Armchair Capitalists

A Respectable Debate

2008-05-12T14:29:00.002-04:00

Andrew Sullivan says that Noam Scheiber says that Obama shouldn't have unmoderated debates with McCain because:

I don't see the upside for Obama.

That's true, there is very little upside for Obama. McCain has very little going for him in this election, and any additional exposure he gets will (most likely) increase his support. It is very easy to suggest things like public financing of campaigns and these unmoderated debates--which would be conducted Lincoln-Douglas-style in front of audiences around the country--when you are the underdog. It is much harder when you are the frontrunner, when there is a cost to doing so.

But I would be disappointed in Obama if he did not try to set a precedent in this race, even if it comes at a cost to his campaign. I'd love to see a series of joint public appearances with McCain. Public financing is a bit dicier, because it is hard to argue that Obama is unduly influenced by money when none of his funding comes from PACs or lobbies and most of it is in small donations. It's hard to know where to draw the line, but I hope that this is an election that shifts the structure of campaigns to a new, better equilibrium.

Reverse Psychology

2006-11-24T19:57:00.000-05:00

Everyone knows why stores sell things for $1.99 instead of $2. It's because we tend to give more weight to the first digits in a price rather than the last. So even though we know that $1.99 is functionally equivalent to $2, we'll give the first a bit more consideration.

However, it seems to me that the reverse happens when you are cutting a price. Dell is offering me a deal in which a $799 laptop is cut down to $719. That didn't seem like much of a deal. But I think that if they had cut it from $800 to $719 it would have seemed a bit sweeter. Something about all those 9's obscures the discount.

Overstatement of the Year

2006-10-04T01:15:00.000-04:00

Quote from the NYT:

Phil Burress, president of the Cincinnati group Citizens for Community Values, said that among Christian conservative voters, the Foley scandal “just sows more contempt for Congress as it becomes nothing more than a playground for sexual perverts.” (emphasis mine)

Yglesias gets it wrong

2006-08-22T18:39:00.000-04:00

Matt Yglesias has a sort of insane post on marginal tax rates and revenues.

If you look at, say, this chart you'll see that overall federal tax revenue hasn't changed all that much since 1962 -- bouncing up and down between about 16 percent of GDP and about 20 percent of GDP. The top marginal income tax rate, by contrast, has changed a great deal, veering from 91 percent to all the way down to 28 percent. In particular, there was a large structural shift during the Reagan years when the top rate started at 70 percent and has never since gone above 39.6 percent.

The implication being that one can infer a supply-side effect from the combination of a) revenues constant as a share of GDP and b) declining top marginal income tax rate. While this is a tempting idea, it is also rather wrong on two levels.

First, on logical grounds. If supply-siders are correct, then a declining top rate would keep tax revenues constant (or increasing) in dollar terms, but they would be decreasing as a share of GDP. The point of supply-siders is that you cut taxes, the economy grows, and so you can collect the same amount of revenue but from a larger economy. This would in most cases imply that revenue falls as a share of GDP (though, admittedly, this is not a necessity).

Second, on factual grounds. Revenue has stayed constant as a share of GDP not because of a supply-side effect but because the base has broadened: that is, more kinds of income are now taxable and not because of increases in income. In particular, the 1986 tax reform (for the right-wing take on it, see here).

Gay Marriage

2006-08-02T03:36:00.000-04:00

A brilliant post by Julian Sanchez that deconstructs the argument for a ban on gay marriage.

I really like this

2006-07-06T20:11:00.000-04:00

Greg Mankiw has a reformulated take on the ages-old efficiency vs. equity problem:

The study of economics leaves a person with two strong impulses.

The Libertarian Impulse: Mutually advantageous acts between consenting adults should, absent externalities, be permitted. The ability to engage in such trades is how people in free-market economies achieve prosperity. When the government impedes voluntary exchange, it prevents the invisible hand of the market from working its magic.

The Egalitarian Impulse: The market economy rewards people according to supply and demand, not inherent worth. Markets often fail to provide people the ability to adequately insure themselves against the vicissitudes of life and accidents of birth. We should, therefore, look for ways to help those who end up at the bottom of the economic ladder.

Most economists feel both of these impulses to some degree. The difference between right-leaning and left-leaning economists is how strongly they feel each of them. Right-leaning economists have a stronger libertarian impulse, whereas left-leaning economists have a stronger egalitarian impulse.

[...]

Here is a conjecture: Whenever a policy appeals to both the libertarian impulse and the egalitarian impulse, economists will offer a relatively united view, as they do on the topic of immigration.

I personally have a strong libertarian impulse, but am also very much persuaded by egalitarian arguments regarding accidents of birth and alleviating market-based risk. Most things that happen are random, or at least unpredictable. In that way, the market is a lot like nature. When natural disasters happen, we don't blame the people hurt by them for their losses. In the same way, if free trade displaces textile workers, it is not really accurate to blame the textile workers for not having foreknowledge of what industries would be profitable in the future. It's random.

At the same time, of course, we do blame people for taking on too much risk. Like those who keep rebuilding Floridian beach houses. And there are clear problems of moral hazard with insuring unemployment. There's a very fine line that must be walked...

Farm Subsidies Transfers

2006-07-02T16:26:00.000-04:00

Greg Mankiw points out this Washington Post exposé on farm subsidies. But the particular program that the piece covers is not a subsidy at all. A subsidy is a negative tax on a good. If I pay you an extra $10 for every acre of corn that you grow, I've subsidized your corn-growing activities. This distorts your decision to grow corn because you'll grow more than you otherwise would. You may not even grow corn at all if I weren't subsidizing you. Since growing corn provides no positive externality and markets for agricultural goods are reasonably close to perfectly competitive, too much corn will be grown. What does that mean, exactly? "Too much corn" means that we could potentially improve everyone's well-being by moving some resources from corn-growing to other productive activities. You, the subsidized corn farmer, won't respond to price signals that tell you to abandon corn-growing for a profession that creates greater value. Moreover, the subsidy will squeeze out unsubsidized farmers, like those in third-world countries.

That's a farm subsidy. What the Post's story is really about is a program that was included as farm subsidy methadone in the Republicans' ultimately unsuccessful 1996 attempt to rid the U.S. of farm subsidies once and for all. Cutting farm subsidies is not a Pareto-improving action. Farmers are hurt (and so is Archer Daniels Midland.) They most likely have to find new work and a new home. They have to be trained to do a new job. They may never reach the same level of income that they once had because they've invested so much in farming-related human capital. But removing farm subsidies is a potential Pareto-improvement. It creates so much new wealth that the losers can (theoretically) be compensated for their lost income by the winners (everyone who benefits from lower produce prices, for example.) This program is an attempt to do that. (Though Republicans were not really interested in compensating anyone, they included the program simply to win Democratic votes.) It is not, as the Post makes it out to be, one of the truly pernicious farm subsidies that we should be most worried about.

However, this program is indeed a very bad way of compensating farmers. The program in a nutshell: if you own land that used to be farmed you get paid a per-acre transfer as long as that land is not developed and regardless of whether that land is still being farmed.

To see why this is a bad plan, consider what a good plan would look like. A non-distortionary compensation program would give everyone who was farming at the time subsidies were cut (or even better, a few months before subsidies were cut) a single payment or series of payments equal to the approximate amount lost through the removal of subsidies. This doesn't alter anyone's decision to farm (from the non-transfer, non-subsidy equilibrium) because it doesn't affect the cost or benefit of farming an additional acre of corn. If farming 500 acres of corn after subsidies were cut is profitable, farming 500 acres of corn would be no more or less as profitable after the transfer as it was before the transfer.

The plan as it was implemented has a number of problems. The biggest problem is that the transfer doesn't follow the people that were hurt, it follows the land. Why do we have an interest in whoever happens to own land that was farmed once upon a time? We don't; we have an interest in the people who were harmed by cutting farm subsidies. The transfer should be issued directly to the farmers, not to the land. This problem goes even deeper, however: it distorts the allocation of land. Suddenly, land that had been farmed had a fixed payment attached to it. Each acre of this land basically comes with an annuity and the price of this land is accordingly higher. Since farmers' property is now artificially worth more, this is in fact an incentive to sell land and stop farming. The plan actually creates an inefficiently low amount of farming. A related problem is the provision that land cannot be developed if you collect payments on it. This is simply silly, why prevent land from being used for more valuable purposes?

In this plan farmers are compensated in an extremely inefficient way: attaching an annuity to each acre of land inflates property values by the amount of the annuity. So, when farmers eventually sell their land, they are essentially paid the amount of the annuity by whoever purchases the land. And whoever purchases the land has a strong incentive to leave it undeveloped, even if it would be best to develop the land. But I wish that the Washington Post had pointed out that the basic idea is good. The losers from farm subsidy cuts are no different from the losers from free trade. Both should be compensated for their losses, not only because it is equitable to do so, but also because they will be more willing to support policies that increase the size of the economic pie.

The Usefulness of Fiscal Policy

2006-06-18T14:12:00.000-04:00

Brad Delong writes:

These days, except in exceptional circumstances--in a liquidity trap, when interest rates are already so low that the Fed can't or daren't lower them further, or when the fiscal expansion comes as a sudden surprise that the Fed does not have time to immediately offset--fiscal policy has next to no stimulative effect at all because the Federal Reserve takes steps to make sure that it does not. That's the big reason that claims in 1993 that the Clinton tax increases were going to send the economy into recession were wrong.

Suppose this proposition is true. The Fed always adjusts monetary policy so that aggregate demand is unaffected by fiscal policy. Then what does fiscal policy do?

(1) It changes the makeup of aggregate demand. Larger government deficits increase the supply of bonds, pushing up interest rates. Higher interest rates mean that fewer people want to invest. This is the "crowding-out" effect. Private investment is far more productive than government debt, so for this reason we shouldn't like deficits.

(2) The other macro effects of fiscal policy have to do with aggregate supply (not in the sense of changing G - T, but in the sense of changing marginal tax rates, subsidies, etc.) Lowering most marginal tax rates increases aggregate supply, so does funding research and development, decreasing unemployment benefits, etc.

(3) There are also the micro effects of individual government programs. These are the things that government spending and tax policy are ultimately meant to do like build infrastructure, redistribute income, provide defense, etc. This is a mixed bag: If these provide a public good or correct an externality they are good, if they regulate a competitive industry or subsidize farmers, they are bad.

These are the things that fiscal policy can do. The results for total budgetary policy are sort of ambiguous, but what about just a typical stimulus package of unfunded additional government spending? Deficits would increase, which is definitely bad. Aggregate supply would be unaffected. It is likely to decrease micro efficiency. So something like this is pretty unambiguously bad. (Of course it depends somewhat on the construction of the stimilus package, it could be worse or better.)

However, it seems politically impossible to ever argue that fiscal policy is impotent with respect to aggregate demand for this reason. We may all know that it's true, but it's hard to imagine that any Congressperson could use this against a bill. Suppose Senator A argues that deficits are just bad because the Fed will offset the stimulus. Senator B asks Ben Bernanke, who says that, no, in fact he doesn't stabilize output, only inflation. And since, in politics, what people say is more far important than what people actually do, Senator B wins.

Google ads

2006-06-15T15:40:00.000-04:00

One Google ad in my gmail tells me:

Why You Shouldn't Invest?

The only realistic way to return
5536% in 18 months with one stock.

Haahahahahahahaaaaahahahahaa...so I follow the link and find this:

Through a combination of the 3 proven investment strategies, you would find companies like the following before they skyrocketed:

Strategy (#1 , #2 , #3)

*Medifast, Inc. -- 5536% Profit in just 18 Months
*Ask Jeeves, Inc. -- 1395% Profit in just 8 Months
*SCO Group, Inc. -- 1382% Profit in just 11 Months

The three strategies are "growth", "value", and "insider trading". It appears that they've just pulled some of the highest-performing stocks ever and listed them as results of the proven investment strategies.

So many things are running through my head...efficient markets...survivorship bias...what does economic theory tell me? Contradicting things. On one hand, it's painfully obvious that this is total crap. If I had invested in the whole market in the 90's, I too could claim that I was invested in a stock that returned 5536%. Rational people use the same model I do: the market is essentially random, so returns from any investment tips this company gives will be no better than average, thanks to mean reversion, and probably worse, thanks to stupidity. On the other hand, it appears that the company pushing the ad is somewhat successful. Thus (some) people must not have rational expectations.

Why the Borough of Swarthmore sucks

2006-05-29T20:20:00.000-04:00

I'd argue it's stuck in a bad equilibrium. There is no reason that Swarthmore, PA should not be a place full of pleasant restaurants and coffee shops. After all, Williamstown, MA has about the same number of students and, if anything, fewer professionals not associated with the school. Yet it manages, apparently, to sustain many nice restaurants and such.

