageous to his job to feign some racist attitudes. More people are willing to talk to him if they feel like he's "one of them." It's an extreme example, but it highlights an important point. We not only like to be around people who look like us, we like being around people who think like us. The more people who have foolish views of those who are not like them, the greater incentive to engage in those views (or least, not challenge your primitive instincts). Bigotry becomes self-sustaining.

This is what makes the ruling on the VRA so disturbing. Even though the South had issues with racism "a long ago" (half a century ago), that certainly doesn't mean many of those attitudes are gone. As the recent decision by students to resegregate a South African school demonstrates, old habits die hard.

Consumer Surplus Is Everywhere

People tend to complain that goods are really expensive or even over-priced. Such good are actually very few; most goods come at great deals. They are just so common, we tend not to notice them.

Consider my bed. Less than two years ago, I paid Ikea $400 for a mattress and box spring. It's incredibly comfortable and still in great shape. Since I'm moving in a couple of days, I'm giving it away (I need to get rid of it quickly). Did I get my money's worth?

Over the past 21 months, I've spent about 16 months sleeping in my apartment (the rest visiting my fiancee during breaks). That means that bed cost me $25 per month, or less than a dollar a night (about 83 cents). On any night, I would have easily spent ten times that amount to avoid sleeping on the floor. I would probably go as high as 15 times (or $12.50). Thus I received $6,000 (or, 15 times $400) - $400 = $5,600 in "consumer surplus." I don't really think of this bed as costing $400. I think of it as giving me a net of over $5,000.

I assume most of you have never calculated your consumer surplus (the most you are willing to pay minus how much you actually paid) for your bed. I bet you haven't done it for your electricity, Internet access, gasoline, or toilet paper. Anything you buy without thinking too much about if you should buy it are items you get a lot of surplus from. Take a moment and estimate your consumer surplus from one of these items. You'll find a lot of stuff is really cheap.

It's All Costs and Benefits

The way economists approach consumer choice theory (why do people buy what they buy at the prices and quantities they do) is really simple. Economic Man (or Woman) goes to a store or website. "What is the most I am willing to pay for this?" thinks Economic Man. "What is the price?" he asks himself. If the value exceeds the price, he buys it. If it doesn't, he doesn't. Simple. Rational.

Nobel Laureate in Economics Daniel McFadden recently argued that economists need to rethink how economists approach consumer choice. Psychology, neurobiology, and other disciplines find a host of things which put our stable, simple world into chaos.

To take one example, the “people” in economic models have fixed preferences, which are taken as given. Yet a large body of research from cognitive psychology shows that preferences are in fact rather fluid. People value mundane things much more highly when they think of them as somehow “their own”: they insist on a much higher price for a coffee cup they think of as theirs, for instance, than for an identical one that isn’t. This “endowment effect” means that people hold on to shares well past the point where it makes sense to sell them.

There are others as well: your loss of happiness is greater if you lose X than your gain of happiness if you acquire X. People prefer a free $10 gift card than to pay $1 for a $15 gift card. There is such as thing as too many choices. It's enough to make economists think people are irrational.

No doubt that people care for other things beyond what you see in our simple model, just like air resistances affects how fast a ball falls but it's so hard to incorporate that at the basic level, you assume it away in intro physics. It's a simplifying assumption. It doesn't require that we redo all of economics or change our fundamental approach.

And this is where these economists get it wrong because most stop there but they shouldn't. None of this demonstrates that people are actually irrational. Rationality is a very low bar in economics: do something when benefits exceed costs. That gets us very, very far. These studies that other disciplines tout are important, not because they undo what we know but because they add to what we know people care about. People derive inherent satisfaction from owning things or getting things for free, just as they value food, sex, and shelter.

Nothing really changes. I guarantee that if you change that $15 gift certificate to $20, $30, or $50, you'll see fewer people willing to indulge in their preference for "free" things. Demand slopes down.

This extends to all areas. Advertising works but it can never brainwash someone into buying something they don't want on some level. Advertising has limits and the fact that you don't buy everything you see advertised to you is a testament to that. I don't like tomatoes and I don't wear makeup. I know this about myself and no matter how many ads I see for either will not change my purchasing patterns. (I've seen thousands of ads for bras; I've never bought one.)

