Marginal Revolution

Blogging for profit?

Companies used to fire their employee bloggers. Now some of them are discovering that blogging is the "ultimate customer intimacy tool." Imagine chatting with your customers on a regular basis, telling them what the product means for their lives, informing them of new developments, and having them visit you [your site] every day. Who knows, it might even supplant some telemarketing. Here is the link. And see this recent discussion of how blog names matter and signal the nature of content.

Induced innovation in prisons

This fascinating article from Wired illustrates how prisoners make the best of their environments by inventing new contraptions.

"Locked in a California prison, Angelo needs a cup of coffee. Bad. But electric heaters used to make instant joe are contraband in jail. So his cellmate combines the metal tabs from a notebook binder with a couple of melted toothbrushes and some rubber bands.

Soon, Angelo is sipping Folgers.

The jury-rigged heater is one of nearly 80 improvised items Angelo meticulously diagrams in a new book, Prisoners' Inventions [check out this fascinating link, which offers diagrams of the inventions and further description]. Working with the Chicago-based art group Temporary Services, Angelo (not his real name) shows how inmates fashion dice from sugar water and toilet paper, dry bologna jerky on jail-house light fixtures, turn hot sauce bottles into shower heads and make grilled cheese sandwiches on prison desks."

One individual from Temporary Services notes that in the movies, "prisoners only create things to escape, get high or kill each other."

The whole thing reminds me of Soviet engineers.

Will Vouchers Split the Democratic Party?

The House has now passed a school voucher plan for the District. A similar plan was approved by the Senate Appropriations Committee but still must be brought to a full vote. Notable Democractic Senators Dianne Feinstein and Robert Byrd crossed party lines to vote for the proposal. Louisana Senator Mary Landrieu abstained but still faced the wrath of the Black Alliance for Educational Options who took out a full page ad in a New Orleans newspaper pointedly noting that she sends her kids to a Georgetown private school and accusing her of turning her back on African Americans. Other DC voucher groups have taken on Ted Kennedy for his opposition to vouchers likening him to Bull Connor. Strong material coming from anyone, let alone a traditional Democrat base.

I can't let this opportunity pass to reply to some of Tyler's further comments but I'll put those in the extension.

The debate so far Tyler 1, Alex 1, Tyler 2.

Let me take Tyler's weakest point first. He writes, "Imagine politicians upping the voucher amount and coverage to win votes each election cycle..." What like education spending is not a political issue today? In fact, over the past several decades we have doubled real per-capita spending on schooling with zero increase in productivity. It's possible that government would set an education voucher at too high an amount (but let's get it above zero before we worry about this!) but at least we will get something for our money.

Defining an acceptable school is a legitimate issue but one that we already face today with private schools, charter schools, and home schooling. I see no reason why private schools under a voucher system could not be regulated as private schools are today. Private schools do face some minimal regulations including hours and some content requirements but I don't think these have been a significant constraint. Some private schools will undoubtedly teach nonsense but Tyler seems to forget that Ebonics, to give just one example, was a creature of the public schools not the private schools.

I will agree, however, that current voucher plans are typically terrible. Existing vouchers are often limited to poor students and sometimes just to poor students in "failing" schools, the voucher amounts are typically low and to add insult to injury it is often illegal to add-on to the voucher amount (a type of price control). Finally, nowhere near enough students are suported. The DC plan, for example, is aimed at some 2,000 students in a school system of 66,000.

I recommend John Merrifield's School Choices: True and False as an antidote to this kind of limited thinking. Merrifield's bottom line is that we need a system under which the government in no way discriminate against parents who send their children to private schools.

Long Live the Marginal Revolution!

It looks like our short-lived technical difficulties are over (cross fingers!). If all continues to be well we should now be available at our permanent address, www.MarginalRevolution.com which is easier to remember than http://MarginalRevolution.blogs.com (the old address will continue to work just fine of course as they map to the same place). I have a question for the techies. Do different browsers use different DNS servers? I was very puzzled to find that the new address worked from IE at least several minutes earlier (and perhaps longer) than from Mozilla. Email me if you know the answer.

Can you find a Republican on the MIT faculty?

