Welcome To the Jungle

Paul Krugman argues America's food quality is what it was a century in the time of Upton Sinclair's The Jungle. A lax FDA (and its industry cohorts) is to blame for the recent "tainted spinach, poisonous peanut butter and, currently, the attack of the killer tomatoes."

Economics is a strange discipline because it really just requires people to take lessons they follow in their everyday life and apply them consistently. The lesson here is that we don't want zero risk when it comes to food. Do you boil every glass of water that comes your way? Demand tests on meat that you get in a restaurant? Grow your own food? Avoid eating at authentic restaurants abroad? Failure to do these things puts us at risk but we gladly accept it. Avoiding that risk is too costly: zero risk is not optimal.

Ensuring consistency does a lot for a good argument. Krugman scoffs at the free-market argument against the FDA--that "private companies would avoid taking risks with public health to safeguard their reputations and to avoid damaging class-action lawsuits." And yet he warns that a lack of regulation for ensuring solid food safety is not "just bad for consumers, it’s bad for business." So firms won't ensure safety on their own because they are too greedy but if the food quality is poor then it's bad for business? I bet he doesn't take a UV light to restaurants, either.

People Are Not Passive

Are there limits to growth? That's what people tell me while citing higher food prices, a planet of 6.7 billion, and cities often exceeding ten million. "There are too many people," they say. What nonsense.

Eleven years ago, Nobel Prize winner Norman Borlaug wrote that with current technology we could feed 10 billion people (a population we're not going to reach until around 2050). With 21st century technology we can surely feed more. Alex Tabarrok reminds us that US land use for crops has been steady from the late 1930s to the late 1980s, a trend likely continuing right now.

Whenever people make note of the resource usage of developed countries or the "carrying capacity" of the planet, they always ignore that people are not passive. We are not infants, sucking thoughtlessly away at the tit of the world. We create more than we consume. Our inventions exceed our immolations (at least in today's world). For every mouth to feed there is a mind to think, hands to work, and feet to move. We cherish our lives, our wealth, and our hope for a better future and we will lash out with every appendage to maintain our true and steady course.

Are there limits to growth? Probably, but we're not going to encounter then in our lifetime. Or even in our grandchildren's grandchildren's lifetime. History is replete with doomsayers and prophecies of cataclysm. And as seductive as their wild-eyed claims are, as invincible as they seem, they're always wrong. Never forget that.

When To Recycle and When To Not

There are four plastic bags near the front door of my parents' house each stuffed with a few weeks worth of newspaper bags. This is my mom's latest attempt to save the world. In her infinite foresight she's gathering these bags to "keep them out of the landfill." She plans to send them back to the newspaper company so they can reuse them. I somehow doubt they will.

Plastic bags are tremendously cheap, evidence in that are giving them away to customers. They still cost the company something but I doubt it'll be worth sorting through the bags to reuse them. Recycling's expensive and often not worth the time and effort. Though in some cases, like recycling cans, it is. People are willing to pay for the savings it brings. Note soda cans are one of the few places you are paid to recycle.

Recycling reduces space used in a landfill but so what? Is landfill space really so scarce that this is worth it? If it is, why aren't we charged per bag or per pound thrown out? Part of this is due to the city-run industry but the a bigger factor is that landfills aren't hurting for space, particularly out here in Iowa.

If you're not being charged to throw it out and if no one's willing to compensate you for your time it's not worth recycling. See a past post on this subject here.

Asbestosis Gone Wild

A court in New Jersey recently ruled Spanish citizens can now sue Owens-Illinois and other asbestosis-related firms based on exposure from U.S. ships. This does not have to translate into actual harm from the exposure. Like most asbestosis litigation, post hoc ergo propter hoc works just fine in the court of law. Indeed, the even possibility of harm is enough to cost Owens-Illinois. To punish firms so overwhelming cheapens our society in two ways.

First we get too little asbestosis. Asbestosis is not evil and its optimal amount is not zero. It's useful and safe in many areas of our society. (Indeed, its wide application is why asbestosis litigation never seems to go away.)

Second we lose good ideas in the process. This is not limited to opportunity costs coming from litigation-related expenses. The possibility of similar attacks can destroy a development before it even starts. If asbestosis litigation can completely ruin an industry, companies are less willing to engage in ideas that they think could be twisted down that same route. Sometimes this is good but the level of asbestosis litigation likely makes firms so risk averse that the net effect is undesirable.