What's Swarthmore's problem? It's stuck in the suburbs. That is, in Williamstown people and their money are stuck in Williamstown and so businesses open and cater to them. In Swarthmore, however, people can go elsewhere: Philadelphia, or other suburbs. So the money of the residents of the Swarthmore is not stuck in Swarthmore proper. Rather, it gets distributed among other suburbs and the city.

Why won't this change? Well, if you are a restaurant person thinking of opening a nice restaurant, where are you going to go? Given that people already leave Swarthmore to find a restaurant -- no one would consider staying in Swarthmore on the off chance that there might be a nice place in town -- your best bet is to locate where the people go: some other suburb or the city. Even if some people would stay, a good portion of people would by habit go off elsewhere for nice food. And you certainly aren't going to get random people from surrounding 'burbs visitng Swarthmore for food. This is very different from Williamstown, where the people, and the money, are de facto trapped.

How did this equilibrium come to be? I don't actually know, but I'd speculate that is has to do with a) the Borough of Swarthmore not allowing the sale of alcohol in its boundaries and b) the downtown being smaller than other downtowns.

I'd further claim that this has something interesting to say about international trade or urban studies: somehow placing a town in suburbia versus the middle of nowhere can lead it produce much lower quality services because of the opportunity for people to go elsewhere.

Why the bus comes just when you are about to give up on it

2006-05-29T20:05:00.000-04:00

Explanation 1: The wait time for the bus follows a normal distribution with a mean of t and some variance. You have some sense of the mean, and perhaps the variance. Once you have waited that mean amount of time, you start to get impatient and want to give up on the bus arriving. However, the probability of the bus arriving at t+1 is much greater than the probability of it arriving at time t+2 and etc. So as you wait past time t, the probability of the bus not showing up very soon becomes vanishingly unlikely.

Redoing this with, say, an exponential process would yield very different results.

Explanation 2: Once you are about to give up, either the bus comes and the bus has arrived just when you are about to give up, or else you do give up and you walk or take a taxi or something. Point being, that it is definitionally true that the bus arrives just when you are about to give up, because otherwise you give up and you never find out how long it takes the bus to arrive.

Why your lane is always the slowest

2006-05-29T19:58:00.000-04:00

A drive from Philly to DC makes me realize that your lane is always the slow one because lanes vary in speed randomly, but you're only aware of your relative speed when your lane is the slowest. At the moment that your lane is the fastest, there is a failure of empathy and you don't look around and think, wow, I'm going faster than those poor shlumps. You only look around when you think, poor me, my lane is the slowest. So you only register relative speeds when your lane is the slowest, not when your lane is the fastest. Hence, your lane is always the slow lane.

Did you know?

2006-05-24T19:20:00.000-04:00

At present, the federal fiscal year commences on October 1st of the preceeding calendar year. And until fiscal year 1976 the fiscal year commenced on July 1st of the preceeding calendar year. This means that between fiscal year 1976 and 1977 there was a transition quarter which does not belong to any year. Oh the fascinating things one learns in Washington.

Alpha Divisions

2006-05-15T11:05:00.000-04:00

Brad Delong objects to this Washington Post piece on the grounds that an hour of studying at 3 am the night before an exam is apt to do little to help you. If this is an intro. stat., that isn't actually so implausible. I'd venture that the other objectionable thing about the article is that "the Indian tutor, who said his name was Mike, spent an hour walking Del Monte through such esoteric concepts as confidence intervals and alpha divisions." Now, I know some statistics and confidence intervals are not esoteric, they are rather basic. Yet "alpha divisions"? Alpha divisions I've never heard of, and nor has Google in a statistical context. See alpha is used to talk about a confidence interval, but the concept of alpha division does not exist (so far as I know).

The White Man's Burden

2006-05-14T21:18:00.000-04:00

Henry got me The White Man's Burden by William Easterly on the vague condition that I blog about it. It turns out to be a rather excellent book. Better, I'd say, than The Elusive Quest for Growth, even though that book made me fully appreciate the richness of "thinking like an economist; whereas I'm not sure how much I actually learned from The White Man's Burden.

The argument of the book is that there are two types of approaches to development, planning and searching, and because of the inherent complexity of a society, being a flexible and innovative searcher is rather more desirable than being a blue-print type planner. Characteristic of searching is solutions which arise from a demonstrable need at the local level and respond to the local particularities. This is opposed to the one size fits all approach of the planners. Searchers only try to make concrete improvements; planners are enamored of grand utopian visions of totally transforming society. Searchers are accountable to local needs, and thus have to deliver; planners are only accountable to the grandiosity of their visions and thus never really fail because they still have their visions.

This all goes to argue that Jeffrey Sachs is not to be trusted. While a given intervention may sound reasonable, having a grand plan is fundamentally misguided. This is not only because you cannot have one set of interventions that will transform society but also because it is hard to evaluate the effectiveness of any one piece of a grand plan in that you can never say that this one piece failed because there were so many other pieces and perhaps the whole thing was underfunded anyway. And thus it is very hard to hold the institution accountable. Easterly advocates having development organizations focus on narrow geographical areas, and also focus on narrow goals, such that they gain local knowledge, and can be held accountable.

He acknowledges that development organizations have been effective when they can be held accountable: so there has been great progress in certain kinds of health and education things (child mortality is way down, for example). He also acknoweldges that holding people accountable through measuring outcomes creates a problem in that people work on the measurable thing, when it may be only a proxy for something more important. For example, primary school enrolment is a proxy for actually educating students. And if you only measure primary school enrolment, then there is no guarantee that that enrolment means that the students are learning anything.

Yet for all these broad strokes, the much more interesting aspects of the book are his discussions of history, democracy and free markets. He argues recent development is just a continuation of colonial efforts, both in terms of the foolishness of planning and lack of attention to local specificty, and in how colonialism also mixed good intentions with self-interest. This is a link that very few modern development economists explicitely make. He has a long section about how free markets and democracies do not just happen. There is no magic market dust, or special democracy potion that can instantly, or even forcefully, transform a society. They both rely on norms and customs that take time to develop and have to be based on knowledge of local history. He gives examples of land reforms that worked because they based the assignment of property rights on past practice, and land reforms that failed because they were following some blueprint of a planner in Washington (or wherever). And democracy, well, his point is that democracy isn't just about elections. This all goes against both "shock therapy" -- which he claims he supported when he was at the World Bank -- and the last 50 years of American foreign adventures.

These sections, especially about the functioning of free markets, are really rather surprising to see coming from a neo-classical economist. As Henry says about some economists, Easterly has all the "correct" economic opinions: that is, his normative views are largely those that economic reasoning would imply. And yet he realizes that well-functioning free markets and market institutions aren't the natural outcome of all human interaction, but require substantial nurturing and cultivating and rely on extra-market things that most economists neglect.

Amartya Sen's review of the book criticizes it on the grounds that Easterly spends too much time attacking development orthodoxy and not enough time praising its successes. But that misreads the point of Easterly's book (and his present career): his goal is not really to be an even-handed critic, but to be a gadfly, pointing out the uncomfortable truths about development that everyone acknowledges on some level, and people even write about, but that no mainstream development economist pulls together in a comprehensive critique of the enterprise. The book is both fun to read, and also interesting for the ways in which Easterly reaches beyond economics to try to explain how the development orthodoxy fails.

So word-of-the-day is useful sometimes...

2006-05-09T15:00:00.000-04:00

Because it turns out that "rapine" is a word with the following definition:

rapine \RAP-in\, noun:
The act of plundering; the seizing and carrying away of another's property by force.

Which means that the phrase "raping and pillaging" should probably be "rapine and pillaging" instead.

Just to note...

2006-04-24T23:40:00.000-04:00

That Greg Mankiw once wrote a column attacking Bill Clinton's failed plan to put 15% of the social security trust fund in equities.

Henry and I Suck

2006-04-24T00:39:00.000-04:00

And this suckage will tend to continue through the end of finals. Ending circa May 12 (for me), and possibly earlier for Henry.

What Is The Washington Consensus?

2006-04-18T13:11:00.000-04:00

I've been known to throw around the term in referring to a neo-liberal stew of policies. Yet that is slightly imprecise. Turns out, that the paper that coined the term is a 1990 paper by John Williamson. The Washington Consensus is defined along 10 policy areas:

"Washington believes in fiscal discipline...Unless the excess is being used to finance productive infrastructure investment, an operational budget deficit in excess of around 1 to 2 percent of GNP is prima facie evidence of policy failure."
If a fiscal deficit needs to be cut, there is a strong preference in post-Reagan Washington for cutting expenditures, rather than increasing revenues. "[S]tronger views are held, especially in the international institutions, about the composition of public expenditures...Subsidies, especially indiscriminate subsidies...are regarded as prime candidates for reduction or preferably elimination...Education and health, in contrast, are regarded as quintessentially proper objects of government expenditure...The other area of public expenditure that Washington regards as productive is public infrastructure investment. There is of course a view that the public sector tends to be too large (see the section on privatization below)."
"Increased tax revenues are the alternative to decreased public expenditure as a remedy for a fiscal deficit...Much of technocratic Washington (with the exception of the right-wing think tanks) finds political Washington's aversion to tax increases irresponsible and incomprehensible...[T]hre is a very wide consensus about the most desirable method of raising whatever level of tax revenue is judged to be needed. The principle is that the tax bas should be broad and marginal tax rates should be moderate."
"Two general principles about the level of interest rates would seem to command considerable support in Washington. One is that interest rates should be market determined..The other principle is that real interest rates should be positive, so as to discourage capital flight and, according to some, increase savings."
"Like interest rates, exchange rates may be determined by market forces...[T]hough there is some support in Washington for regarding [a market determined exchange rate] as the more important...the dominant view is that achieving a "competitive" exchange rate [that promotes exports] is more important than how the rate is determined. In particular, there is relatively little support for the notion that liberalization of international capital flows is a priority objective for a country that should be a capital importer and ought to be retaining its own savings for domestic investment."
Trade policy: "Access to imports of intermediate inputs at competitive prices is rgarded as important to export promotion, while a policy of protecting domestic industries against foreign competition is viewed as creating costly distortions that end up penalizing exports and impoverishing the domestic economy...The free trade ideal is generaly...conceded to be subject to two qualifications. The first concerns infant industries...The second qualification concerns timing. A highly protected economy is not expected to dismantle all protection overnight.
While "liberalization of foreign financial flows is not regarded as high priority...a restrictive attitude limiting the entry of foreign direct investment (FDI) is regarded as foolish...The main motivation for restricting FDI is economic nationalism, which Washington disapproves of, at least when practiced by countries other than the United States."
"[P]rivatization may help relieve pressure on the government budget...However, the main rationale for privatization is the belief that private industry is managed more efficiently than state enterprises, becuase of the more direct incentives faced by a manager who either has a direct personal stake in the profits of an enterprise or else is accountable to those who do...This belief in the superior efficiency of the private sector has long been an article of faith in Washington (though perhaps not held quite as fervently as in the rest of the United States), but it was only with the enunciation of the Baker Plan in 1985 that it became official US policy to promote foreign privatization."
"Another way of promoting competition is by deregulation...It is generally judged to have been successful within the United States, and it is generally assumed that it could bring similar benefits to other countries."
"In the United States property rights are so well entrenched that their fundemental importance for the satisfactory operation of the capitalist system is easily overlooked. I suspect, however, that when Washington brings itself to think about the subject, there is general acceptance that property rights do indeed matter."

Not that I have any grand thoughts. But precision is useful. By the way, Williamson writes

While it is jolly to become famous by inventing a term that reverberates around the world, I have long been doubtful as to whether the phrase that I coined served to advance the cause of rational economic policymaking. My initial source of concern was that the phrase invited the interpretation that the liberalizing economic reforms of the past two decades were imposed by Washington-based institutions like the World Bank, rather than having resulted from the process of intellectual convergence that I believe underlies them. From this standpoint, much better terms would have been Richard Feinberg's "universal convergence" (in Williamson 1990) or Jean Waelbroeck's "one-world consensus" (Waelbroeck 1998).
However, I have gradually developed a second and more significant concern. I have realized that the term is often being used in a sense significantly different to that which I had intended, as a synonym for what is often called "neoliberalism" in Latin America, or what George Soros (1998) has called "market fundamentalism". When I first came across this usage, I asserted that it was erroneous since that was not what I had intended by the term. Luiz Carlos Bresser Pereira patiently explained to me that I was being naïve in imagining that just because I had invented the expression gave me some sort of intellectual property rights that entitled me to dictate its meaning: the concept had become the property of mankind. To judge by the increasing frequency with which this alternative concept is being employed by highly reputable economists (such as Stiglitz 1999, n.33), I fear that Bresser had a point.