I am not a Republican, but the results from articles of this kind, from David Horowitz's Center for the Study of Popular Culture, disturb me. In America the number of registered Democrats and Republicans, over time, is roughly equal. The same cannot be said for university faculty. The most Republican school these researchers had in their sample was Northwestern, which still had a 4-1 ratio in favor of Democrats. The aggregate ratio was about 10-1, with the school sample included the entire Ivy League and Berkeley. Brown had a 30-1 ratio in favor of the Democrats. They couldn't find a registered Republican at MIT, Williams, Oberlin, or Haverford. They found 3 registered Republicans among the administrators of the Ivy League.

Being a collector is cheaper than you think

"...80 percent of the lots Christie's sell go for under $8,000." From the Thursday New York Times (registration required), and why couldn't an editor improve the grammar in that sentence? The median lot at Sotheby's sells for $4,177, at Christie's South Kensington, a branch, the median lot sells for $2,259. More than ever before, collecting is no longer the exclusive province of the wealthy.

Why I worry about vouchers

Alex (my co-blogger) and I have been arguing for years, it is perhaps no surprise that now we do it in the blogosphere. He is more optimistic about the performance of school vouchers than I am. He notes that housing vouchers have worked well, better than government housing, I think that school vouchers are more problematic than housing vouchers for several reasons:

First, government must define which schools are acceptable recipient of vouchers. In the short run it is fairly clear, it is far less so if we have vouchers in place for twenty years and schooling evolves. What about schools that teach black supremacy? Radical Islam? Creationism? Remember how controversial a few supposedly obscene NEA grants were? Not all those grants went directly to the artists either. What if an educational program involves home schooling plus ten hours of class time a week? Would that qualify for a voucher? Defining "suitable housing" does not involve a problem of nearly this magnitude.

Second, school vouchers could become the new middle class entitlement, as I mentioned in my New Zealand post earlier today. Imagine politicians upping the voucher amount and coverage to win votes each election cycle, just as they are now extending senior health coverage to prescription drugs. Again, we have not seen this with housing vouchers but "parents" are a much bigger and stronger constituency.

If I had my finger on the vouchers button, I would press it and allow experimentation at the state and local levels. So many American urban public schools are a disgrace. But few partial deregulations have worked better than promised. Most have created perverse incentives and occasioned considerable backlash, we all know that electricity "deregulation" has been a mixed bag at best, although the idea in principle makes sense.

If we are going to move forward with vouchers, I would like to know what the plan will look like, once it gets through the political meatgrinder. I don't know any voucher proponent who has done this.

How rich are you, globally?

If you earn $36,000 per year, you are in the top one percent of our planet, for a more comprehensive look at your relative status, check out the Global Rich List, don't use commas when you type in your yearly income. Their stated goal is to encourage charity and make us feel happy about how rich we are, in reality I think they are trying to make us feel guilty about how rich we are. They don't mention the policies and cultural attitudes that created this wealth.

The reference is from the blog of John M Scalzi.

Addendum: Donald Sensing tells us much more about the genesis and meaning of the list.

Kiwi watch: Can New Zealand fly again?

Read this interview with Roger Douglass, former New Zealand finance minister and the initiator of New Zealand's market reforms, which now have stalled for a decade.

Douglass tells us: "Government spending on welfare, retirement income, health and education has now reached $8,000 per New Zealander and $24,000 per household per year [that is Kiwi dollars, take 55 American cents as a ballpark figure for the time period in question]". At the same time the quality of these services has not been rising. Douglass proposes tax credits for these services instead, combined with market provision on the supply side.

Unlike with vouchers (see Alex's previous post on vouchers), the state would not have to define what constitutes an acceptable education or social service. This is a significant advantage of Douglass's notion of tax credit. On the other hand, the reform institutes the equivalent of a negative income tax or guaranteed annual income. A welfare payment that is automatic and easy to collect has bad incentive effects and runs the risk of becoming a new middle class entitlement, increased before every election.

Douglass describes "believability" as the biggest obstacle to reform. Given that a large change would be in the offing, most New Zealanders simply would not believe that they would receive equal or greater quality services for the same or lower net price.

"Blame Sarbanes-Oxley"

Peter Wallison, in today's Wall Street Journal (registration required, and yes you have to pay), serves up a biting critique of Sarbanes-Oxley, the recent legislation aimed at limiting conflicts of interest within corporations.