This second issue is critical but often ignored because this lost opportunity is never seen (be definition). It makes it difficult to estimate the true cost of asbestos litigation. But if the technological and economic progress in the past few decades is any indication, that cost is a lot higher than most people might think.

Order At A Bargain

This week on EconTalk Allan Meltzer poetically reminded us that

A country that won't experience a small recession will end up having a big one.

Free markets are messy things and it won't be perfect all the time. Nothing will be perfect all the time. We must remember that slowdowns and corrective recessions are the price we pay for the benifits of a dynamic and enriching society. And we're getting a damn good deal.

If You Build It, They Will Ride

Paul Krugman claims Americans face a paradox as we adapt to higher oil prices and away from our suburbia lifestyle.

Public transit, in particular, faces a chicken-and-egg problem: it’s hard to justify transit systems unless there’s sufficient population density, yet it’s hard to persuade people to live in denser neighborhoods unless they come with the advantage of transit access.

This is not really a big problem if you remember your marginalism. Extend a single rail line through a residential area. If oil prices are as high as everyone says they are, people will move to that area. Apartment buildings will replace townhouses (and if you're smart, you bought some of that land around the rail before the construction was announced).

Firms solve this problem all the time. Wal-Mart constructs its stores in the middle of no where. It doesn't fret about the low population density (it prefers it, actually) because it knows people will come to it. Same goes with any large scale project that people will want. Assuming, of course, they want what you're building.

All Bad Stuff Isn't Worth Avoiding

As the semester closes, a student came in to collect his final and we got to talking about immigration. He's concerned about illegal immigration, largely for security reasons. Keep out the illegal immigrants and you'll to keep out the terrorists. It only takes one to make a disaster, after all.

But the optimal amount of terrorism (or pollution, accidents, illiteracy) is not zero. It might seem so because we really don't like seeing bad things happen (terrorist attacks being some of the most tragic) but complete prevention is a very costly thing to do.

Reducing terrorism requires the command of a vast amount of resources. Thus increasing security reduces the amount of things we can do (workers are busy patrolling borders). This "opportunity cost" is can actually cost lives: doctors tend soldiers with heat stroke instead of citizens with heart attacks. Terrorism reduction through border control also reduces the number of people who peacefully work in the US (the vast majority of them) so our opportunity cost deepens. We not only have fewer people producing other things, we have fewer people producing at all.

The cost of terrorism reduction increases faster than it falls. Picking out the obvious amateur is pretty easy, but once all the easy guys are caught, tracking down the elusive expert is much harder. For each percentage point closer to zero we get, that single point costs more and more. Our "increasing marginal cost" puts a tremendous amount of strain on our economy without obvious benefit beyond that one more person captured.

Preventing terrorism in the U.S. is particularly expensive. The country's size makes it that much harder to find terrorists. Its decentralization means any terrorist attack will have a small impact on the functionality of the country. Its productivity means that we are giving up so much more when we wander the desert looking for illegals. The accounting costs are very high. The opportunity costs are very high. The benefits are pretty low. Zero is not the optimum.

Playing with Statistics

Bill Moyers appeared on The Daily Show tonight and fretted over the rising gap between "the rich" and "the poor." That these terms are arbitrary and vague didn't seem to bother him. Nor did he seem to mind that the numbers are useless. Comparing a gap now and a gap twenty, ten, or even five years ago assumes nothing else has changed.

But lots of things have changed, including the people the numbers are looking at. People are moving higher up in incomes and starting at lower incomes (because of immigration, more schooling, etc). This is a great scenario but Moyers' naive examination of it would suggest disaster. When we follow the individuals (which we don't do enough of so the data is a little old), "....the bottom 20% in 1975 were also in the top 40% at some time in the 16 years follow." (Sowell, p135) Here's a table from Steve Horwitz's page that gives us a more complete picture:

Income Mobility 1975 to 1991 (UM Data)
	Bottom 20% (1991)	Fourth 20%	Middle 20%	Second 20%	Top 20%
Bottom 20% (1975)	5.1	14.6	21.0	30.3	29.0
Fourth 20%	4.2	23.5	20.3	25.2	26.8
Middle 20%	3.3	19.3	28.3	30.1	19.0
Second 20%	1.9	9.3	18.8	32.6	37.4
Top 20%	0.9	2.8	10.2	23.6	62.5

Why Are There No CEO Assassins?

My newly found of love of Burn Notice reminds me of a question Robin Hanson posed to use a few weeks ago. Why don't firms assassinate the CEOs of their competitors? It seems pretty strange but industrial sabotages is an old practice and a highly paid CEO is the lynchpin of the company.

