Marginal Revolution

The Divorce Myth

I want to start my week guest blogging by talking about divorce. Betsey Stevenson and I had an op-ed in yesterday’s New York Times noting a very simple fact: those married in the 1990s have proved less likely to divorce than those wed in the 1980s, which were less likely to divorce than those wed in the 1970s. The Divorce Facts are that divorce is falling, and marriages are more stable.

What is surprising, is just how easily and how often the Divorce Facts lose out to the Divorce Myth. The Divorce Myth is that divorce is rising. When the latest divorce numbers came out last week, they once again confirm this quarter-century long decline in divorce, but the media (including the Times, Post, and the Inquirer) chose instead to write (incorrectly) about rising divorce. (In their defense, the data were presented in a way that invited misinterpretation, a subject that I shall return to in a future post.)

Why the persistence of the Divorce Myth?

1. Blame the public for underestimating divorce: Tyler has argued that Americans “underestimate the probability of divorce”, and so when the statistics show that divorce is quite common, they infer divorce must have risen.
2. Blame the public for overestimating divorce: Greg Mankiw thinks that this “seems be an example of what Bryan Caplan calls ‘the pessimistic bias’, a tendency to overestimate the severity of economic problems.”
3. Blame the press: Mankiw may be a bit unfair on Joe Citizen: the average person gets their news from the press, and in this case, the press reported falsehoods as facts.
4. Blame the politics: We argued that “Reporting on our families is a lot like reporting on the economy: statistical tales of woe provide the foundation for reform proposals. The only difference is that conservatives use these data to make the case for greater government intervention in the marriage market, while liberals use them to promote deregulation of marriage.”
5. Blame the professors: Academics are meant to provide the facts offsetting the political hacks. But we don’t. Economists have had too little respect for simple facts; publication glory lies with grand theories. Ideologically-motivated profs teaching family sociology or family law would rather reinforce the Myth than offset it.

Personally, I go for #4 causing #3, unchecked by #5, and would love to see research by Bryan testing #1 v. #2.  Your thoughts?

Justin Wolfers to Guest Blog!

Justin Wolfer's work on prediction markets, racial bias in the NBA, happiness, and divorce has been mentioned on this blog many times so we decided to cut out the middlemen, i.e. us, and let Justin do all the work.  The amazing thing is he said yes.  Tyler and I are delighted to have Justin guest blogging with us this week.

The aforementioned works are just a portion of Justin's output.  The media love his work on sports and betting but Justin's work with Oliver Blanchard on European unemployment, for example, has been influential in the profession (and come to think of it also made the papers).  Justin has also worked on business cycle theory and with Greg Mankiw on inflation expectations.

Justin is known for careful, thorough and compelling empirical work.  He often has what I think of as the last word on a subject as with his paper on the Coase theorem and divorce or his work with John Donohue on the death penalty.

An open secret and an open sin in economics is that many empirical studies are difficult to replicate, even when journals supposedly require authors to make their data publicly available.   Here is how you replicate a Wolfers paper:  You go to his web page you  download the data and often the code, you run it - and damn it you get exactly what is in the journal.  I have done this several times and every time I am shocked that this actually works.   (And before being accused of being a hypocrite let me acknowledge that I too have sinned but under Justin's example I am resolved to do better in the future.)

With all this in his favor I almost want to report to you that this guy may be a excellent economist but oh what a jerk.  Alas, Justin is modest to a fault, highly supportive of the work of others and great fun to talk with over a beer.  The worst thing I can say about him - and I feel I must say something bad if only to be credible - is that he really needs a haircut.  Welcome to MR, Justin!

Inequality and unhappiness

What I found was that economic inequality doesn’t frustrate Americans at all.  It is, rather, the perceived lack of economic opportunity that makes us unhappy.  To focus our policies on inequality, instead of opportunity, is to make a grave error—one that will worsen the very problem we seek to solve and make us generally unhappier to boot.

Here is the full article, interesting throughout.  This paragraph is right on the mark:

One of the many problems with the egalitarians’ line of reasoning is that it misinterprets the experimental evidence.  The two famous studies mentioned above don’t necessarily mean, as the egalitarians claim, that people would be happier in a world of total equality.  Rather, they suggest that in a world of inequality, people like having more than others and dislike having less—even to the point of neglecting their financial interests.  How people would react to a miraculously equal world is something that the studies don’t attempt to address.

And this:

But there is another, more fundamental, reason that the arguments linking economic inequality to unhappiness are mistaken.  If the egalitarians are right, then average happiness levels should be falling.  But they aren’t.  The GSS shows that in 1972, 30 percent of the population said that they were “very happy” with their lives; in 1982, 31 percent; in 1993, 32 percent; in 2004, 31 percent.  In other words, no significant change in reported happiness occurred—even as income inequality increased by nearly half.  Happiness levels have certainly shown some fluctuations over the last three decades, but income inequality explains none of them.

Thanks to Michael Cragg for the pointer.  You might also revisit my earlier post on mobility.

How to get students into the library

Students at 30 colleges can check out something besides books at their school libraries this fall: Starbucks.

I do not oppose this trend, which so far has been wildly successful, but it is a sign of just how far things have gone.