Here is a key passage:

...this was a wholesale change in the governance of American corporations, putting significantly more authority into the hands of independent directors and correspondingly reducing the power of corporate managements...it may have had unintended consequences - a reluctance of managements to take the risks and make the investments that had previously brought the economy roaring back from periods of stagnation or recession...The independent directors of a company are part-timers...Unfamiliarity in turn breeds caution and conservatism...They [directors] have little incentive to take risk and multiple reasons to avoid it.

There is not much more to the Op-Ed than that, no real facts, but this is an important point. Passing Sarbanes-Oxley was a kneejerk reaction from a Congress that felt the need to do something, anything, about corporate scandals. The Senate voted for it 99-0 (only a few negative votes in the House), never a good sign, unanimous votes often mean that an angry and uninformed public opinion rules the day. Time will tell what costs we will pay for this mistake.

Here is a small bit on implementation costs, but keep in mind they are secondary to the question of how investment gets distorted. I realize that corporate insiders are not the ones to trust here, but they don't like the law either.

Let's accept the fact that corporate governance isn't always fair, and opt for the system that does the best job of delivering the goods.

Addendum: Here is a direct link.

Make your kids taller

Virginia Postrel, in defense of the new FDA-approved drug that can make your kids taller.

Russian rebound

David Warsh offers a good, balanced piece, with good links, on Russia's recent economic performance, seven percent growth last year, a bright spot in Europe. A third of Muscovites earn a normal European wage.

I visited Moscow last month, it seemed poorer to me than Mexico City. Even more worrisome, there was a noticeable apathy about politics, only the Mafias seem to care. My wife is Russian, so I had good chances to meet and talk with other Russians, a select group no doubt, but even they had little passion to work for political improvement.

Stay tuned. And don't ask about the provinces.

Sowell and Schwarzenegger

Thomas Sowell endorses Arnie for governor, read his analysis, "I will vote for Arnold and hope for the best."

When is word of mouth important?

I have found some data on the relative importance of word of mouth for various purchases and choices. The first number in each category is what percent of respondents say they rely on other people, as one of the three best sources of information in a given area. The second number is the percent relying primarily on advertising:

Restaurants: 83, 35 (word of mouth is huge, by the way check out my ethnic dining guide)

Places to visit: 71, 33

Prescription drugs to try: 71, 21 (the prevalence of word of mouth here surprised me, do men really boast to other men about the effectiveness of Viagra? Or do women spread the word?)

Movies to see: 61, 67 (this time I am surprised that advertising is so effective, I guess that is why they spend $30 million marketing the average Hollywood movie)

Videos to rent or buy: 59, 45

Retirement planning: 58, 9

Clothes to buy: 50, 59

Finding a new job: 47, 54 (I am surprised that ads are so potent here)

Computer equipment: 40, 18

Web sites to visit: 37, 12

From the new book The Influentials, by Ed Keller and Jon Berry. The book is about the ten percent of the American population that (supposedly) tells the other ninety percent what to do, I assume that bloggers fall into the former category. The material is a bit fluffy, still unlike many marketing books it does have useful facts and figures. By the way, we are told that word of mouth is important for books too, although there is no single simple figure to cite.

Education Vouchers: The Lessons from Housing

Tyler is concerned that a voucher system for education might end up looking like our health care market – "a crazy-quilt mix of bad incentives, high costs, and increasing levels of intervention." But our health care system is not a voucher system - much more relevant is the existing voucher system for housing. Public housing has been a disaster in this country, low quality, dangerous and expensive (to the taxpayer). The Section 8 voucher and similar certificate programs have been far superior on all measures. What would you rather have – an apartment in a public housing project, costing the taxpayer $1000 a month, or a voucher worth $500 a month that you could spend on private housing?

The economic studies on the superiority of vouchers are unanimous. Here is Ed Olsen, one of the country's leading researchers:

Five major studies have estimated both the cost per unit and the mean market rent of units provided by housing certificates and vouchers and important production programs, namely Public Housing, Section 236, and Section 8 New Construction.1 These studies are based on data from a wide variety of housing markets and for projects built in many different years. Three were multi-million dollar studies conducted for HUD by respected research firms during the Nixon, Ford, Carter, and Reagan administrations. They are unanimous in finding that housing certificates and vouchers provide equally desirable housing at a much lower total cost than any project-based assistance that has been studied, even though all of these studies are biased in favor of project-based assistance to some extent by the omission of certain indirect costs.