Dean Baker Has a Blog

2006-04-15T13:33:00.000-04:00

And it proves that I really have no clue as to my actual political views. For I read him and nod along in agreement, and then I read, say, Marginal Revolution and also nod along. Either this represents a marvelous open-mindedness to convincing arguments, or else a total inability to read critically.

Man

2006-04-14T15:44:00.000-04:00

It's rather depressing to watch a disaster as it unfolds. I have a hard time getting worked up about genocide in Sudan, but watching it spill-over into Chad is quite troubling. I was introduced to Sudan with the message: this is a disaster area. So it seems normal that terrible things would be happening, it's in the nature of the place. But Chad is different. There has been a vague sense of hope about the place. In particular, it emerged from 20 years of strife to become stable enough -- get this -- to have oil companies invest in it. Imagine a place so unstable that an oil company wouldn't go there? It boggles the mind. Oil companies are in Nigeria, Sudan and etc. Additionally, it had put in place some nice anti-corruption measures with respect to the oil revenues. There was potential. Then in December it withdrew from the anti-corruption stuff and now this. Sad.

More On UBI

2006-04-04T03:14:00.000-04:00

For our vast readership hungering for more on the Universal Basic Income, I highly recommend the Boston Review's forum on the topic. Highlights, for an econ geek, are Herbert Simon and Edmund Phelps.

Why Does Charles Murray Want a Universal Basic Income?

2006-03-28T16:07:00.000-05:00

Henry and I (and here and here) tossed around the idea of a Universal Basic Income as a kind of pie in the sky idea. And yet here comes Charles Murray (yes, this Charles Murray) proposing...

Murray: We start with a country that is the richest country in the world, with most of its people having lots of money (compared to any historical standard), ample money to provide for their own retirements, medical care, and the rest of it. On top of this national wealth, we then add more than $1 trillion to help people provide for comfortable retirement and medical care, and so forth. And guess what? We still have millions of people without comfortable retirements, without adequate medical care. And only a government can spend that much money that ineffectually.

The alternative I suggest is give every adult American, age 21 and older, $10,000 a year. And let them run with it.

Borders: So $10,000 for every single American? As soon as you turn 21 you start getting this money?

Murray: That's right. And there are a couple of key points to be made here because some folks will be thinking of past attempts at negative income taxes which provided a floor under income and certain experimental programs. And this is different. This is not a floor. This is not a case of, "if you make less than $10,000 a year we will top up your income to $10,000." This is $10,000 period. And so if you're making $10,000 a year, your net is $20,000. If you're making $20,000 a year, your net is $30,000.

There are some complications down the road, but they aren't very important. I'll just mention them real quickly.

At $25,000 of earned income you start to pay a surtax on the grant, and that reaches a maximum of half the grant. So at $50,000 you only have a net of $5,000 from the grant. The reason for that is pretty simple--that you want to give upper income people something for all the money they're putting into taxes right now to provide for their own medical care and retirement, and they get that net of $5,000. And I argue it's a better deal than what they're getting now.

But the other main point is that the surtax doesn't kick in until $25,000 of earned income. So the negative work incentives are pretty small.

Borders: Do you know of any other countries that have tried anything like this? Or is this entirely new?

Murray: The idea is a direct descendant of Milton Friedman's proposal for negative income tax. George Stigler sometimes gets the credit for that. But George Stigler himself says it was suggested to him by Milton Friedman back in the early 1940's. So it's a direct descendent of that idea, considerably revised, but on a much bigger scale and doing much more. I'm not using this just to cure poverty. I'm using this money to take the place of Social Security and Medicare and Medicaid and all the rest of those kinds of things.

Borders: I take it that your system, to get the $10,000 per year, we would have essentially to abolish all other entitlements and transfers.

Murray: That's absolutely essential. It's not on top of an existing system of payments; it is instead of.

Odd, no? The convergence of the egalitarian left and the libertarian right? Though the motivation here is mainly to reduce government waste, rather than to actually help people. But, hey, you take what you can get.

Information asymmetries in insurance markets are good!

2006-03-27T03:22:00.000-05:00

I'm not really qualified to comment on the relative position of this paper on the sense/nonsense line, but it has an odd intuitive plausibility that I don't understand at all.

The main contributionis to show thateliminating informational asymmetries byimposing information sharing isdetrimental, a result thatapparently contradicts previous contributionson the efficiency effectsof categorical discrimination underasymmetric information (e.g., Crockerand Snow 1986). Onefacet of the presentresult is that allowingasymmetries of information todevelop through time decreasesthe efficiency of competitionex post, thereby enlargingthe set of viablelong-term contracts in theex ante competition game,thus increasing welfare. Anotherfacet is insurees' enhancedcommitment: in the casein which information isnot transmitted to prospectiveinsurers, individuals obtain apartial commitment power notto switch insurers expost in case ofgood news. This crediblecommitment device allows themto extract a higherlevel of long-term insurancefrom ex ante competition,and notably insurance againstthe "risk" of havingno accident and beingreclassified as a goodtype. Thus allowing asymmetriesof information to developalleviates the problem ofthe provision of long-terminsurance. This normative resultputs forward a clearargument in favor ofderegulation, even though (andeven because) it wouldproduce asymmetric information ininsurance markets.

Furthermore, a secondaryresult of the analysisis that preventing thetransmission (across insurers) ofinformation about insurees' pastcontract choicesor, more realistically,making sure that insurersdo not make expost offers contingent onex ante contract choiceresultsin a strict welfareimprovement, through menus ofcontracts. This is true,although information about exante contract choices isworthless in this exante symmetric information situation.The fact that menusof contracts can strictlyimprove on single contractsin a symmetric informationenvironment is a newresult.

Consumer Driven Health Care

2006-03-23T22:04:00.000-05:00

The New York Times had an op-ed a couple days ago by one Peter Salgo. It starts out as an attack on how terrible it is that patients are being treated as consumers in health care. Yet his remedy is....wait for it....that patients behave more like consumers.

Evaluate what it is you expect from your doctor, then ask for it. If you are unhappy with your doctor, fire him. If you cannot get more than a seven-minute face-to-face encounter with your doctor, he needs fewer patients. The true power in the health care economy rests not with the doctors and certainly not with the backroom business staff. It rests with you. If you insist on being treated with care and respect, you will be. And the system will improve as a result.

From The More You Know The Less They Know Files

2006-03-21T13:27:00.000-05:00

Slate has an article about the Western Sahara and the plight of the Sahrawi people. The amazing thing, especially given that the author Carne Ross is an advisor to the Sahrawi government in exile, is that the history is just plain wrong. You expect bias, but factual error? Ross (Ms.? Mrs.? Mr.?) writes

In 1975, Morocco invaded the former Spanish colony of the Western Sahara. A long and inconclusive guerrilla war followed. The Polisario Front, which represents the people of the Western Sahara known as the Sahrawis, was supported by Algeria. Morocco was supported by France, the United States, and other major powers.

This neglects several things.

If you want to talk about countries invading, you'd probably want to mention that Mauritania "invaded" Western Sahara at the same time;
Invasion is actually the wrong word: Spain had control of Western Sahara until 1975 and granted control of the northern tw0-thirds to Morocco and the southern third to Mauritania;
The Polisario Front was supported by Morocco as well, until Morocco had a claim on the territory;
And why the interest in Western Sahara? Because Western Sahara is rich in minerals.
And why was Morocco granted some control, and not Algeria? Because Morocco was willing to grant Spain control of the mineral wealth, but Algeria was not. Proving one lesson: if you cut a country out of the mineral wealth, it will sponsor counter-insurgents that destroy your ability to control the territory.

This also leaves out any detail of Mauritania's sad involvement in Western Sahara. It fought with the Polisario Front from 1975 to 1978 (during which the Polisario front attacked the capital city a couple times). The cost of the war weakened the government sufficiently that there was a coup in 1978, and then that coup leader reduced involvement in Western Sahra, and then in 1979 there was another coup, and then a few months later the leader of that coup died in a helicopter crash. And Mauritania finally recognized the Sahrawi government in 1984 (as do about 60 countries around the world).

This in no way undermines the moral outrage that you ought to feel about Western Sahara. If anything, it ought to increase it. The Sahrawi should have self-determination. And it's only because of Spain's interest in the mineral wealth that they don't. And the article isn't even as detailed about the ills that Morocco has visited upon Western Sahara as it ought to be. The most important is moving Moroccans into Western Sahara so that it is majority Moroccan and building a massive security wall, changing the facts on the ground, as they say (sound like somewhere else we know?)

Who knew?

2006-03-20T01:29:00.000-05:00

Speaking of cities: There are a lot of people in China and it turns out that a lot of them live in close proximity to each other, but not just in Beijing and Shanghai. China has ninety cities with populations of over one million. From New Economist we learn about Chongqing, a city of about ten million. Here is a tall building. Here is a street. Here is a plaza. From the Guardian article:

A dapper, twinkly-eyed 68-year-old, Yin is one of the nation's great industrial pioneers, the 21st-century Chinese equivalent to Titus Salt, Josiah Wedgwood or the Cadbury brothers. [...] His creed is one of benevolent self-interest. "China is too poor. We need high-speed growth. The rich need to increase the income of the poor," he says. "If we improve the living standards of peasants, then they can buy our motorcycles and cars." Within five years, he aims to more than double his workforce to 20,000. Next to the factory, bulldozers are already churning up fields for another one.

Glaeser is a beast.

2006-03-16T01:59:00.000-05:00

Via Stephen J. Dubner I very much enjoyed reading this NYT Magazine profile of Harvard economist Edward Glaeser. His research takes something that may not seem interesting at first (the history and development of cities) and makes it absolutely fascinating:

In 2000, Glaeser took a sabbatical from Harvard and began to spend a few days a week in Philadelphia working with Joseph Gyourko, a real-estate economist at the Wharton School of the University of Pennsylvania. Glaeser had already been thinking about the relationship between housing and urban poverty when one day he and Gyourko began to discuss why cities like Philadelphia and Detroit — places with poor future prospects, both economists believed — weren't doing even worse in terms of population. Why didn't everyone leave, Gyourko wondered, and go to a place like Charlotte, N.C., that had a fast-growing economy? This question addresses a puzzle of urban economics. Cities (think of Las Vegas or Phoenix) can grow at a very fast rate, exploding overnight with businesses and residents. Some can increase in population by 50 or even 60 percent in a decade. But cities lose their residents very slowly and almost never at a pace of more than 10 percent in a decade. What's more, when cities grow, they expand significantly in population, but housing prices tend to rise slowly; even as Las Vegas grew by leaps and bounds in the 1990's, for instance, the average home there cost well under $200,000. When cities decline, however, the trends get flipped around. Population diminishes slowly, but housing prices tend to drop markedly.

Glaeser and Gyourko determined that the durable nature of housing itself explains this phenomenon. People can flee, but houses can take a century or more to finally fall to pieces. "These places still exist," Glaeser says of Detroit and St. Louis, "because the housing is permanent. And if you want to understand why they're poor, it's actually also in part because the housing is permanent." For Glaeser, this is the story not only of these two places but also of Buffalo, Baltimore, Cleveland, Philadelphia and Pittsburgh — the powerhouse cities of America in 1950 that consistently and inexorably lost population over the next 50 years. It is not just that there were poor people and the jobs left and the poor people were stuck there. "Thousands of poor come to Detroit each year and live in places that are cheaper than any other place to live in part because they've got durable housing still around," Glaeser says. The net population of Detroit usually decreases each year, in other words, but the city still attracts plenty of people drawn by its extreme affordability. As Gyourko points out, in the year 2000 the median house price in Philadelphia was $59,700; in Detroit, it was $63,600. Those prices are well below the actual construction costs of the homes. "To build them new, it would cost at least $80,000," Gyourko says, "so there's no builder who would build those today. And as long as those houses remain, the people remain."

Also his view on New Orleans:

Late last year, Glaeser wrote a controversial article that made a case against rebuilding New Orleans. He has since become an intellectual leader to a tiny, unsentimental, let's-not-rebuild-the-city faction. "There's some small core of the city that should be there," he says, "but the city itself has been in decline for 50 years and in relative decline for 150 years relative to the U.S. population as a whole. It's not a great spot to have a city; it's incredibly expensive to build the infrastructure to keep it there. You can't possibly argue that New Orleans has been doing a good job of taking care of its poor residents, either economically or socially. And surely some of the residents are better off by being given checks and being allowed to move elsewhere."

