Sunday, January 29, 2006

Bush = Rawls

Matthew Yglesias opines:
But meritocracy is a bad thing and we shouldn't be complacent about inequality. Better social insurance and better provision of basic social services (America's libraries, parks, subways, etc. are all messed up, as are a shockingly large proportion of our urban sidewalks and streets) is part of the answer, but ultimately inadquate. There's nothing wrong with a little income redistribution, but this is hard to achieve and sustain on a massive basis over time. The best answer is what John Rawls called "property owning democracy", measures designed to disperse ownership of capital.
"Ownership society," anyone?

Wednesday, January 25, 2006

Subsistence Peasants

It also fits what economists and a number of political scientists now say about the peasantry: that peasant customs are not uneconomic, that even subsistence peasants are engaged in considerable amounts of trade, and that peasants themselves are really not obstacles to economic growth. All of this literature points to a very different argument. Indeed, it suggests that the real obstacles to growth lie elsewhere: with politics, with institutions, and with the rest of the economy -- in particular with the economy's ability to provide human and physical capital and opportunities for trade.
--Philip Hoffman, Growth in a Traditional Society: The French Countryside, 1450-1815, pg. 19. Winner of the 1997 Sharlin Memorial Award of the Social Science History Association.

Tuesday, January 17, 2006

Reinventing the wheel

The comment thread on Delong's post and the original Marginal Revolution post about the forthcoming (in the JPE) paper by Becker, Grossman and Murphy explaining that drug prohibition fails because demand for drugs is inelastic is filled with objections that this is hardly original and is old hat to anyone who has ever learned about elasticity. Too true. But you can't forget that a fair amount of economics is about refining and formalizing things which we think are obvious -- just to make sure it definitely and certainly holds together. Though you always feel a bit ripped off to work through math and graphs and find that you only learned modelling technique and not any actual insight into the world.

My thought about the paper is that while demand from addicts is plausibly inelastic, I wouldn't be surprised if demand among potential addicts is elastic: I'm much more likely to try cocaine if it costs $5 than if it costs $1000. This argues for the view that if price is pushed high enough, drug use will decline over time (a view the data probably disproves).

Friday, January 13, 2006

An Odd Alliance

On C-SPAN yesterday I saw an ABA panel on immigration. There were union representatives and others, but part of the pro-immigration contingent consisted of arch-tax-cutter Grover Norquist, ACLU executive director Anthony Romero, and a representative of some official Catholic group. There's probably no other issue that all three of them would agree on. Romero is pro-choice, Norquist wants lower taxes, the Catholic guy is pro-life and wants higher taxes. There's something about this issue that just cuts through everything.

Also, Patrick Leahy is perhaps the least funny person ever. During the Alito hearings Specter and Grassley would occasionally joke back and forth (once about Anita Hill: weird?) and Leahy would always try to jump in with some jibe but was consistently unfunny. He just didn't get it.

More Friedman

Friedman continues to annoy, but he does get all excited about how you can turn anything into a financial instrument (specific examples: movie receipts and personal talent (see David Bowie and Korn)). Implicitely he's arguing (perhaps without knowing it) that we are moving closer to the world of general equilibrium theory where it is possible to buy insurance against all possible contingencies. If you think about, however, such a world is not only not our own world but can never happen because the set of all possible future worlds is infinite, so all existing and future humans could never write down insurance for all possible contingencies. Even if financial markets become more developed, it is impossible for them to become perfect.

Thursday, January 12, 2006

Productivity and product

I am in the sad position of having to read The Lexus and The Olive Tree for the third time: the first was self-inflicted as a naive high school student (and even then I found it too glib), and the second time and this one because certain professors have an irrational affection for the book. Anyway, this time around I am delighted to find utter stupidity as early as page 12 where Friedman argues that the 35 hour week in France reduces productivity. This of course is ludicrous. Productivity is product per hour. Working less hours doesn't mean you work less hard. If anything, it increases productivity because of diminishing marginal productivity. Friedman then explains it for the simpleminded as the French having to run a 100 meter dash in flip flops, whereas the Americans get to wear their sneakers. But this is totally wrong. It's like the French running an 80 meter dash in sneakers and the Americans having to run the full 100 meters.

Tuesday, January 10, 2006

I used to think...

...that I was an INTJ. But I am actually an INTP who wanted to be an INTJ. Well, enough of that. I'm a hedgehog, not a fox.

Monday, January 09, 2006

Why goods prices end in nine

If consumers break brices into two bits -- say the ones place and the cents -- and economize on search costs by looking only at the ones place, then producers will rationally maximize the cents. But since consumers are rational they "know" that the cents are 99 because they know the expected value of cents. Yet this denies the firm the opportunity to price in intermediate values of cents (because consumers don't look and assume it to be 99). So then the demand function faced by the firm is essentially a step function of the value of the ones place rather than a much smoother function of dollars and cents. This step function has to be inside the dollars and cents demand function. The producer is hurt by the way consumers perceive prices. This model can be extended to larger denominated things by thinking about consumers who only look at the hundreds place, or the thousands place...The effect on the consumer is ambiguous, though you suspect that she is made worse off by being forced to save a bit more than she wanted.