Ads work because they help us economize on other things we find valuable such as time and mental energy. On occasion, I find myself at the store wanting a general thing, like a cracker, but no strong preference on brand name. Then I remember a jingle or a funny commercial and so I buy Wheat Thins or Ritz. This is not irrational; I didn't have a strong preference and making a choice is costly both in time and mind. Costs exceed benefits to make up my own mind so I'll do what's easiest: I'll follow the ad.

That I am describing this everyday purchase in this way does not make me unusual. Quite the contrary, as an economist I'm trained to think like a typical strangers. Time is a real resource people care about. Thinking hurts. So we avoid it if it's cheap to do so. We are rational.

Unsustainable Pricing

A series of clicks today led me to this YouTube video of Senator Warren's March 2013 congressional hearings on the minimum wage.

At 2:53 she notes as a result of an increase in the minimum wage to $10.10/hour over three years, the price of a fast food meal would rise by four cents.

So instead of it being $7.19 it would be $7.23. Are you telling me that's unsustainable?

Given the context, "unsustainable" probably refers to the restaurant business itself. As in, "if you raise your price by four cents, are you really going to have issues?"

The answer is yes.

There is a nasty consumer habit to believe that the prices we see are given, as if they were determined randomly or granted to us from a deity. But they are the careful, careful decision of business owners and analysts with the sole aim at maximizing revenue. The $7.19 price came from a conversation like this (all prices are post tax):

"How about $7 for the meal?"
"$7 is a bit low; I bet we can up our revenue if we increase by two quarters."
"Our market research tells us our consumers are particular price sensitive, especially given the state of the economy. I wouldn't go higher than $7.05."
"Really? We can definitely go higher than $7.05. I was thinking $7.40."
"No way! Our competitors' are pricing lower than that. We gotta go much lower."
"Our competitors price there for a reason."
"A TV dinner only cost $5. This is our competition."
"It isn't nearly as easy, nearly as good. When we offered a coupon last year, people barely used it. We can afford to go higher. We have investments to pay off."
"How about $7.35?"
"Burger King's $7.25."
"It also's been hitting the airwaves harder than us. Let's drop a little below them and get our customers through price."
"$7.24?"
"A little bit more; something big enough that they just can't respond."
"$7.17? Has a nice ring to it"
"Maybe...or $7.20"
[Market research]
"$7.19 seems to be the sweet spot."

This is an abstraction, (void of uncertainty which is another factor they consider but I need to go to bed) but it's meant to remind us that firms do not grab numbers from nowhere, especially for firms who tend to sell very cheap food and where customers are very sensitive to price. Warren's thought process seems to be "Well, I'd pay 4 cents more while on my campaign trail" but she is a wealthy individual with very little time and not many alternatives: it's hard to get more insensitive than that.

Many customers, especially when times are tough (and thus when  increasing the minimum wage is most popular), are very price sensitive. This goes double after a lot of time has passed and they can adapt to the 4 extra cents (which, for a family of four and a biweekly meal out totals to $16.64 over the course of a year) in ways such as going to restaurants with fewer minimum wage workers (and thus less of a price increase so at least you get more for your money) to eating at home more to eating less when you do eat out.

At the heart of Warren's question is a puzzle: if an extra four cents is so sustainable, why isn't it already four cents more expensive?

It's because it is. That's the revenue maximizing price.

The Government Isn't a Household

I was recently told that the balancing the U.S. budget is like balancing a family budget. If you're spending too much, cutting out a lot of little things can make a big difference. In the conversation, cutting back on the EPA was a theme.

The EPA budget in 2011 was about $8.5 billion. The Federal government spent $3,630 billion that year and brought in $2,314 billion. This is a deficit of $1,316 billion. So if we to eliminate--not merely scale back but completely remove--the EPA, we are shaving off a little more than 0.6% of the deficit.

Let's put that in perspective. Suppose your household make $50,000 a year (after taxes) but you spend about $78,435 a year (this keeps our household income and expenses in proportion to the Federal government: here our deficit is $28,435). Our EPA equivalent is an expense of $170.61. You're spending more than $28,000 a year than you earn and some people are arguing you can solve your problem by three fewer video games.

Yes, yes, I know. The argument is that if we do enough of these little cuts (and keep in mind, I'm eliminating the EPA, not just cutting it back), it adds up into a significant effect. Forget the fact that there aren't enough little cuts to use until you run into the politically tough stuff (Medicare, Social Security, defense). The household analogy is fundamentally flawed beyond that.