Oh the joys of continuity

2006-03-15T15:44:00.000-05:00

Kevan Choset posts one of the better problems from analysis: given a continuous surface, like the earth, show that there are opposite points (antipodal points) with identical temperatures (the best solution in comments is this one).

While you can treat it as a surface, I don't actually have the math to do so. Taking an arbitrary circumference, like the equator, will accomplish the same thing and be much clearer (and will also show that there uncountably many such pairs of antipodal points with identical temperature).

You have a circle with continuous temperature. Temperature is bounded (finite), so you will have a maximum and a minimum. Now create a function of the difference in temperature at opposite points on the circle. Because this new function is simply the composition of a continuous bounded function (one that assigned temperature to points on the circle) it will also be continuous and bounded. You have a continuous bounded function giving the differences in temperature values at antipodal points on some circumference of the earth.

Right about now we'd like to invoke the intermediate value theorem and say, aha, the function will be zero at some point. Yet this requires knowing that the distance function is positive somewhere and negative somewhere else. To do this note that there was a minimum value on the circumference. Then the difference from a point opposite it on the circle will be positive (or negative). Similarly, we have a maximum. So the difference from a point opposite on the circle will be negative (or positive). Hence we have a positive and negative value in our distance function.

By the intermediate value theorem, because this a continuous function that has a positive value somewhere and a negative value somewhere else, it must take on the value 0 somewhere in between. At this point, then, we have our antipodal points with identical temperatures.

Because this was for an arbitrary circumference, we've shown that on any circumference around the earth (or even just a part of the earth) there are antipodal points with identical temperature.

I want this badly.

2006-03-14T01:41:00.000-05:00

Paul Krugman once wrote:

When I was young and naive, I used to imagine that my career as an economist could eventually branch out into one as a general social scientist. And I still love to read and think about the broader questions - a book like Jared Diamond's Guns, Germs, and Steel can keep me happy as a clam for weeks. But the clarity and power of economic analysis can spoil you: once you have a taste of what it means to have a really insightful model, you tend to be inhibited about looser speculations.

The truth is that other social sciences are still waiting for their Adam Smiths. Someday they will find them; as Colin McEvedy wrote in his introduction to the Penguin Atlas of Ancient History, "History being a branch of the biological sciences, its ultimate expression must be mathematical." But for the meantime I guess that I am stuck with my day job.

Well, now we have Economic Origins of Dictatorship and Democracy by Daron Acemoglu and James A. Robinson. Tim Harford reviews it for FT:

With these four cases, Daron Acemoglu of the Massachusetts Institute of Technology and James Robinson of Harvard begin an ambitious attempt to explain the different paths that democracies and non-democracies can take when viewed in retrospect: steady progress as in Britain; oscillation in Argentina; stable, high-performance dictatorship in Singapore or the repressive apartheid regime. What they produce is an abstract model that will infuriate historians but deserves their attention.

[...]

Acemoglu and Robinson model the struggle for democracy as a piece of game theory - a strategic contest between a small number of players. Social classes are collapsed into individuals: the basic model is a two-player struggle between the “elite” player and the “citizens” player. The players are rational, foresighted, take each other’s responses into account and are motivated by economic interest rather than ideology.

Game theory is an ostentatiously spartan tool for analysing mass historical movements. Intra-group conflicts and distinctions between different types of democracy are swept aside.

Acemoglu and Robinson know they are simplifying aggressively: they often use the phrase “Occam’s Razor”, meaning that by shaving away superficial historical details, they will expose the underlying structure of the emergence of democracy. I think it’s worth suspending disbelief to see where the model goes - but historians and political scientists may be less patient with its reductionism.

[...]

Acemoglu and Robinson argue that for the elites as well as the FBI, the answer to this dilemma is to give up the kid. That is, the elites can irrevocably hand over some power to the masses by creating democratic institutions. By doing so they dissipate the threat of revolution and keep some power for themselves, too. The concession is more credible than offering a change in policy (such as bigger welfare payments or lower taxes) because policies are easily changed but democratic institutions are not easily disbanded. Because the concession is more credible, it is also more effective: by making such concessions the elites avoid revolution.

Also see Econoclasm's comments on the book (scroll down a bit.) I had some opportunity to see Acemoglu in action this summer at a number of applied micro seminars and he was brilliant. I expect that this book will be as well. Things like this are why I am getting into economics...

Warner write-up

2006-03-14T01:37:00.000-05:00

Via Brad Delong, this entertaining Matt Bai write-up about Mark Warner:

That Warner has suddenly become a commodity, even among those who know little about him, was obvious at the Florida Democratic Party convention in December, where he swept into a party for the delegates, led by an escort of state police. "That's Governor Warner!" one woman said excitedly. "He's so good-looking!"

"He's got a huge head!" her companion observed, craning her neck to see over the crowd as Warner signed autographs. "He sort of looks like Schwarzenegger."

"I do think he has the best chance," I heard another delegate say knowingly. Warner's speech to the convention the next morning drew a more-than-perfunctory standing ovation.

A Mark Warner/Mitt Romney showdown in the 2008 general would please me very much.

Just wanted to mention...

2006-03-14T01:33:00.000-05:00

Masa of Econoclasm writes:

Economists are good at finding WHAT the efficient outcome is. A good example is free trade. But economists are bad at finding HOW the efficient outcome can be achieved. That's why politicians often don't like the free trade policy, for example. In the process of implementing free trade, there will be those who lose from free trade. Politicans cannot ignore such people. Finding what the efficient policy is is like what scientists do in natural science. But finding how it is achieved in reality is a different job. In the case of natural science, engineers undertake such a job. What about social science?

A point that I have tried to make in the past.

Gay marriage and institutions

2006-03-14T01:13:00.000-05:00

1. Matthew Yglesias writes:

In Stanley Kurtz's nightmare scenario once gay marriage is legal, then polygamous Mormon fundamentalists will get their rights, which in turn will lead to widespread adoption of polyamorous lifestyles leading, in turn, to massive "swinging" and the general breakdown of Western Civilization. That all seems odd to me. Aren't conservatives supposed to believe in human nature? Don't they think there's probably a reason most people don't live like that that's a little deeper entrenched than legal non-recognition of gay couples?

No. Conservatives believe in human nature, but they believe it is inherently bad; at least according to Thomas Sowell's Conflict of Visions. People are just naturally nasty, so we must have institutions in order to constrain them. Like markets and, ostensibly, marriage. The conservative argument FOR gay marriage is that society has excluded a significant portion of its members (gays) from an important institution (marriage). Extending that institution should be a good thing. Of course one need not accept the premise about human nature.

Wow

2006-03-06T17:40:00.000-05:00

Check out this awesome spam:

Subject: RE: Opportunity for Partnership

Hello,

Compliment of the season!

I was reading through your profile on the internet and found it interesting. Be so kind to contact me at your earliest convenient for a possible business deal.

I am still in London and do not intend to return to Russia soon for security reasons. Hence I am not ready to sacrifice my life for Russia's Political purposes.

If you are not familiar with my profile, please take a moment of your very busy schedules to read about me on the internet and send your response to misamore_bruce@bk.ru or better still end at fax at: +44 (0) 7005 804 486.

Thank you for your time and attention.

Warmest regards,

Mr. Bruce K. MISAMORE,
Chief Financial Officer,
YUKOS Oil & Gas Co., Russia.
London Contact:
Tel #: +44 (0) 7040 106 187
Fax #: +44 (0) 7005 804 486.

Problems With Comparative Advantage

2006-03-02T00:37:00.000-05:00

Remember way back when when Chuck Schumer and Paul Craig Roberts published an op-ed in the Times arguing that in our brave new world with mobile factors of production, Ricardian comparative advantage no longer determined trade flows? And s0 we couldn't be guaranteed of the welfare enhancing capabilities of trade? Now knowing a bit of trade theory, I can tell you that this is insightful only insofar as you've only ever seen intro. econ.. For, you see, the other two work-horse models of international trade both show that some people get screwed by international trade. It is only because of the simplicity of public discourse about economics -- due, perhaps, to economist's ideological conviction that free markets are best -- that this is both surprising and novel to most people.

Your basic international trade theory consists of three vaguely related but quite different models: Ricardian models, Heckscher-Ohlin models, and specific-factor models. Only in the Ricardian models with one factor of production is trade Pareto optimal and so makes everyone better off. This is because wages are determined exogenously by technology and so everyone gets paid the same regardless.* With trade, then, you allocate resources more efficiently and so produce more and so everyone is better off. Trade flows are determined by relative productivity of countries.

In Heckscher-Ohlin models of two factors (with two countries and two goods), both countries have the same technology and it is different relative amounts of the factors that determine trade flows. But here trade doesn't benefit everyone: the Stolper-Samuelson theorem states that in an H-O framework, the scarce factor of production is always made worse off by trade. This is because you will export the good that embodies more of the factor in which you are abundant. In moving from autarky to free trade you shift production towards that good and in so doing make the production of both goods have a higher proportion of the abundant factor, raising the returns to the abundant factor and, it turns out, absolutely lowering the returns to the scarce factor.**

In one version the specific-factors model, you have one factor that can't move between sectors in the economy (is specific) and one that can. The specific factor in the sector that produces the good that is imported is made absolutely worse off by trade. So if you have labor in pants and labor in cars, and capital that can move betweeen, if you import pants, then the labor in pants is made worse off. This is because each unit of labor in pants now has less capital to work with and so is less productive and so is paid less. Alternatively, both factors can be specific and then the one that is scarce will lose.

So in two of our three work-horse models, you have that the factor abundant in the production of (H-O), or specific to, the import-competing sector is harmed by free trade. It is very easy to see the parallel to present worries about free trade: suppose that the U.S. has two factors, skilled and unskilled labor, then in two models you'd find out that unskilled labor gets screwed by trade (because we're abundant in skilled labor and, presumably, skilled labor is more mobile than unskilled labor). Only in Ricardian models which assume that all labor is the same does everyone do well.

What to make of all this, though, depends. As Henry cautioned, results from theory are only useful insofar as you think that the model captures the aspect of fundamental importance in the world. It turns out that the Heckscher-Ohlin model does a terrible job of describing actual trade flows, and that Ricardian theory does a lot better (basically, productivity has more importance in determining trade flows than factor endowments). And empirical work has shown that you can't attribute much of the change in worker's wages to trade (which also says that you can't attribute much welfare gains to trade either); that is, it is the increasing importance of technology that has resulted in increased wage gaps between skilled and unskilled labor, and not trade. So, sure, know that there are theoretical arguments that say that free trade isn't quite as fantastic as economists will claim. But don't be so sure that this makes it the case that these are the models that are actually relevant.

Two additional fun facts: first, you can get more sophisticated versions of these models, like Krugman's*** specific factor model with monopolistic competition, where it can happen that everyone does benefit from trade (though, depending, the scarce specific factor might lose). Second, Jones**** puts together a Ricardian model in which if you have a footlose factor that can move between countries -- like, say, capital -- then trade flows are determined sometimes by comparative advantage and sometimes absolute advantage (returns to capital). This endorses the Schumer Roberts point that with footloose capital comparative advantage no longer rules. However, it's unclear what applicability this has to the plight of unskilled workers in the US today (though it might: I just haven't thought about the model enough).

*Though you'll often get hand wavy talk of adjustment costs and all that, but that doesn't obviate the basic point that everyone is better off.
**The why of this is slightly obscure and difficult to grasp. But it's true, trust me.
***Krugman, Paul 1981. 'Intra-industry specialization and the gains from trade', JPE 89: 959-973.
****Jones, Ronald 2000. Globalization and the Theory of Input Trade. MIT Press. (chapter 2)

Could I Pass 8th Grade Math?

2006-02-26T14:41:00.000-05:00

Yes, it turns out. As would Kieran Healy and PZ Myers. But I passed in my standard half-assed fashion getting 9/10 correct. I would, however, cry foul. The quiz claims I got #2 wrong: Is "-7" an integer, whole number, prime number or irrational? I said it was a whole number, but it is also obviously an integer. Given that whole number is a rather vague concept with many definitions that is used only in 8th grade algebra (Wikipedia says it is either all integers, non-negative integers, or positive integers), I'm going to claim victory (in actuality you talk only of integers and their subsets, not whole numbers, but I thought that maybe since whole numbers and integers were both possibilities they had non-standard definitions in this context).

At Crooked Timber there is a weak debate about whether or not "-7" is a prime number. People are getting all caught up trying to divide things by "1" and itself, but the relevant fact about primes is that they provide a unique factorization of any positive integer. If you had both positive and negative primes, then you would not have such a unique factorization (though prime means something slightly different in ring theory, 'cause the important idea is dividing, and not factoring).