*See Kaushik Basu 1997. "Why are so many goods priced to end in nine? And why this practice hurts producers." Economic Letters 54: 41-44.

Sunday, January 08, 2006

Airport Security

Chatting up travelers, while maybe new in the US is standard procedure in Israel. For example, at Ben Gurion airport by the time you are at the point of walking through a metal detector and having your carry-on scanned, you've already been stopped three times. The first time in your car when you are driving in you are stopped by soldiers and said hello to. If you happen to be American with white skin and an American accent, your "shalom" gets you waived on. Presumably, different skin color or different accent would get a different response. Then at the door to the terminal building you are stopped again and said hello to and asked if you are travelling alone or...You then put all your checked bags through a bomb scanner and while waiting in line you chat with security personnel about what you were doing in Israel, where you were staying, who you were staying with and, in some cases, where and when you learned Hebrew. The extended conversation also happened in Zurich checking in for the El Al flight to Tel Aviv and, more suprisingly, in Brussels boarding an American Airlines flight to New York.

Saturday, January 07, 2006

Local Currencies

This post of Isaac's started me thinking about money. Macroeconomic policy can really only take place at the level of a currency zone (an area sharing the same currency) becayse money and the price level are so fundamental to the macroeconomy. For example, if the Fed pursues an inflationary monetary policy to boost output, output may be boosted a lot in, say, Silicon Valley, and very little in, say, small-town Michigan. So unemployment falls nationwide, but is high in Michigan and low in Silicon Valley. It's impossible for monetary policy to differentiate between localities within the currency zone. (This is also true for fiscal policy in general. Suppose you give a million dollars to the people of a dying town in Michigan. Will this stimulate output in that town? Maybe to some small extent, but most of it will end up in towns that have active production.)

What if Michigan and Silicon Valley had different currencies? They could pursue different macroeconomic policies. Michigan could print money and inflate their economy and Silicon Valley could keep their currency stable, or whatever they wanted to do. But if you wanted to buy a computer, you would have to exchange your currency. Thus, this is a bad idea.

Of all the memes in the world...

...I had to be tagged by this one: five weird things about me. Okay.
  • At restaurants I will gorge myself on bread and salad in order to box most of my actual meal up for lunch the next day.
  • In high school my friends and I watched infomercials for fun. I even own part of the Miracle Blade III Perfection Series knife set (as does Angelica).
  • Last summer I ate a burrito almost every day and often twice a day.
  • About a year ago a streak of my hair turned white. I have no idea why.
  • I actually like math, economics, and Wisconsin.

Capital Capital Capital

I just finished reading Hernando de Soto's The Mystery of Capital. The first few chapters are interesting, but then you realize that he's saying the same thing over and over and over. Yes, you've convinced me that the extralegal sector is large and undercapitalized. Yes, and certain legal property rights reforms will allow the poor to use there assets as capital. Yes, this is an immensely good thing. Now end the book already!! It's unfortunate because I think there was some interesting material in the last chapter, but I just skimmed it.

Now I have started to read Jeff Sachs' The End of Poverty as Isaac already has. (Though I may be shelving it for a moment to read something else.) Both books are nominally about ending poverty, but it's clear that de Soto and Sachs are taking about different impoverished people. Capitalization of property will not help the extremely poor. Because they have no assets. In fact it's hard to imagine anything that will help them except food and medicine. But I haven't read very far...

Wednesday, January 04, 2006

Good advice

N. Gregory Mankiw dispenses surprisingly frank and good economic advice:
#1: This year I will be straight about the budget mess. [...]

#2: This year I will be unequivocal in my support of free trade. I am going to stop bashing the Chinese for offering bargains to American consumers. I am going to ask the Bush administration to revoke the textile quotas so Americans will find it easier to clothe their families. I am going to vote to repeal the antidumping laws, which only protect powerful domestic industries from foreign competition. I am going to admit that unilateral disarmament in the trade wars would make the U.S. a richer nation.

#3: This year I will ask farmers to accept the free market. While I believe the government should provide a safety net for the truly needy, taxpayers shouldn't have to finance handouts to farmers, many of whom are wealthy. Farmers should meet the market test as much as anyone else. [...]

#4: This year I will admit that there are some good taxes. Everyone hates taxes, but the government needs to fund its operations, and some taxes can actually do some good in the process. I will tell the American people that a higher tax on gasoline is better at encouraging conservation than are heavy-handed CAFE regulations. [...] I will advocate a carbon tax as the best way to control global warming. [...]

#5: This year I will not be tempted to bash the Fed. [...] I know that the U.S. has an independent central bank for good reason. [...]

#6: This year I will vote to eliminate the penny. [...]

#7: This year I will be modest about what government can do. I know that economic prosperity comes not from government programs but from entrepreneurial inspiration. [...]
It's very hard to disagree with any of that (though the part about the penny is kind of...odd. My new hypothesis is that Mankiw tried to push reasonable economic policy as much as he could while he was in the Bush administration, but that the CEA no longer has any influence in the White House.