Imagine you attempted the same strategy but you needed everyone's approval before you made changes. You can't cut your cellphone budget unless your talkative daughter approves. The video game budget adjustments need approval from your kids. Hell, even your dog has to approve adjustments to how many new toys he gets.

Now spending your time and effort taking away a few video games seems really dumb. In fact, it might be better to spend more on video games just so the kids won't complain when you dip into their college fund (which is a really big expense and can solve the problem by itself).

Like a household budget, our budget needs to be balanced. But there's where the analogy stops because to change the Federal budget, you have to get approval from folks who are about as forward thinking as teenagers and as thoughtful as a family dog.

The Scarce Resource of Political Capital

A couple of days ago I participated in a round table discussion on the state of the economy. It was organized by the office of Representative David McKinley and included local business leaders and political actors. Two of Bethany's best students were there as well, about 12 overall.

While the main purpose of the meeting was sequestration, the businessmen wanted to express concerns about the EPA, making sure the congressman was aware of the barriers it sets up. The EPA's smothering them and, by extension, job creation. I emphasized regime uncertainty: the only way we're going to get the investment needed to bring job growth back up is for Congress to strike some kind of deal. There's too much uncertainty in the market. Everyone agreed, but I don't think people really got it.

Everyone seemed to believe that McKinley could do both: help strike a budget deal and weaken the EPA (and do other things, too). But he can't. He only has so much political capital to spend and making these things happen requires getting a lot of people on board. McKinely's a Republican so reigning in the EPA will upset some Democrats which will make it harder to strike a deal. And since he's a member of the Tea Party Caucus, increasing taxes is politically tricky, too. A common Sophie's choice in politics: what the country wants or what the constituents want. (Oh wait, that's not a good analogy; they will side with their constituents almost every time.)

This is why I like pork. If you think of it solely as a project (e.g. a bridge to no where), then yes, it's wasteful. No one seemed to like pork at the round table discussion and I regret I didn't defend it because pork makes things easier. If EPA deregulation and politically stable is what you buy with political capital, pork is a way to earn it.

Pork is cheap. Giving every Representative a $5 million pet project would cost a little less than $2.2 billion dollars. If that gives us a budget deal, we get stability and economic growth: that's worth hundreds of billions of dollars. Yes, it might take more than $5 million to get cooperation from some, but others won't require any pork. It's a good deal.

Political capital's a scarce resource. Like the money Congress is fighting over, you can't have everything. But if you sleep with the pigs, you might get enough to make everyone satisfied.

James Buchanan (1919-2013)

Nobel laureate and Father of Public of Choice James Buchanan passed away at the age of 93. He was a titan of a thinker and a tireless defender of liberty. He will be missed.

Here is Tyler Cowen, Alex Tabarrok, Robert Higgs, Arnold Kling, Don Bordeaux, Russ Roberts, David Henderson, and additional remembrances compiled by Don Bordeaux.

Pete Boettke posts a video of a panel discussion with Buchanan from a conference held in his honor, Don Bordeaux discusses Buchanan's thoughts on public debt (in two parts), and here is Buchanan's Nobel lecture.

Two Krugmans Enter, One Krugman Leaves

Paul Krugman likes to contradict himself but never have I seen it happen within a single column. Writing on health care costs, he states:

But even as Republicans demand “entitlement reform”, they are dead set against anything like that. Bargaining over drug prices? Horrors!

I agree, being able to bargain over drug prices is a good thing. Makes sense: being able to bargain and not blindly accept forced prices is a hallmark of free-markets. But later he writes:

If they were serious about deficits, they’d be willing to consider policies that might actually work; instead, they cling to free-market fantasies that have failed repeatedly in practice.

Ah, but you might say that the goal is to allow the government more bargaining power and since the government increasingly has monopsony power (like a monopoly but there're few buyers rather than few sellers), it's not a free-market. In other words, Krugman tells us that monopsonies are actually desirable, which is endorsing a law which states only Microsoft gets to hire engineers. Even non-economists should understand why that's a bad idea.

That's not the only issue with today's column--the claim that private firms apparently have no incentive to reduce costs is equally strange and the point that an underfunded voucher system won't work is equally obvious (since it's underfunded!)--but those are for another post.