As with housing, the market for education would be very competitive so we would not see price rises due to monopoly problems (as Tyler fears might be the case). There has been a big debate about whether private schools result in better outcomes that public schools. Put aside this debate and focus on what is undeniable - private schools have achieved at least as good outcomes as have public schools but at about half the cost (similar to the cost savings of vouchers over public housing). Thus we are starving the most productive sector of the educational market and throwing money at the least productive sector. Prices might rise in a voucher market but only as a rational response to the lower price of quality in private schools.

Step Gingerly

I saw my first one today - a Segway, ridden by a student! It went by me quite fast. Will they become the next cool item on spread-out suburban campuses? Maybe, but I predict students will still be late for class.

A response to Charles Murray

An article in today's Washington Post cites recent research on the heritability of IQ. Here is the bottom line:

"Genes do explain the vast majority of IQ differences among children in wealthier families...But environmental factors - not genetic deficits - explain IQ differences among poor minorities." The IQ heritability quotient is 0.72 for well-to-do families, but only 0.10 for poor families. The key data involves 623 pairs of twins born to poor black mothers. It seems that genes and environment interact to a greater degree than had previously been thought, perhaps good genes help you only significantly only when you have a certain minimum level of educational opportunity.

The piece will be out in the November issue of Psychological Science, here is the home page of the author, Eric Turkheimer.

Virginia Postrel

www.aldaily.com carries a review of Virginia Postrel's new book The Substance of Style, on how ours is an age obsessed with beauty and style. Virginia, of course, has one of the best-known blogs, in addition to being a periodic columnist for the New York Times, I would describe her views as "light-handed libertarian." I will post a review of the book in due time.

What will a voucher buy?

I have often wondered what an educational voucher will buy. How large need vouchers be to give students access to decent education? A recent Cato study, by David Salisbury, attempts to answer this question.

Here is part of the Executive Summary:

"Government figures indicate that the average private elementary school tuition in the United States is less than $3,500 and the average private secondary school tuition is $6,052. Therefore, a voucher amount of $5,000 would give students access to most private schools. Since average per pupil spending for public schools is now $8,830, most states could offer a voucher amount even greater than $5,000 and still realize substantial savings. A survey of private schools in New Orleans; Houston; Denver; Charleston, S.C.; Washington, D.C.; and Philadelphia shows that there are many options available to families with $5,000 to spend on a child's education. Even more options would be available if all parents were armed with a voucher or tax credit of that amount."

Salisbury admits that the cost figures do not include all capital outlays or pension liabilities. On the other hand, vouchers could introduce more competition, lowering costs.

I worry about how vouchers themselves will affect prices and costs. Private schools for poor urban students are cheap, in part, because the school knows the parents cannot afford much more. If the first $5000 is free, the price could go up considerably. In addition, if the schools can somehow coordinate on yet higher prices, there will be political pressures to raise the voucher amount.

Mixed public-private systems are not always cheaper than more public systems, in part because private firms are often skilled in extracting resources from the public sector. The American health care system, for instance, has considerably higher administrative costs than does the "single-payer" Canadian system, read here for a recent comparison. I don't favor national health insurance by any means, but these figures should give pause to voucher advocates.

The research of Harvard professor Caroline Hoxby suggests that increased school competition brings increased school quality. But her work does not clear up the most difficult questions about vouchers. If you imagine the system in place, on a large scale, for lengthy periods of time, and subject to pressures for rent-seeking and regulation, what would it look like? Would it truly serve parent demands for good education, or would it look more like the American system of health care, a crazy-quilt mix of bad incentives, high costs, and increasing levels of intervention?

Game theory in popular culture

This delightful site lists and describes the uses of game theory in film, television, music and other areas of popular culture. The entry for Dr. Strangelove, for instance, reads as follows:

Kubrick's cold war dark comedy. One five-minute scene explains credible commitment, highlighting the importance of clarity, irreversibility, and public knowledge.