It's not like it would be that difficult to get away with it given the resources these firms have at their disposal. Besides, most murders don't get solved if they are done halfway smart and pulled off by someone not in the system. Mob families have contract killings all the time (using "all the time" in a loose sense). So why aren't CEOs dropping like third world dictators? Here's a few theories.

Rule of law. This is a bit of hand-waving but it's worth noting that my above examples of common assassinations (mobs and developing nations) take place in contexts where the rule of law is precarious at best.

Externalized benefits. Your gain is your third party's gain. But she's also your rival and didn't have to pay for the hit. Even if just two firms are the biggest boys on the block by far, the threat of a new competition (which would surely arise) could get you to shrug your shoulders. Why off the CEO of Pepsi when that will allow another Pepsi to rise up? Meanwhile, Pepsi's still there and now you have two rivals.

Retaliation. This is how mob bosses (and some nations) keep the peace. A CEO is less willing to off his counterpart if he believes they'll respond in kind.

Built in redundancy. In a weird way, every firm large enough to make the risk worth it is prepared for it. It's likely not explicit, but every shareholder knows their CEO could have a heart attack or die in a car accident. If the CEO is worth his salary (and the economic analysis suggests he is), then he's worth taking out an insurance policy for. This means there are other guys who know just as much about the firm and are probably almost as good as the guy in charge. True lynch pins (such as Steve Jobs and Warren Buffet) are rare. Ok sure, you could just take out the back ups, but how do you know who they are? And more than one mysterious death will raise attention--the chance of getting caught rises pretty quickly with each additional dead body.

Shhhhhhh. Of course for all we know CEOs are killed, but we just know them as heart attacks and horrible accidents. Remember the whole idea is not getting caught.

Upcoming Final Exam

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

Select one of the methods we discussed on how expansionary monetary policy increases GDP (there were five in total, from lecture 19) in the short run. Detail the logic (i.e. the series of causation) of why this avenue of monetary expansion increases GDP. Why won’t this work in the long run? At what point in the causation does the method you selected stop working? Why?

Why Banks Hate Foreclosures

In the mess of the sub-prime collapse, you occasionally hear that the banks purposely lent to people they knew couldn't pay back the loan. This why they get the loan money and keep the house. Seems like a pretty good deal. Why don't banks do this all the time?

Banks are a business--they don't really want the house, they want the money. You can't pay your workers with bits of a home. You can't use it to invest. You can really only use it to live in, but all the management staff has a place to live already. Homes are what economists call "illiquid" assets--assets that can't turn into other things easily. Banks prefer liquid assets such as bonds, futures contracts, stocks, and cold hard cash.

Can't the bank just sell the house it forecloses? That is what they try to do, but each day it takes costs the bank money in the form of lost opportunities. CNN reported that people who gave up the home to the bank tend to trash the home. They rip out piping, steal toilets, take out cabinetry, lay claim to fixtures, and punch holes in the wall. One family grabbed a pair of decorative columns from a home. Homes like these have to sold at a discount or the bank pays to fix them up. And then they have to pay to keep the house from accumulating additional damage while it sells. It all adds up to time and money down the hole in the floor where the toilet used to be. And banks don't like it.

There Is No Peak of Progress

James Howard Kunstler appeared on the Colbert Report today promoting his new novel about a world without oil. Kunstler claimed we have hit the peak of oil and now we must get off of oil and abandon our Wal-Mart suburbia ways.

Kunstler is mistaking economics with physics. There's a finite amount of oil, but that's not what we care about. We care about energy. As the price of oil rises we find new sources of electricity. We improve wind, solar, nuclear, coal, geothermal, and oil efficiency. We find new deposits, including things we never considered oil before. Someday we will not use oil, but it will be phased out, not ripped away. Kunstler imagines the oil wells "drying up" will come as a surprise--a paradox concerning that's what everyone talks about. Assuming ignorance on the part of the oil companies (who's fortunes are made on the stuff) is patently absurd.

Colbert wisely (though I doubt he meant it this way) brought up the terror of Y2K, asking "When's that going to hit?" I remember the scares of the millennium bug vividly, the concern that planes will fall out of the sky and the world will suddenly end. It didn't. No one wanted to go back to the Stone Age so programmers fixed the problem. Now we are better off than we were eight years ago, and the Y2K scare a distance and quaint memory. Kunstler's novel will surely follow the same path.

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.