I'm Not a Grinch; I Just Don't Like Negative Externalities

I don't remember how it came up, but I couldn't help myself. And when it started, I couldn't stop. Today I told my managerial class that I don't like Christmas. Or, more accurately, the Christmas season. They were surprised, and so of course I had to tell them why. But my hatred for the season really stems for a hatred of any negative externality people blissfully ignore, things people don't think are externalities.

A negative externality is when something imposes a cost onto others. We are familiar with examples: pollution, cigarette smoke, screaming/crying babies, traffic. Basically anything someone does which makes people who had nothing to do with the transaction worse off. I buy power from the power company, but neither of us pay the cost of the pollution which poisons the water downstream from the power plant.

We're all well aware of these problems and there are attempts to correct for them. But what I find endless annoying are those negative externalties which so many refuse to acknowledge. And that brings me to the  Christmas season.

Christmas Season. For one month, everything becomes about Christmas. I must endure the decorations, the constant Christmas references in all media, the music on the radio, the Christmas theme in virtually every article, the extra traffic, and, most of all, the cheeriness of everyone who assumes you are as excited about the season as they are. Don't get me wrong: there are things I've found enjoyable. I like time with the family, I like my neighbor's Christmas cookies she bakes every year, I like the time off from work. But if we were to at least diversify the season for a month, I would welcome the change.

Sports. If you like sports, that's fine, but shut up about it. Don't be surprised when other people think slaying dragons is more interesting than watching football. Don't think me a fool because I don't know if the Raiders and the Cubs play the same game. Don't run around screaming and honking horns when the team you like wins. Or loses. (I really don't understand what motivates you.)

Dogs. Again, I don't hate dogs as much as the externalities they create. And really, I don't like how dog-lovers don't understand how inconsiderate they can be when they assume no one cares about these externalities. Dogs are not angels: they bark, they smell, their "kisses" are slobber. Dog poop, even when I see it to avoid it (which isn't always) stinks. Not to mention, they bite (and yes, they do bite; they of course don't bite you because you're the one who feeds them).

I am well aware that all of these things are better existing than not; the total annoyance they create is probably outweighed by the total joy they create. Benefits probably exceed costs, including the external, and in my book that's the thumbs up even if I'm not a fan.

But, for the love of all that is good and holy (religion: that's another one; not everyone's religious you know) stop assuming everyone's like you. I'm not excited that Christmas is coming, I don't want to pet your dog, and no, I didn't watch the #%$%^ game last night.

A Very Interesting Sentence

Within two or three decades the difference between automated driving and human driving will be so great you may not be legally allowed to drive your own car...

From The New Yorker

Let People Sell Kidneys!

In 2011, 35,031 people were added to the wait list for a kidney transplant. Only 31,626 were taken off the list that year, growing the waiting list by over 3,000 people.

Of those removed, 16,195 were taken off because they got a new kidney. However, 4,959 were taken off because they died and an additional 2,506 were taken off because they became too sick to either survive the surgery or have a new kidney make the difference (it's not clear from the source which one, or both, is the case).

About half of the individuals who are waiting for a new kidney are between the ages of 50 and 64. Their median wait time (between 2003 and 2004, the most recent years available) is 1,627 days or 4.45 years.

Dialysis cost about $75,000 per patient per year. That's $3,375,000 per patient.

Even if the market price for a kidney was $100,000, that would save not only millions of dollars per patient but, by getting kidneys faster, save thousands of lives. Every. Single. Year.

Data on kidney wait list found here.

Sweet Thoughts

Friend and economist Brian Hollar made a tongue and cheek reference to claims that eating chocolate helps you win the Nobel Prize. Per capita chocolate consumption correlates strongly with per capita Laureates. Yes, yes, yes, we're all aware of the "correlation is not causation" platitude--though I wonder if half the people who say truly understands it--and it probably applies here. But there's probably such a story here. Not that winning Nobels cause people eat chocolate but wealthier nations eat chocolate and have more Laureates. Wealthier countries, after all, have better nutrition and caloric intake (which helps the brain develop), are safer (so smart/driven people are less likely to die young), and allow greater specialization (so smart/driven people don't get stuck doing menial labor rather than expanding the boundaries of knowledge). Moreover, wealthier countries have the capital equipment that's so helpful when doing revolutionary work. Switzerland has the highest per-capita in Laureates. Switzerland also has CERN. The heteroskedastic nature of the best fit line supports this theory: chocolate-starved countries have few Nobels but chocolate-rich ones have either many or (relatively) few. When you're wealthy, there's a lot of different things you can spend your money on. (I assume if there was a Nobel for engineering, Germany would be higher.) This is all pretty straight forward; this post is largely a record so I can remember to use this example in class when I teach research methods next year. Still, it's a fun exercise.