Maybe you already knew that one, but check out the takes on House of Games, Princess Bride, and War Games, all underrated movies, chock full of game theory. See also the site's treatment of TV shows, the links on music and books are skimpier and less convincing. The book section could be much more complete, the music section is doomed to be short, at least they could have mentioned John Cage's idea for "aleatory" (random) composition. We do learn that the Greek composer Xenakis once wrote an intentionally game-theoretic piece for two competing orchestras.

Galbraith II

James K. Galbraith (son of John K.) has a strange review of William Greider's The Soul of Capitalism in today's Washington Post. He doesn't say much about Greider's book but does offer the following:

More deeply, we may question the book's premise. Has the United States really solved the scarcity problem? That may have been more true five decades ago when a tract called The Affluent Society first made the case. Then, the United States was the world's dominant industrial power. Today, our material abundance rests on fragile strands: our military reach, the willingness of the world to export cheap goods to us and to lend us the means to pay for them.

In the past 50 years real GDP per-capita has almost tripled (and this doesn't account for improvements in the quality of many goods and services) and yet it may have been more true 50 years ago that the scarcity problem was solved?!! This is taking family fealty too far. The explanations for our fragile abundance are not too convincing either. Put aside the fact that the US is less dependent on trade than most other industrial nations. More interesting is that Galbraith thinks that the hundreds of billions of dollars we are spending on military adventures in Iraq, Afghanistan and elsewhere are a net positive for the economy. Why? Later he suggests that the Iraq war is about a "tenacious drive for oil." Where then is the oil dividend? Has Galbraith filled up at the pump recently? In truth, Empire rarely pays and whatever the political case for war it will never turn a profit.

For the fanatic

A familiar and useful source on American politics is back, the Almanac of American Politics, edited by Michael Barone, see the book's web page, you get 1800 pages for your $60. It analyzes every American political district exhaustively, and has been accused of having a conservative political bias. The Chicago Tribune tells us that Barone is to politics as Bill James is to baseball. Recommended for researchers and political junkies.

The Cost of a Sibling

Having siblings costs you money over the course of a lifetime, just ask Ohio State sociologist Lisa Keister.

How much? Holding a variety of relevant factors constant, individuals with one sibling have an average net worth of $62,000. If you have another sibling, it drops to $49,000, then to $40,000, then to $24,000. Seven or more siblings, you have on average net worth of $6,000. Keister suggests, consistent with the research of Gary Becker, that parents invest less in each child when they have more children.

Keister herself has three brothers. See this summary of the research.

I am surprised that the effect from one child to two, or from two to three, is so small. And how much stems from a change in parental investments? Some fraction of the parents with more kids did not expect the pregnancies but rather made planning mistakes. If you think that planning/execution capabilities are carried in the genes, you would expect the offspring to be worth less for genetic reasons. So the Becker effect may be weak rather than strong, at least for the first few children.

Keister's research also argues that much of the black-white wealth gap is due to the lesser willingness of African-Americans to put their money into stocks and mutual funds. It has long been a puzzle to economists (see here for one account) why individuals do not invest more money in the stock market, given that American stocks have outperformed bonds by significant margins over all previous twenty to thirty time horizons. Keister's research both deepens the puzzle and hints at the relevance of psychology and context for understanding investment decisions.

Our shrinking arms industry?

The Washington Post reports on our shrinking arms industry:

A few numbers tell the story...the aerospace-defense industry workforce shriveled from 1.3 million in 1989 to 689,000 at the end of 2002, roughly the number employed in 1953...Between 2002 and 2008 nearly half of the industry's workforce...will be eligible for retirement...universities are churning out few replacements.

Overall military spending is up, but only for 2003 has the weapons procurement allocation gone up. Here is a piece on the beginnings of the downward trajectory in some categories of spending.

But I don't buy the Post's account as stated. Procurement more generally is up across the agencies and stable within DOD, see this recent GAO report. In fact it appears that "A few numbers" do not tell the story. For the DOD, information technology accounts for 46 percent of the procurement total over the last five years. We are spending to make weapons smarter, not spending less on weapons. Not to mention that ship spending has risen 128 percent, again over the last five years. Aircraft spending is up 42 percent.

In part we simply like the weapons we have, and thus we are building more of them, or upgrading their quality. And since we are investing in information technology, it is hard to argue we are mortgaging our future. If we are underspending in any areas, look toward Iraqi reconstruction and intelligence, two areas where our failures have been obvious.