Industrial Policy

2006-02-22T00:24:00.000-05:00

In and among other activities, I spent the weekend reading about industrial policy and strategic trade policy (the other major activity was understanding Krugman's very excellent 1981 article, "Intraindustry Specialization and the Gains from Trade"). What's really quite funny about reading these articles from the mid-1980s is how of the moment they are. Interest in strategic trade policy arose from the academic end because there happened to be some nice advances in academic modelling that let you think about market imperfections and international trade. While all that is well and good, an academic fashion does not a policy argument create. And the wide-spread interest in the policy implications of that research came about only because this was the 1980s and we all feared the spectre of Japan, and wondered how we would ever keep up with their marvelous economy, fueled by the genius of the MITI bureaucrats. The issue bubbled along into the first Clinton Administration, with Paul Krugman (a major player in the academic end of it) saying the theory had little practical significance and getting pissed off at Laura Tyson et al. And then....the second half of the 1990s came, and productivity took off in the US and it was apparent that Japan was stagnant. You don't hear much mention of strategic trade policy or industrial policy anymore, now do you?

And for good reason, I'd say. At least in the academic formulations, strategic trade theory is one of those odd theoretical curiosities that arise all the time in international trade, but which you'd be insane to base policy around (has any country tried to stop growth in the good they export in an industry in which they are dominant on the grounds of immiserizing growth? Don't think so.). It turns out that strategic trade policy in its pure form relies upon knowing precisely what the pay-offs of a game are, and also knowing which game your oponent is playing. For you have to subsidize your domestic oligopolist by enough to make them gain either greater market share than, or force out, a foreign competitor. And the simple confusion between the game being a prisonner's dilemma, or it being an oligopolist thing with either Bertrand or Cournot competition can cause you to subsidize by too much, or worse, too little (for then you gain nothing at all for your money).

Because the implicit world model that advocates of strategic trade policy have going for them is a very queer one. It seems odd to suppose that any one industry is so so beneficial to the country that the country must must have it (for, at best, that is what strategic trade theory will get you: one industry here or there). Any given industry is probably pretty dispensable. What matters a hell of a lot more is the agglomeration of businesses hanging around. Because that is where new jobs and ideas and growth will come from. Not any one industry, but the possibility of creating more. And that comes from all sorts of marvelous other government policies that, to list, would make me sound remarkably conservative. To advocate an industrial policy is to claim that we need to help businesses. And yet to do so by advocating creating all kinds of additional distortions is just odd.

Hating on algebra

2006-02-17T22:34:00.000-05:00

Richard Cohen sets off a vast string of comments by going on an anti-algebra screed. His basic premise, that algebra doesn't help you think straight, is defensible insofar as logical thinking is required in most any discipline and so you can learn it well by taking another discipline seriously. Yet to see logic stripped down is certainly clarifying. And algebra is not only about logic, but also about having a sense of quantities and how they fit together. This is basic to being an informed citizen and consumer of goods and information (not that I read the Post, but I'd never ever trust any commentary from Cohen on any economic topic ever again). People who claim that they've done fine in life without any mathematical knowledge are certainly not lying, but a bit of quantificational reasoning adds a richness to your understanding of the world that can only help.

Kevin Drum says that algebra is boring but it lets you do calculus, which is beautiful. I'd say that knowledge of algebra lets you do abstract algebra, which is possibly even more beautiful (though in a very different way). He also wonders if he'd trade knowledge of calculus for a working knowledge of French. Given that I can get by in French and have taken advantage of that to spend time in France and Senegal, and that I'm a math major and so sort of know calculus, I'd say that a) they aren't strictly comparable and that b) the kinds of experiences I've had based on French could be loosely approximated in English (say, England and the Gambia)*, but that knowledge of math has opened up whole areas of study -- economics, which I've taken advantage of, and, say, physics, which I haven't -- that wouldn't have been available without math knowledge. So if I had to choose just one, I'd take the math. Though I'm quite content to know both.

*Obviously the beauty of, say, Provence is unparalleled, but I could go to Provence and not speak French. The unique experience of speaking French is interacting with people with very different perspectives, something that you can come close to by finding English-speaking people from far away places (though by speaking english their perspective is closer to yours, but...).

Why do we enjoy things?

2006-02-15T23:24:00.000-05:00

Seen (or a close approximation to) in a New York cafe (along with the actual Chelsea Clinton):

"We've raised prices 10%, we hope this won't affect your enjoyment of the cafe."

The straight neo-classical view is that this sentence is non-sensical: I'm eating the same cake so I'll derive the same amount of utility from it, whatever the price. A piece of cake is a piece of cake and its utility is constant. The only difference a change in price will make is that I'll go to the cafe less, or order less stuff while I'm there; my budget constraint has shifted inwards, but the utility from a fixed kind of cake remains constant.

Everyone I've given this reasoning to has violently disagreed: a $4 piece of cake identical in all other respects to a $4.40 piece of cake does not taste the same. Not only will you consume less cake over time, but your enjoyment of a given piece of cake will be decreased. People either take this as a general indictment of my attempts at economic cleverness, or else as a reason to embrace a "behavioralist" interpretation of the feeling. But what mechanism does the latter imply (for my cleverness is unimpeachable)?

One way to think about the experience of eating the cake is in a Stiglitz-like way: a consequence of the dependence of quality on prices (following the title of his 1987 JEL article). Price is a signal of quality and not scarcity. By paying more, you expect a higher quality piece of cake. Because your expectations are not met and it is a $4 quality piece of cake -- and not a $4.40 quality piece of cake -- you are disappointed. Your expecations are not met and so the utility from eating that cake is less if you have to pay more.

The other proposed mechanism is that somehow you feel cheated, ripped off, or taken advantage of. I cannot, however, articulate a coherent argument for that position (given that you aren't obliged to go to the coffee shop and purchase cake).

So I come to the quite banal point that our enjoyment of an event is quite dependent on our expectations of our enjoyment of that event (or, to put it in statistics talk, our prior matters).

Bush = Rawls

2006-01-29T11:46:00.000-05:00

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?

Subsistence Peasants

2006-01-25T15:47:00.000-05:00

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.

Reinventing the wheel

2006-01-17T00:26:00.000-05:00

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).

An Odd Alliance

2006-01-13T21:08:00.000-05:00

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

2006-01-13T13:50:00.000-05:00

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.

Productivity and product

2006-01-12T15:31:00.000-05:00

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.

I used to think...

2006-01-10T01:20:00.000-05:00

...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.

Why goods prices end in nine

2006-01-09T21:54:00.000-05:00

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.

Airport Security

2006-01-08T12:51:00.000-05:00

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.

Local Currencies

2006-01-07T16:02:00.000-05:00

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...

2006-01-07T15:36:00.000-05:00

...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

2006-01-07T14:20:00.000-05:00

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...

Good advice

2006-01-04T17:08:00.000-05:00

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...

Growth and Redistribution

2006-01-03T02:32:00.000-05:00

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.

The Best Argument Yet

2006-01-01T22:17:00.000-05:00

...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

2006-01-01T20:22:00.000-05:00

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?

Travelling

2005-12-25T12:09:00.000-05:00

On this day it is appropriate that I set off for the Holy Land. To return circa January 7th. While the Holy Land surely has internet, it may not have internet (or time) for me. Perhaps no posting.

Damn it...

2005-12-25T00:25:00.000-05:00

I thought that writing a paper on the new game show Deal or No Deal might be a good idea, but it's definitely not original.

The Right

2005-12-24T18:38:00.000-05:00

Something even more important than ideology holds the Right together: culture. The coalition is more sociologically coherent than one might imagine. Gun ownership is much more common among Evangelical Christians than it is, say, among university professors. Nearly half of small business owners consider themselves born-again Christians. Antitax advocates and members of the Christian Coalition are both enthusiastic listeners to talk radio. Back in the 1960s, Jewish urban intellectuals and Southern moralists had little in common. They may still be odd bedfellows but, over time, they have discovered things to talk about: the tragedy of family breakdown, the evils of Yasser Arafat and Hillary Clinton.

--John Micklethwait and Adrian Wooldridge, "Right Nation" 196.

Off Center

2005-12-23T13:35:00.000-05:00

Off Center is an excellent how-to guide for exercising political power. How you, as head of a political party in power, could be more effective at getting passed the legislation that you want. The problem is that it has aspirations to being more: to showing how this is unprecedented and violates the will of voters -- that Republicans are governing from the Right while the voters are centrist. On that score it fails.

Hacker and Pierson cannot show that what Republicans currently do is unprecendented for they never make a case for what is the precedent. They hint darkly that various Republican tactics have no precedent and I, as a nice partisan, am perfectly willing to believe them, but they never actually provide comparative (historical) evidence for this claim.

Their use of polling data to prove voter preferences is equally flawed. They provide lots of polling data showing that a given policy was un/popular at a given moment, or that compared to other worries the policy proposal was relatively low on the list (tax cuts: only 5% of voters had taxes at the top of their lists of worries, yet Bush went ahead...). There are two problems. First, what does polling data actually mean. Second, how are people's responses to polls translated into action (votes).

I'm generally skeptical of survey data on political preferences because it always makes me so happy (yay universal health care!) and then I'm disappointed in how people actually vote. This is because of all the peripheral issues that determine how people respond to polls: what are the alternatives and the trade-offs that people are forced to consider, who are they trying to impress...And the way that Hacker and Pierson report some poll results is quasi-misleading: Even a poll that shows that only 5% of people consider tax cuts a top priority might show that it is among the top 5 for a vast majority.

Just because someone claims in a poll that tax cuts aren't important to them doesn't mean that they won't vote for the guy who gave them tax cuts. Hacker and Pierson would need to present some kind of theory -- however crude -- linking poll results on individual policy questions to how people actually vote. There is a big difference between a prospective question on a poll and a vote in a polling booth for someone who actually delivered.

This all comes back to my quasi-belief in revealed preference: if people vote a certain way, then they must want it. There was also an odd way in which voters in Off Center swung wildly from rather intelligent people (we're supposed to believe what they tell pollsters and believe that people are consistent in what they tell pollsters and what they want from politicians) to rather stupid people (voters can't figure out what is going on in Washington because the media isn't quite straightforward and Republicans mislead). Someone (Bryan Caplan, say) could probably say something more interesting about this inconsistent view of the voter.

If you want to understand how to weild power (or how Republicans wield power), this is an excellent book. If you want to generate moral outrage because this is unprecedented or goes against what American's really want, well, there is work to be done. Plus, it is written in that annoying chatty and inelegant style (with short, crude sentences and contractions) that academics adopt when they write for the masses.

Dude

2005-12-22T14:02:00.000-05:00

Paul Soglin has a blog where he talks about Sacha Baron Cohen and more timely topics. For those lacking in Madison political trivia, Soglin was elected mayor in 1973 as a nice radical and then was re-incarnated in the 1990s as an almost DLC-type mayor. His many daughters include Rachael, the spelling of which confused me for many years on how to spell Rachel (the daughter is named after a Michael).

Charlie And The Chocolate Factory

2005-12-20T22:39:00.000-05:00

Is a stunning movie. The creepiness of Willy Wonka goes along with the general creepiness of Roald Dahl's fiction. If anything, the movie reduces the creepiness (we see that the other four children survive). Though the back-story on Wonka serves to make him more creepy and odd -- as it should. Really rather marvelous.

Tax Incentives

2005-12-20T16:20:00.000-05:00

Suppose that the political process in each town is perfect such that the maximum amount of tax incentives the town will offer max's out at exactly equal to the increased utility to the town. How does a company decide to locate? Given that there are multiple communities bidding, it will pick a location based on the maximum of tax breaks plus profit to be derived. Without tax breaks it would maximize profit (efficiency) in choosing location; with tax breaks it maximizes efficiency + tax breaks, so it may not maximize efficiency. This has happened because the company internalizes some of the positive externalities of its being located in a given town.

We can say a few other things about company location decisions given that it maximizes profit and tax breaks:

A place that is more profitable will, ceteris paribus, win;
A place that is able to offer more tax breaks will, ceteris paribus, win;
If tax breaks are sufficient, a location that is less profitable might win.

This last is the interesting case. I'm pretty sure that this is still total welfare maximizing, but the distributional issues are rather interesting.

Within the town: the tax breaks increase everyone's taxes (or decrease everyone's services) but benefit largely those employed by the firm (though there may be spill-overs). So this is a redistribution to people who work for the firm from the other townies.
Between firm and town: we have stipulated that this town is a less efficient place to be. The town, because it is competing against lots of other towns, will have to bid a large portion of the benefits of having the firm located their. Hence, most of the within town benefits will go to the firm. So money is redistributed from town to the firm (given that the firm was there before).