Billionaires Per 10 Million

The US tops the list of countries with the most billionaires but who cares about the raw numbers? I'm much more interested in the number of billionaires per person. Or per ten million people in this case. That makes it easier (though some countries on this list don't have ten million people...but that just highlights how billionaire-friendly they are). Here's where I got my countries by population data. I removed Hong Kong's population from China's as I assume that their billionaires weren't included in China's billionaire count.

Country	Billionaires per 10m
Hong Kong	91.4
Switzerland	71.3
United Kingdom	22.6
Germany	16.8
United States	15.3
Canada	11.4
Russia	6.8
Brazil	2.5
China	1.1
India	0.9

A World Without Greed

Suppose we lived in a world without gravity. How would we feel about that? (For now, ignore the fact that without gravity our atmosphere and oceans would dissipate, suffocating all life on earth.)

How we feel depends on what we're talking about. No one could fall to their death and flying around would be really easy. Launches to space could happen almost accidentally. But at the same time liquids would get in all sorts of electronics and ruin them. Hydroelectric dams won't work. Plumbing, irrigation, and natural gas lines would fail. Assemblies lines would be chaos. Drinking would be hard.

Our civilization is built with gravity in mind. This counts not just preventing the bad stuff that comes with gravity (we have rails to prevent falls) but leveraging its reliable existence into something that benefits us. The constant gravitational pull lets us generate enormous quantities of power very cheaply. We'd be fools to ignore it.

Why then are we so reluctant to build our world assuming greed is as consistent as gravity? Why do we often assume that we live in a world without greed, where teachers, politicians, labor unions, and even companies will not act in their best interest? It is particularly tragic because we could rely on that consistent force of nature (and if you've ever seen a plant turn its leaves to light, you've seen greed as a force of nature) to transform that force into something productive.

Instead of relying on benevolent governments to determine the best way to reduce pollution, tax pollution and give people the incentive to find the best solution.

Instead of relying on good feelings to ensure we have good teachers, let there be a marketplace for education so the good teachers are rewarded and the bad ones are punished.

Instead of forcing experience and credentials to ensure everything from doctors to hairdressers make a quality product at a low price, remove barriers of entry and allow consumer sovereignty and competition to encourage a better world.

Instead of capping liability damages and relying on a regulatory agency to make sure firms don't skimp on safety, let's instead make sure that the firm will swallow the full cost of its carelessness.

If you think it's hard to change laws, you are absolutely right. But it's as impossible to repeal greed as it is to repeal gravity. Best to learn to live with it.

Ethics Are Incentives

It is not enough to know what's the right thing to do; one must also have the incentive to. If your back is to the wall, you'll do unethical things (even if you may justify it as ethical while you're doing it). But it is hard to blame people for doing bad things if they are just responding to incentives. Consider this passage from Nothing to Envy describing life in North Korea during the famine.

...[Hunger] targets the most innocent, the people who would never steal food, lie, cheat, break the law, or betray a friend. It was a phenomenon that the Italian writer Primo Levi identified after emerging from Auschwitz, when he wrote that he and his fellow survivors never wanted to see one another again after the war because they had all done something of which they were ashamed.

As [North Korean] Mrs. Song would observe a decade later, when she thought back on all the people she knew who died during those years in Chongjin, it was the "simple and kindhearted people who did what they were told--they were the first to die."

If you refuse to give a starving child your food when you are starving, are you really a bad person?

A True Coasean

In India, Rajesh Shah opened a menswear shop called "Hitler." Naturally the local Jewish community is rather upset and demand that he changes the name. Mr. Shah's response?

If the Jewish community really wants the name changed, they can pay for it, Mr. Shah said. “I have spent too much on branding for my shop,” he said.

Ronald Coase would be proud.