UPDATE:Brad Delong agrees:
I have no doubt that Greg made as strong a case within the Bush administration's councils for his seven points of advice that he felt that he could without losing all effectiveness. I would like to know why he appears to have had so little impact on policy...

Tuesday, January 03, 2006

Growth and Redistribution

Robert Lucas (via Cafe Hayek):
Of the tendencies that are harmful to sound economics, the most seductive, and in my opinion the most poisonous, is to focus on questions of distribution. In this very minute, a child is being born to an American family and another child, equally valued by God, is being born to a family in India. The resources of all kinds that will be at the disposal of this new American will be on the order of 15 times the resources available to his Indian brother. This seems to us a terrible wrong, justifying direct corrective action, and perhaps some actions of this kind can and should be taken. But of the vast increase in the well-being of hundreds of millions of people that has occurred in the 200-year course of the industrial revolution to date, virtually none of it can be attributed to the direct redistribution of resources from rich to poor. The potential for improving the lives of poor people by finding different ways of distributing current production is nothing compared to the apparently limitless potential of increasing production.
Brad DeLong:
What will the moral consequences of unequally distributed prosperity be? Friedman fears, and perhaps for good reason, that they will resemble the consequences of economic stagnation. People who feel that they are living no better, or not much better, than their parents will search for enemies: Hollywood writers, foreigners, people of “loose” morals, and Harvard graduates. And America will become a less free and less democratic society. The argument follows the lines of the argument in Thomas Frank’s What’s the Matter with Kansas? Those for whom the American market economy is not delivering increasing prosperity do not reach for the right answer: policies to strengthen the safety net, provide security through social insurance, and improve opportunity through better education. Instead, they reach for the wrong answers: closing down society and denouncing enemies—anti-Hollywoodism as the social democracy of fools, one might say.

I find myself more optimistic. This is not to say that I disagree with the political program for America today that can be drawn out of Friedman’s book: the pro-growth, pro-opportunity, pro-social-insurance policies of today’s national Democratic Party are mother’s milk to me. But I do not think we look forward to the generation of stagnation in the working and the middle classes that Friedman fears. Yes, the past generation has been a distributional disaster for America. Yes, at some point in the future the “outsourcing” of jobs made possible by modern telecommunications and computer technologies will produce enormous structural change in the American economy. But the population of the United States is growing slowly. The desirability of the United States as a place in which to locate economic activity is growing rapidly: the underlying engine of technological progress is spinning faster than it has in at least a generation. I see rising working- and middle-class incomes in America during the next generation generating what is in Friedman’s terms a virtuous, not a vicious, circle.

Sunday, January 01, 2006

The Best Argument Yet

...against advocates of the idea of "choice paralysis" (from Julian Sanchez at the Daily Dish):
In other words: Maybe ceteris paribus having to pick from 20 very similar sorts of corn flakes at the supermarket is just an added hassle, and we'd be just as well off if the supermarket only stocked one or two of them. But ceteris ain't never paribus: Having to compete with 19 other close substitues puts strong price and quality pressure on each manufacturer. So it's not enough to point out that choice between a gaggle of similar products might be more annoying than a choice between some small subset of those same products—if the choice set were persistently limited for everyone, then you wouldn't have those same products, put probably significantly worse ones. The fact that some people agonize over which of a dozen sorts of corn flakes to buy means you're likely to do better picking one at random than if you agonized over the choice between the only two brands in the world.
Really, just the standard argument against monopoly power.

"Gifted" Education Debate Rages

This Washington Post column stimulates a Matt Yglesias reply. Matt writes:
The idea is that, well, no child should be left behind. It's an essentially egalitarian aspiration -- the school system should try to do well for the hardest to teach kids, included ones coming from difficult backgrounds and ones who simply for whatever reason have a hard time with school. The idea of "gifted" programs is basically the reverse vision -- that the school system should focus on the easiest cases and push them to the highest level of achievement possible.


Julian Sanchez at the Daily Dish makes the point that even the lower-performing students get some benefit from the success of higher-performing students. I would contend that those benefits are fairly small on a dollar-for-dollar basis. After all, while geniuses could be anywhere in our midst, they will probably be successful and genius-like even without "gifted and talented" programs (see Albert Einstein.) (By the way, why does Julian think that Steve Jobs is a genius?)

But, as a society, we shouldn't squander the potential of kids from "almost genius" on down to "above average." As the Post column notes,
Shockingly, studies establish that up to 20 percent of high school dropouts are gifted.
That seems to indicate that there is a problem with incentives. If you are lucky enough to be one or two standard deviations above the mean (or whatever "gifted" means) then returns to education should be quite high; dropping out should not be an attractive option.

Spending more money on lower-performing students reduces the cost of being a lower-performing student. Spending more money on higher-performing students increases the (opportunity-)cost of being a lower-performing student. So perhaps spending more money on higher-performing students will increase the number of higher-performing students.

On a different note, I think that the terminology "gifted" should be dropped. There's no discrete difference between kids who are "gifted" and "not gifted," it's just a matter of how many standard deviations out on the normal distribution they are. "Giftedness" is continuous, why shouldn't policy attempt to be continuous as well?