So tax incentives serve largely to increase profit at the firm, and then redistribute money from other towns-people to the workers (unless the spill-overs are greater than the tax breaks).

This looks a lot less malicious if spill-overs are very large. Also, if the company does not stay, then the town might die; whereas if it does not come it just might not grow. So the endowment effect is at work, I'd suspect. I'm sure there is much more to say. Henry?

The Two Sides of Monsieur Porter

2005-12-18T20:36:00.000-05:00

Eduardo Porter has two articles in today's Times. One is quite intelligent, pointing out that the tax breaks employers receive for providing health insurance would be almost sufficient to fund health care for the poor. As policy this would run into the old adverse selection problem in that employers would no longer buy health insurance for employees and so employees would have to get insurance on their own. This is potentially rather difficult, though the article hints that people would be forced to pool in order to buy health insurance which may or may not make any sense. But the basic analytic point is sound and interesting.

The other is a rather foolish attempt to be counterintuitive on the "trade and not aid" argument. Porter points out that countries which import food would be hurt by lifting food subsidies in the West because it would raise the prices of imported food. If you are a net importer, this obviously has detrimental welfare effects. But the "trade and not aid" is not about short-term redistribution, but about changing the long-run incentives in poor countries. If food prices rise, then you get more farming and hopefully more capital accumulation in a distributed fashion. Now "trade not aid" has problems: not least, the estimated rise in food prices may well not be sufficient to do much. But at least take the argument seriously, and don't argue against a mis-reading of it.

Heathrow (again)

2005-12-17T18:14:00.000-05:00

Ten hours to go in Heathrow.

Why aren't airports fully functional all night? Specifically, why aren't international airports with long-haul flights open all night? I can't change money, buy food, go to my terminal or do much of anything except sit here and read. (Frank Conroy's Body & Soul, which is very nice.) But why not run flights to, say, Chicago or Hong Kong throughout the night? When you are traveling more than 5-6 time zones, time becomes somewhat meaningless anyway. I suppose that flight crews based in London would not be happy about 4:00 A.M. flights. But if they were based in Chicago, it would make more sense.

The entire economy is a game...

2005-12-17T03:41:00.000-05:00

If you have time and you want to hear brilliant people talk about game theory and its applications, listen to Robert Aumann and Thomas Schelling's Nobel Prize lectures.

Wow

2005-12-16T11:33:00.000-05:00

Via Brad Plumer, the U.S. will spend nine percent of GDP, about $1 trillion, on advertising in 2005. Health care is at fifteen percent of GDP. Plenty of people wonder if we can "afford" to spend fifteen percent of GDP on health care, yet you won't hear anyone questioning whether we can "afford" to spend nine percent of GDP on advertising.

Finals are finished

2005-12-16T11:29:00.000-05:00

Yay. If last year is any indication, expect this blog to go on a four month hiatus. I suspect, though, that this year will be different (for many reasons I hope these next four months are very different from my last December - April, blogging is but a minor one).

Romney won't run for reelection

2005-12-15T07:45:00.000-05:00

Another step closer to my 2008 dream match-up between Mitt Romney and Mark Warner.

Iraqis like to vote

2005-12-15T07:38:00.000-05:00

See here

If Iraq does in fact become a functioning American-style democracy, will it all have been worth it? I would venture to say yes.

Some last observations of Budapest

2005-12-15T07:13:00.000-05:00

When I was in Spain for a weekend, there were huge crowds gathered around a troupe of Native Americans in traditional Native American garb and playing traditional Native American music. (Since I go to Swarthmore I am compelled to point out that none of this may in face be traditional. But it seemed that way.) Today, I walked by the same thing at a market by my apartment. It seems odd to me that this is so popular in Europe, but I guess it's not much different than, say, non-Irish celebrating St. Patrick's Day.

I frequent a Chinese buffet down the street. From what I can tell it is run by a mother and her two children, they are the only people I ever see working there. And they are there daily: the buffet is open for 10 hours and there must be another 3-4 involved in food preparation and cleaning. So each works perhaps 14 hours a day, every day of the week. Such is the cost of building capital, it requires total commitment and a little ambition. Where do you see the same sort of thing in the United States? Is it solely a feature of developing economies?

Two finals down, two to go. Out of Hungary on Saturday, into America on Sunday (with 12 hours in London in between. Ugh.)

The National Review Is Fun

2005-12-12T20:56:00.000-05:00

The 50th Anniversary issue especially has some real gems. Like Ramnesh Ponnuru arguing for the coherency of conservatives in that....wait for it....conservatives take the American Founders seriously. Not that there is any particular piece of wisdom we can learn from the past, but that conservatives engage in a conversation with the Founders. Sure they may emphasize different things, but what's important is that they respect the Founders. Now this has the slight problem that suddenly American conservatism has been defined to be entirely distinct from conservatism in every other country -- and in fact has nothing in common with conservatism in any other country, which is odd, to say the least. And trying to differentiate this from liberals is rather strained. Plus it is just odd: I've always understood conservatism to either be a statement about human nature or a respect for tradition. Tradition not in terms of what some random dead dudes wrote down, but as in what has worked in society before -- and what is perceived to make it work today. Anyway.

It would be foolish, because futile, to seek to impose an artificial conceptual unity on the Right. Whatever holds the conservative coalition together, it is clearly not any of the most intense passions that immediately motivate its factions. Conservatives are not held together by the Christianity of the social Right or the free-market faith of the libertarians or the aggressive nationalism of the hawks.

Yet I think that most American conservatives, of whatever stripe, cna reasonably be described as engaged in a common enterprise, even if the fact that it engages them in common sometimes eludes them. That enterprise is the conservation of the political inheritance of the American Founders.

It is also an enterprise that divides them. Different types of conservatives have different understandings of what that inheritance is, emphasize different aspects of it, and reach different conclusions about what conservation practically entails. This may be a paradox but it is not a contradiciton. The enterprise consists in important part of a continuing conversation about what it means to conserve that inheritance.

Having a plush office

2005-12-11T03:04:00.000-05:00

Matt Yglesias launches into the whole should-college-athletes-get-paid question, and in comments people get caught up on the question whether college athletic programs make money. Sometimes that is relevant sometimes it is not. When it is claimed that college athletics is useful because it brings in donations or makes money it is useful to point out that this is not empirically accurate. When someone wonders whether college athletes could be paid and it is pointed out that athletic programs don't make money hence it is not affordable, this is not useful because big time athletic programs are not run as profit-maximizing enterprises (is anything run to maximize profits?). Rather, they maximize the luxury of coaches and players and the excitement surrounding it. This is not the same as maximizing profit. Because administrators have no reason to make money -- it would just go back to the univeristy -- they spend it by making their lives, and the lives of their athletes, more pleasant. Entirely rational behavior. But you cannot infer anything about what the actual money spending capabilies are from the profit-loss statement because you are working with a "business" that works with a soft budget constraint and has a major principle-agent problem with respect to maximizing profit.

An odd statement...

2005-12-09T04:43:00.000-05:00

From this essay that attempts to link economics with evangelical Christianity (emphasis mine):

The best of a rising generation were revolting against their training, and because of this the press and public paid attention. Orthodox economists counterattacked, first in France and then internationally. Right-wing globalist Robert Solow wrote a savage editorial in Le Monde defending standard economic theory. The debate became so protracted that the French minister of education launched an inquiry.

But Solow is practically a socialist...

Progressive pricing for knowledge

2005-12-06T08:06:00.000-05:00

Attempting to see this paper, I find:

Download Restriction: Access to the full text is generally limited to series subscribers, however if the top level domain of the client browser is in a developing country or transition economy free access is provided. More information about subscriptions and free access is available at http://www.nber.org/wwphelp.html.

Luckily, my .hu TLD gets me in for free. (Though I do have one and maybe two other ways to access it.)

Just wanted to point out...

2005-12-06T07:29:00.000-05:00

...that Mitt Romney's health care plan for Massachusetts is really smart. Basically, he intends to make health insurance mandatory. Those with the means will have to pay for it themselves and the poor will receive subsidized (or free) insurance. Everyone in Massachusetts will have some sort of policy.

Why is this smart? Because the main problem in the health insurance market is adverse selection. A fair insurance policy (one that costs what is paid out in benefits to the average insuree) is not viable. Those that are less likely to get sick will not purchase the policy, while those that are more likely to get sick will buy it. The result is that insurance prices are pushed up and many are left uninsured.

Romney's plan forces everyone to purchase insurance. In this case, insurance companies can charge the fair price without fear of adverse selection. Result: everyone is insured at a lower price.

Isaac, what do you think?

Wow

2005-12-06T00:23:00.000-05:00

Daniel Drezner's blog is often rather disappointing, more news summary than analysis and when there is analysis, well, it's uninteresting or predictable. But this is really interesting and really smart. Not that I necessarily agree with it.

I'm indecisive...

2005-12-05T15:42:00.000-05:00

Henry wonders about my foxiness. He's probably right: economics has given me more of a hedgehog view of things, but I still resent simplicity in viewing the world. For reasons of biography I have to like and respect Isaiah Berlin, but for reasons of being a wishy-washy pluralist his essay "John Stuart Mill and the Ends of Life" has to be one of the more inspiring things I've ever read. Some random quotes (understand the "he" is J.S. Mill, but I highly doubt it is an accurate reading of Mill, rather, this has to be understood as speaking of oneself in the third person):

What he hated and feared was narrowness, uniformity the crippling effect of persecution, the crushing of individuals by the weight of authority or of custom or of public opinion; he set himself against the worship of order or tidiness, or even peace, if they were bought at the price of obliterating the variety and colour of untamed human beings with unextinguished passions and untrammelled imaginations.

-- 221, "Liberty," (also in Four Essays on Liberty)

He was committed to the answer that we can never tell (until we have tried) where greater truth or happiness (or any other form of experience) may lie. Finality is therefore in principle impossible: all solutions must be tentative and provisional.

--227

To understand is not necessarily to forgive. We may argue, attack, reject, condemn with passion and hatred. But we may not suppress or stifle: for that is to destroy the bad and the good, and is tantamount for collective moral and intellectual suicide. Skeptical respect for the opinions of our opponents seems to him preferable to indifference or cynicism.

-- 229

Without infallibility how can truth emerge save in discussion? There is no a priori road towards it; a new experience, a new argument, can in principle always alter our views, no matter how strongly held. To shut doors is to blind yourself to the truth deliberately, to condemn yourself to incorrigible error.

-- 232

the conviction..that there exists a basic knowable human nature, one and the same, at all times, in all places, in all men -- a static, unchanging substance underneath the altering appearances, with permanent needs, dictated by a single discoverable goal, or pattern of goals, the same for all mankind -- is mistaken.

-- 233

Man is spontaneous, that he has freedom of choice, that he molds his own character, that as a result of interplay of men with nature and with other men something novel continually arises, and that this novelty is precisely what is most characteristic and most human in men.

-- 234

Fallibility, the right to err, as a corollary of the capacity for self-improvement; distrust of symmetry and finality as enemies of freedom...

-- 237

Many-sidedness of the truth and of the irreducible complexity of life, which rules out the very possibility of any simple solution, or the idea of a final answer to any concrete problem.

-- 237

Turns out...

2005-12-05T15:31:00.000-05:00

...that finals are bad for blogging. And, also, that discussing Bayesian updating of subjective probabilities without resort to any mathematical notation is mildly difficult, though kind of cool. This in the context of Pauly's 1980 book "Doctors and Their Workshops" where, in chapter 4, consumers put more or less weight on physicians' advice depending on their past history with the physicians' advice. The model is a bit goofy (you assume a constant marginal product of medical care given a level of health and you assume that consumers know their level of health, but you assume that the table matching a level of health to marginal product of medical care is not widely known). Yet it is ever so inventive to make the demand side smarter than most models would have it be.

Sonic?