I knew sooner or later someone would write this paper

Yes Pigou taxes can possibly have counterintuitive results:

Judged by the principle of intertemporal Pareto optimality, insecure property rights and the greenhouse effect both imply overly rapid extraction of fossil carbon resources.  A gradual expansion of demand-reducing public policies -- such as increasing ad-valorem taxes on carbon consumption or increasing subsidies for replacement technologies -- may exacerbate the problem as it gives resource owners the incentive to avoid future price reductions by anticipating their sales.  Useful policies instead involve sequestration, afforestation, stabilization of property rights and emissions trading.  Among the public finance measures, constant unit carbon taxes and source taxes on capital income for resource owners stand out.

Here is the full paper, here are non-gated versions.

The point is this: carbon taxes drive down the net post-tax price which fossil fuel suppliers receive; in fact the resulting transfer of wealth from the Saudis to the U.S. is a common argument for such taxes.  But the lower net supply price is not in every way a blessing.

One possibility is that at the new and lower (supply) price, other (non-Pigou-taxing) countries will buy more fossil fuels, picking up some of the slack and counteracting the carbon taxes at the global level.  This effect is strongest for low marginal cost oil.  If Americans buy less oil but all the oil will end up sold in any case, demand simply has been redistributed rather than lowered.  Instead the key is to get that oil to stay in the ground.

Second, at a lower supply price the intertemporal Hotelling resource extraction problem is tricky rather than straightforward, again especially for low marginal cost oil.  Lower (supply) prices today also mean lower (supply) prices in the future, so, after a tax is imposed, the time path of extraction can easily tilt toward the present rather than away from it.

Note that the higher the (posted) oil price goes, the lower are extraction costs relative to price and the more likely these counterintuitive results become a potential problem.  In 2006 average extraction costs were only 15% of the average spot price.  Obviously if extraction costs are high the lower net supply price to the producer does keep the stuff in the ground.

Further counterintuitive results can arise if market players expect a Pigouvian tax to rise over time.  A (politically impractical) alternative is to make the tax very high today and lower it over time.  We are more likely to do the opposite.

The bottom line is this: paying countries to blow up their oil fields may be more effective than taxing the resource.  (TC: don't some people volunteer to do this work for free?)

Empirically, I still suspect that the "naive" first-order demand side effects predominate.  But if you want to know all the ins and outs of Pigou taxes, it's worth spending some time thinking through these problems.  Taxing intertemporal resource stocks doesn't always lead to simple, predictable results.

Assorted links

1. The Great Moderation

2. Funny yet tragic titles, of course I ordered the book

3. An interesting paper on prizes (the link is now printable)

How to lower your discount rate

Mark Broski, a loyal MR reader, asks:

If you woke up one morning and said to yourself, "You know what my problem is? My damn discount rate is too high."  What would you do, if anything, to lower it?

Maybe Mark should lower his discount rate later, not now, thus solving the problem right away. 

Alternatively, you can view lack of patience and lack of concern for his future self as conceptually distinct problems.  To cure lack of patience, develop routines for interrupting episodes of irresponsible present-oriented behavior.  Ring up each purchase at a separate store register, or write a journal entry before each cookie you eat.

When it comes to lack of concern for your future self, whoop de doo.  If you are going to ignore anyone else's interest, your future self is a good place to start.  This is only a problem if you attach special status to your future self, in which case maybe you are not ignoring its interests, at least not relative to your other moral omissions in life. 

If you need to be more altruistic more generally, precommit to developing personal ties to those you wish to help.  As for your future self, start adopting some old people's habits now, to build the tie between the 2007 you and the 2027 you.

Do you all have any other advice for Mark?

The Coldest Winter

When word of the North Korean invasion reached Washington, it was late Saturday evening and the American government, which did not then operate eighteen hours a day seven days a week, was scattered.  The president, a man with a great fondness for train travel, had dedicated a new airport...on Saturday and then flown home to Independence, Missouri.  Dean Acheson, the secretary of state, was on his farm in Maryland and the other key figures in the government were doing the most banal of weekend things.

...The moment Truman heard about the invasion, he began to prepare for his return to Washington.  Still, he was careful not to vary his schedule.  That Sunday morning he visited his brother Vivian's farm as originally planned.   

That is from the immediately gripping The Coldest Winter: America and the Korean War, by the late David Halberstam.  It's yet another splendid fall book, though I am still wondering why government leaders did not work harder back then.

Rehashed hash

When blogging I try to keep book rehash to a minimum.  But tonight I cannot resist making a point from Good and Plenty:

In the past most people didn't much like or listen to most of the music they bought, or in any case most of the value came from their very favorites.  A relatively small percentage of our music purchases accounted for most of our listening pleasure.  So if people can sample music in advance, and know in advance what they will like, music sales will plummet.  This will be a sign of market efficiency, not market failure.

Admittedly copyright issues are being superimposed on this scenario at the same time, so the net assessment of current music trends is complex.  But when there is uncertainty about consumer tastes, falling output can be a strong Pareto improvement.  (It's just like how having lots of dates is not necessarily the sign of a happy love life.)  Less music is being produced, but we're getting more of the stuff we want.

Does illegal file-sharing cut into CD sales?

Stan Liebowitz says yes, rebutting the well-known arguments of Koleman Strumpf, published in the Journal of Political Economy.  I would be happy to link to a response by Strumpf.  In the meantime, two notes: a) I suspect non-fair use CD burning is in any case the bigger issue, and b) significantly lower musical sales, and yes sales are falling, still can be welfare-improving.  The real consumption of music seems to be up.