2005-12-04T06:16:00.000-05:00

Via Dan Drezner, this review by Louis Menand of Philip Tetlock's new Expert Political Judgement: How Good Is It? How Can We Know?. He divides "experts" into two categories. Menand writes:

Tetlock uses Isaiah Berlin’s metaphor from Archilochus, from his essay on Tolstoy, “The Hedgehog and the Fox,” to illustrate the difference. He says:
Low scorers look like hedgehogs: thinkers who “know one big thing,” aggressively extend the explanatory reach of that one big thing into new domains, display bristly impatience with those who “do not get it,” and express considerable confidence that they are already pretty proficient forecasters, at least in the long term. High scorers look like foxes: thinkers who know many small things (tricks of their trade), are skeptical of grand schemes, see explanation and prediction not as deductive exercises but rather as exercises in flexible “ad hocery” that require stitching together diverse sources of information, and are rather diffident about their own forecasting prowess.
A hedgehog is a person who sees international affairs to be ultimately determined by a single bottom-line force: balance-of-power considerations, or the clash of civilizations, or globalization and the spread of free markets. A hedgehog is the kind of person who holds a great-man theory of history, according to which the Cold War does not end if there is no Ronald Reagan. Or he or she might adhere to the “actor-dispensability thesis,” according to which Soviet Communism was doomed no matter what. Whatever it is, the big idea, and that idea alone, dictates the probable outcome of events. For the hedgehog, therefore, predictions that fail are only “off on timing,” or are “almost right,” derailed by an unforeseeable accident. There are always little swerves in the short run, but the long run irons them out.

Foxes, on the other hand, don’t see a single determining explanation in history. They tend, Tetlock says, “to see the world as a shifting mixture of self-fulfilling and self-negating prophecies: self-fulfilling ones in which success breeds success, and failure, failure but only up to a point, and then self-negating prophecies kick in as people recognize that things have gone too far.”

I think I'm a hedgehog, by virtue of personality alone. (Isaac can speak for himself but I would venture to say that he is a fox.) I also think that in the past year I've tried to become more of a fox. But it's fun being a hedgehog, you don't have to think about subtleties or nuance, just get out your intellectual nuclear weapon and go crazy. Unfortunately, it's easy to become irrelevant.

Thank you

2005-12-03T08:32:00.000-05:00

Finally, someone has recognized the absolute banality of the popular anti-Bush movement. Via Matt Yglesias, this piece in TNR by Jason Zengerle makes a sacrificial lamb out of Bright Eyes' Colin Oberst. But a worthy lamb he is; writes Zengerle:

So, without further ado, here are the opening lines of the protest song of the century: "When the president talks to God, are the conversations brief or long? Does he ask to rape our women's rights? And send poor farm kids off to die? Does God suggest an oil hike when the president talks to God?" Yes, the lyrics are that bad, and the instrumentation--provided by a lone, off-putting acoustic guitar--isn't much better.

[...]

The only thing that's provocative about Oberst's celebrated protest song is its insults. "When the president talks to God, do they drink near beer and go play golf?" Oberst sings. "When he kneels next to the presidential bed, does he ever smell his own bullshit?"

Is this helpful? Will this convince anyone that isn't already convinced? Will this cause people to take to the streets? No: no more than the "Bush is stupid" jokes that drop into my inbox regularly; no more than the equally awful Green Day lyrics that are all the rage these days; no more than "Fahrenheit 9/11".

Bush is obviously an utter incompetent. Please, just try and keep the discourse civil, intelligent and maybe even hopeful.

Odd examples

2005-12-02T00:03:00.000-05:00

A large part of medical care is concerned with the receipt of comfort, reassurance and sympathy, and it is difficult to receive from someone who is being treated in the way a second-hand car dealer might be treated by Ralph Nader.

--J. Richardson. 1981. "The Inducement Hypothesis" in Health, Economics, and Health Economics at pg. 205.

Economics is cool

2005-12-01T07:55:00.000-05:00

Via Michael Mandel, the schedule for the 2006 AEA meeting. Some seminar titles:

The Economics of Paying Too Much
Economics of Marriage and Dating Markets
Multiple-Father Families
The Family, Institutions, and Economic Growth
Inattention and Consumption Behavior
Kyoto and Beyond: Alternative Approaches to Global Warming
Exposing Cheating and Corruption
Skin Tone Discrimination and Economic Outcomes
Endogenous Information Acquisition
Behavioral Political Economy

Not only is economics cool, it's hardly the rationality-worshipping caricature some make it out to be.

With headlines like this:

2005-12-01T00:44:00.000-05:00

U.S. Is Said to Pay to Plant Articles in Iraq Papers , do you really imagine the U.S. government is half-competent? What does Iraq need for long-run stability? A stable and functioning civil society. Doing things that allow people to dismiss any and all newspapers and news reports as fabrications cooked up by the U.S. government and thus rely on rumor and gossip for their politics is not a useful base for functioning democratic politics.

Plus, any positive news people read in the papers is suspect despite the fact that some may well be accurate. And any supporter of the U.S. in print will be accused of being paid-off despite the fact that some supporters may well be genuine. This is one of those utterly short-sighted and narrow-minded policies that has so many ridiculously obvious bad consequences that it boggles the mind how somebody could think it was a good idea. The goal of the policy is clearly to shift opinion in favor of the U.S. government positions. But lying and planting propoganda probably isn't the ideal way of improving people's opinion of you, isn't it? Ironically, what led to this was a perceived need to improve credibility!

Citing a "fundamental problem of credibility" and foreign opposition to American policies, a Pentagon advisory panel last year called for the government to reinvent and expand its information programs.

Talk about counter-productive. Something like this is bound to leak out at one point or another. Shouldn't whoever came up with this wake up the next day and think wow, that was a dumb idea and move on to more intelligent plans?

Worker Unity

2005-11-30T19:49:00.000-05:00

There is an oft-made argument in the Marxist literature (for example, pg. 29 of "Production Process In A Competitive Economy" by Samuel Bowles, AER March 1985) that capitalists will seek to sow worker disunity to -- and here is the rub, the sole reason offered is to prevent unionization (the mechanism would be that you bargain seperately with different groups of workers, put workers of different racial/ethnic/gender characteristics in different jobs). There is, however, the trade-off because worker disunity decreases morale and induces shirking. Sowing disunity is hardly a costless proposition. Yet this trade-off for the firm is never mentioned. Plus, arguably, segragating workers of different racial/ethnic/gender characteristics within the firm would increase unity within each individual unit, even if total workforce cohesion is decreased. Then you might end up with unions of, say, janitors. Though this may be clever: you get cohesion at the unit level but no overall cohesion. Hence, all workers don't band together but morale is still high. But I don't think this is right. Point being, the argument strikes me as a rather strained explanation for why there aren't more unions -- those capitalists organize work so as to prevent it! Aren't explanations about collective action and etc. so much more fun?

How is math different from religion?

2005-11-30T14:13:00.000-05:00

I made the mistake of repeating the best math joke ever to a table of humanities majors:

Why did the math grad student drop out to become a poet?

Because s/he wasn't creative enough [to do math].

I like it because artsy-fartsy people have this self-image of being so creative and interesting, especially as compared to those boring science types. Well, math ain't exactly memorization and is remarkably pretty.

This launched debate about the epistemological status of mathematical knowledge. The claim, to which I had no real counter-argument, was that math is no different from religion. Theologians start from the axiom that, say, god exists and can do such and such, and then -- somewhat rigorously -- derive a whole theory about how the world works. Mathematicians start with some axioms about how sets fit together and then build up a rather interesting edifice. What's different?

A couple counter-arguments seem tempting, but ultimately not useful. One is to assert that, well, physics describes the world (is a successful science) and is based on mathematical ideas, so something must be right. But I don't think an argument from pragmatics is what we want. Another is to say that math is rigorous and deductive and theology is not, but that begs the question of the status of our axioms.

This really reveals why I ought to take philosophy of math next semester. Sadly, I won't. Suggestions?

The Non-econometrician's Lament*

2005-11-27T22:17:00.000-05:00

As soon as I could safely toddle
My parents handed me a model.
My brisk and energetic pater
Provided the accelerator,
My mother, with her kindly gumption,
The function guiding my consumption;
And every week I had from her
A lovely new parameter,
With lots of little leads and lags
In pretty parabolic bags.

With optimistic expectations,
I started on my explorations,
And swore to move without a swerve
Along my sinusoidal curve.
Alas! I knew how it would end;
I've mixed the cycle and the trend,
And fear that, growing daily skinnier,
I have at length become non-linear.
I wander glumly round the house
As though I were exogenous,
And hardly capable of feeling
The difference 'tween floor and ceiling.
I scarcely now, a pallid ghost,
Can tell ex ante from ex post;
My thoughts are sadly inelastic,
My acts incurably stochastic.

--Sir Dennis H. Robertson. 1956. "Economic Verse" in Economic Commentaries, pg. 174.

*Composed mainly during a session of the International Economic Association Conference on the Business Cycle, Oxford 1950, and published in its Proceedings (see p. 85).

The Marshall Plan*

2005-11-27T22:13:00.000-05:00

We hereby pledge each European nation
By Re-deployment and by Integration,
By Customs Unions (innocent of Preference,
And so consistent with our terms of reference)
To swell each asset, prune each liability,
And thus attain to Global Viability.

Summoned from every country (except Spain),
Briton and Benelucifer and Dane,
Affluent Switzer and penurious Greek,
We swear with hand on heart (and tongue in cheek)
By 1950 shall the thing be done
--Or if not '50, well then '51.

So look benignly on your zealous scholars,
Dear Mr Marshall, and release the dollars.

--Sir Dennis H. Robertson. 1956. "Economic Verse" in Economic Commentaries, pg. 173.

*Suggested report for the Committee of European Experts which met in Paris to consider Mr Marshall's offer, 1947.

What Do Economists Economize On?

2005-11-27T22:01:00.000-05:00

There exists in every human breast an inevitable state of tension between the aggressive and acquisitive instincts and the instincts of benevolence and self-sacrifice. It is for the preacher, lay or clerical, to inculcate the ultimate duty of subordinating the former to the latter. It is the humbler, and often the invidious, role of the economist to help, so far as he can, in reducing the preacher's task to manageable dimensions. It is his function to emit a warning bark if he sees courses of action being advocated or pursued which will increase unnecessarily the inevitable tension between self-interest and public duty; and to wag his tail in approval of courses of action which will tend to keep the tension low and tolerable.
...
What does the economist economize? ' 'Tis Love, 'tis love,' said the Duchess, 'that makes the world go round.' 'Somebody said,' whispered Alice, 'that it's done by everybody minding their own business.' 'Ah well,' replied the Duchess, 'it means much the same thing.' Not perhaps quite so nearly the same thing as Alice's contemporaries thought. But if we economists mind our own business, and do that business well, we can, I believe, contribute mightily to the economizing, that is to the full but thrifty utilization, of that scarce resource Love -- which we know, just as well as anybody else, to be the most precious thing in the world.

--Sir Dennis H. Robertson. 1956. "What Do Economists Economize On?" in Economic Commentaries, pg 147-154.

Hah

2005-11-25T19:07:00.000-05:00

Former FEMA Director Michael Brown, heavily criticized for his agency's slow response to Hurricane Katrina, is starting a disaster preparedness consulting firm to help clients avoid the sort of errors that cost him his job.

Says the AP.

Traffic as metaphor

2005-11-25T00:34:00.000-05:00

This reminds me of one of my pet theories: the flow of traffic serves as a very nice metaphor for the effectiveness, and limits, of economic ideas of how people interact. You have a group of people with approximately initial equal endowments (cars). They are minimally supervised, if at all, and yet they all manage to interact in a manner that is largely mutually beneficial. Traffic flows and there are very few accidents (I've never witnessed an accident). Sure they aren't all brilliant drivers and sometimes they do stupid or annoying things. But people in general stay in their lanes and drive at an appropriate speed and don't make rash moves. They are competent. And traffic flows such that everyone gets where they want to go in an approximately reasonable amount of time. An effective and mutually beneficial order arises from a group of people with equal initial endowments.

But this order and this competence does not arise from nowhere and isn't a utopia. People's skills are not only licensed by the state, but there is also heavy socialization about appropriate driving behavior. You have government that makes laws and sometimes even enforces them. You have government to build and maintain roads (though some would claim that either god, or private companies can do this). You have accidents and you have unnecessarily scary experiences. We have odd phenomena of mass slowdowns, like "gaper's gap" and gridlock which could be alleviated by intervention of some sort. Because people are cautious and law abiding, they drive slower than they would if we had a traffic god with perfect coordination and perfect control.

Don't you see how nice a metaphor this is? And surely this could be expanded to include even more aspects of society that you wish to describe.

Naive traffic economics

2005-11-24T23:58:00.000-05:00

Arnold Kling writes:

From my perspective, with the Washington DC area one of the three worst regions in the country for traffic, the anti-congestion motivation for taxing gasoline is worth considering. On the other hand, I think that taxing congestion-causing behavior directly may be a better approach.

But isn't the even better policy to reduce the costs of alternative modes of transportation (public transport)? A very naive welfare calculation would suggest that improving public transportation to make it faster and more convenient and hence reducing congestion and so reducing travel times everywhere would do more to enhance welfare than making efficient transport more expensive, even given that government could compensate people with toll revenue because there is the deadweight loss of "distorting" prices by taxing gasoline (though I suspect that the naivite lies in assuming that you can actually find non-distorted prices in transportation). And objections that public transportation systems always lose money aren't convincing for I don't think the marginal road turns a profit either.

Sociological categories in economics

2005-11-24T23:51:00.000-05:00

I left the following comment to this Tom Bozzo post about George Akerlof and Rachel Kranton's essay on identity. Economics has a broader problem with the fact that people are, as one of my professors liked to say, "meaning generating beings," and not just utility machines (and, I would maintain, meaning cannot be reduced to utility however clever you are).

I'm working my way through "An Economic Theorist's Book of Tales" and the more severe limitation of his models attempting to incorporate "sociolological" phenomena is a philosophical one: by sticking identity in the utility function, you assume that it can be traded off against other things at some price. For example, he writes (in chapter 5, "A Theory of Social Custom of which unemployment is one consequence") that someone doesn't want to be just rich, they want to be rich and famous. But they want to be famous only insofar as this can be translated into a wealth equivalent (that is, more money would make them just as happy as less money and more fame). Yet to the average person, to claim that someone wants to be rich and famous means that there is something about widespread recognition that is not understandable in purely monetary forms. A sociologist would, I think, claim that fame cannot be purely traded off against money. The assumption of comparability is one I'm comfortable with when arguing with sociology majors, less comfortable with when arguing with economics majors.

A Most Unexpected Link

2005-11-24T23:39:00.000-05:00

Here.

What actually drives the t-shirt industry...

2005-11-22T18:37:00.000-05:00

From this talk given by Pietra Rivoli (hat-tip Isaac):

So over and over again, as I tried to understand something, I kept coming back to politics. I kept saying, okay, the way to understand why this happened is to understand how the politics works. The markets are really not central; they're not that big a part of the story.

Now, much of the debate over globalization is about markets. On the right you have people saying that unfettered markets will lift all boats. On the left you say unfettered markets are crushing the poor. Coming out of writing this book, one of my conclusions was that this particular debate on the virtues versus the evils of markets was misspecified, at least for this T-shirt. It wasn't whether markets were good or bad but about whether the politics were good or bad and what the effects of the politics were on various actors in the T-shirt story.

Now, this relates to a second point. Many activists—more broadly, people on the left—have a variety of proposals or ideas that kind of go something along these lines: we have to protect the poor, we have to protect those that don't have resources from the cruelty of market forces. That's not something I found in my T-shirt's life story. What I did find over and over again is that those people without power, those people that were poorer, those people that had fewer resources, didn't so much need to be protected as they needed to be allowed to play. And they needed to be allowed to play with the same deck of cards as everybody else.

The excitement of New Institutional Economics

2005-11-17T22:43:00.000-05:00

Take this test and see how much you can remember from The Economic Institutions of Capitalism. And then remember why it is a distressingly annoying book to read, though it contains some interesting ideas.

He's back!

2005-11-17T05:25:00.000-05:00

Paul Krugman, in his 11/14/05 column (reproduced in full below) provides the best argument I've heard for public health insurance (and it's just adverse selection):

Several readers have asked me a good question: we rely on free markets to deliver most goods and services, so why shouldn't we do the same thing for health care? Some correspondents were belligerent, others honestly curious. Either way, they deserve an answer.

It comes down to three things: risk, selection and social justice.

First, about risk: in any given year, a small fraction of the population accounts for the bulk of medical expenses. In 2002 a mere 5 percent of Americans incurred almost half of U.S. medical costs. If you find yourself one of the unlucky 5 percent, your medical expenses will be crushing, unless you're very wealthy - or you have good insurance.

But good insurance is hard to come by, because private markets for health insurance suffer from a severe case of the economic problem known as "adverse selection," in which bad risks drive out good. To understand adverse selection, imagine what would happen if there were only one health insurance company, and everyone was required to buy the same insurance policy. In that case, the insurance company could charge a price reflecting the medical costs of the average American, plus a small extra
charge for administrative expenses.

But in the real insurance market, a company that offered such a policy to anyone who wanted it would lose money hand over fist. Healthy people, who don't expect to face high medical bills, would go elsewhere, or go without insurance. Meanwhile, those who bought the policy would be a self-selected group of people likely to have high medical costs. And if the company responded to this selection bias by charging a higher price for insurance, it would drive away even more healthy people.

That's why insurance companies don't offer a standard health insurance policy, available to anyone willing to buy it. Instead, they devote a lot of effort and money to screening applicants, selling insurance only to those considered unlikely to have high costs, while rejecting those with pre-existing conditions or other indicators of high future expenses.

This screening process is the main reason private health insurers spend a much higher share of their revenue on administrative costs than do government insurance programs like Medicare, which doesn't try to screen anyone out. That is, private insurance companies spend large sums not on providing medical care, but on denying insurance to those who need it most.

What happens to those denied coverage? Citizens of advanced countries - the United States included - don't believe that their fellow citizens should be denied essential health care because they can't afford it. And this belief in social justice gets translated into action, however imperfectly. Some of those unable to get private health insurance are covered by Medicaid. Others receive "uncompensated" treatment, which ends up being paid for either by the government or by higher medical bills for the insured. So we have a huge private health care bureaucracy whose main purpose is, in effect, to pass the buck to taxpayers.

At this point some readers may object that I'm painting too dark a picture. After all, most Americans too young to receive Medicare do have private health insurance. So does the free market work better than I've suggested? No: to the extent that we do have a working system of private health insurance, it's the result of huge though hidden subsidies.

Private health insurance in America comes almost entirely in the form of employment-based coverage: insurance provided by corporations as part of their pay packages. The key to this coverage is the fact that compensation in the form of health benefits, as opposed to wages, isn't taxed. One recent study suggests that this tax subsidy may be as large as $190 billion per year. And even with this subsidy, employment-based coverage is in rapid decline.

I'm not an opponent of markets. On the contrary, I've spent a lot of my career defending their virtues. But the fact is that the free market doesn't work for health insurance, and never did. All we ever had was a patchwork, semiprivate system supported by large government subsidies.

That system is now failing. And a rigid belief that markets are always superior to government programs - a belief that ignores basic economics as well as experience - stands in the way of rational thinking about what should replace it.

Emphasis mine. Paul is doing what he does best (besides perhaps building models of currency crises): clearly explaining basic economic ideas to a large audience.

Pro-Growth Progressives...

2005-11-17T03:40:00.000-05:00

Last week there was a debate at TPMCafe's Bookclub that could have been interesting (had it not devolved into a shouting match) over Gene Sperling's new book, The Pro-Growth Progressive. Unfortunately, there's no permalink to the whole thing. So here: 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 17, 18, 19, 20, 21, 22, 23, 24, 25, 26.

Now that the dust has settled, it seems Sperling has made a lot of points and proposals that I have always liked, if his arguments are a bit flawed.

For example:

The EITC is the model of a policy that promotes economic dignity and upward mobility while again workers directly - not interfering with the market or employers. A quality 0-5 education program for poor children would promote the values of fair starts, develop the cognitive skills most essential for the 21st century workforce, and actually help employers by allowing more working parents to avoid missing work.

I like the EITC. But of course the EITC interferes with the market, it is a subsidy on labor. And in this case, as in many others, interfering with the market is not necessarily a good thing. It induces more hours work than you would otherwise choose. However, it is one of the better ways to redistribute income. I also like the idea of more birth-five education. But I don't like Sperling's language about the "21st century workforce" and I don't think that it's better to have parents away from their children for longer and longer periods of time.

Sperling's basic philosophy is almost identically mine:

What do I mean by progressive? I define it with three values. A belief in economic dignity for those who take responsibility for their lives; the opportunity for upward mobility, and the commitment that life's outcome should not be determined by the accident of your birth.

To the extent I am a liberal (or progressive?) I think that the government should focus on these things (and one other.) But what's up with "pro-growth progressive?" Are there two trendier or more cliched labels than "pro-growth" or "progressive" (which even the West Wing poked fun at in the live debate episode.)

Jason Furman points out that (amidst shameless Sperling-worship):

One of the interesting points Gene makes in his book is that our policies should target all of these sources of job loss. Retraining, wage insurance, and other proposals should apply to everyone dislocated from a job.

Finally, someone makes this point.

One more thing. Jason Furman agrees with me that

I love George Bush's phrase about an "ownership society," just not his policies to promote more ownership for owners and more debt for everyone else.

The policies may be flawed, but the idea is basically good, isn't it? Don't we want people to have some wealth and self-sufficiency? So it pains me to see Democratic politicians attacking the notion of an "ownership society" itself.

Weather

2005-11-16T16:38:00.000-05:00

It's been ridiculous in Swarthmore today: on November 16 temperatures in the high 60s or low 70s! In the course of writing the previous post, though, the sky has gone from slightly cloudy to covered in hulking low and gray clouds. It's going to be an exciting storm.

Expertise? Just give me the drugs

2005-11-16T16:33:00.000-05:00

The New York Times writes about "young people" who self-medicate, and bypass the supposed expertise of psychiatrists.

For a sizable group of people in their 20's and 30's, deciding on their own what drugs to take - in particular, stimulants, antidepressants and other psychiatric medications - is becoming the norm. Confident of their abilities and often skeptical of psychiatrists' expertise, they choose to rely on their own research and each other's experience in treating problems like depression, fatigue, anxiety or a lack of concentration. A medical degree, in their view, is useful, but not essential, and certainly not sufficient.

As with any "trend" piece, one wonders how widespread this is (though if one didn't have such pieces, how would one think to look for data on a question?). Yet it says many an interesting thing about medicine. One phrase that gets tossed around in health care debates is "consumer-driven" health care: consumers ought to have more choice. The whole structure of the health care system is based on patients relying on the expertise of doctors, doctors as gate-keepers to health care. Insurance works, insofar as it does, because someone verifies the legitimacy of your complaint and treatment. The widespread perception that maybe doctors are useless -- or at least that psychiatrists are useless -- would do very odd things to the market for psychiatric drugs. You'd end up with psychiatrists being reduced to prescription machines (more so than they already are), and so the whole purpose of the profession would be undermined. They don't know more than we do. And the necessity of FDA approval would be called into question: if people can self-prescribe, why can't they assess risk of drugs? Why do we need a central group to certify drugs? Why not have a centralized group that verifies that public information about drugs is accurate, rather than that the drug is effective? Though again, this is all based on one trend piece and odds of this being more widespread than a small group of young urban professionals is slim.

Marseille

2005-11-16T12:58:00.000-05:00

Via Marginal Revolution and Battlepanda, comes this Washington Post piece on Marseille. As I noted, Marseille is liable to be the most successfully integrated city in France due to its history and demographics, which the Post story summarizes nicely.

History is one source of this stability. While other cities in France fret about the arrival of immigrants over the past 50 years, Marseille has been a magnet for outsiders for well over 100: Italians fleeing poverty, Greeks and Armenians escaping wars, Moroccan sailors jumping ship, Spanish smugglers looking for a haven, Europeans returning from France's former Algerian colony and impoverished Algerians themselves seeking work.
A substantial Jewish community exited Algeria and settled here. On any downtown Marseille street corner, distinct fashions float by: a white Arab-style caftan here, the black overcoat of a Lithuanian Jew there, an African dyed garment, and a French short-brimmed cap over there. There's a budding Chinatown up in Panier, the cluttered neighborhood of sand-colored buildings on a hill above the Old Port.

"Marseille was made by immigration," said Pierre Echinard, a local historian. Of a population of 800,000, a quarter is of North African descent. Residents say they miss the ethnic variety when they leave the close quarters of their city, which is squeezed against the Mediterranean Sea by hills.
...

Marseille, a city more than 2,600 years old, long predates France, not to mention the Roman Empire. (It was so anti-Roman that emperors used to send troublesome consuls to Marseille as a kind of uncomfortable exile.) "Marseille feels it submitted to a power -- Paris -- that didn't bring it benefits. Marseille had long stood on its own and it was always open to the world," Echinard said.

Unlike municipal leaders elsewhere, recent mayors of Marseille have given official recognition to communal diversity, rather than trying to fit everyone into one box of Frenchness. A program called Marseille Hope, begun in the late 1980s, periodically organizes consultations among religious leaders -- Catholic, Orthodox Christian, Muslim, Jewish and Buddhist -- on community problems.

The Post story spins the relative calm as a good thing. You could also conclude that the absence of perfect calm is the indicator of a bad thing. On a more touristy note, the Panier is a) rapidly yuppifying and b) tremendously attractive. And bouillaibaisse is excellent.