Marginal Revolution

What if the candidates pandered to economists?

Do read Greg Mankiw on this topic.  The list of policies favored by economists includes support free trade, oppose farm subsidies, leave oil companies and speculators alone, tax the use of energy [does he mean carbon-based energy?], raise the retirement age, invite more skilled immigrants, liberalize drug policy, and raise funds for economic research.

I don't disagree that there is a consensus on retirement age but it was news to me to read that.  My informal impression had been that many economists on the left felt this would place undue burdens on people with physically demanding jobs.  And personally I would sooner subsidize hard science than economics; I don't think we've earned our keep lately!

Or maybe Greg is just saying that it would win economists' votes.  Like Alex, I wonder if economists vote on a more rational basis than do other people.  If I meet a French economist, I suppose that his views are more shaped by his being a Frenchman than by his being an economist.  I'd like to see a poll of Canadian economists on health care reform.

Sebastian Flyte rules

Re XII  ‘there is a groupie for every male endeavour’

THIS IS SO MONEY. It is one of the great triumphs of modern capitalism: let a thousand status hierarchies bloom! Unlike in hunter gatherer days, there isn’t one status hierarchy to climb and that’s that, there are endless hierarchies to climb, endless things to specialise in. Roissy’s good buddy, the economist Tyler Cowen, has been pushing this idea for a while now, and the effect this has on human happiness and potential is mind-boggling. Guys can rise to the top of whatever work/hobby hierarchies there are, or at least portray to women that yes, he is in THE PROCESS of climbing to the top. There are obvious caveats: females aren’t impressed by computer game related status, even though leading 30 guys from around the globe in World of Warcraft to quickly and efficiently take down an enemy is actually an impressive accomplishment - I think this will change in the future. But for now, I’ll bet the college ultimate frisbee champ gets some pretty good action.

Here is Sebastian's blog.

Markets which only look like an infinite regress

The risk that a claim won’t be paid—a potential downside that every buyer of insurance faces—was an uninsured exposure until recently, according to the developers of a new policy to provide coverage so that risk managers can contest such rejections...

The new coverage, available to businesses of all sizes, will pay up to $250,000 in legal expenses associated with contesting the denial of an insurance claim under a commercial policy.

Here is the economic rationale:      

Mr. Surdyk said that during the course of his work with insureds, he found that while many clients had legitimate disputes with their insurers, the underlying claims being denied were small-dollar amounts relative to the legal costs of coverage disputes.  “It wasn’t worth it for a client to hire us to file a lawsuit against an insurance company over $50,000—and insurance companies know that,” he said.

Here is the full story, and thanks to Travis for the pointer.

Questions which are rarely asked

Who has stolen the most picture with the smallest part?

Grant McCracken offers up some nominations:

Holly Hunter in Time Code
Steve Zahn in Out of Sight
Selma Blair in Cruel Intentions
Siobhan Fallon in Men in Black

Jason Kottke points us to this list.  Can I cite Andre the Giant in The Princess Bride?

Seth Roberts writes to me

That's a good way to put it: quality of walking opportunities.  Reduced or enhanced because I don't read the language?  I'm not sure.

I say enhanced.  More generally, I see Paris and Buenos Aires as the two cities with the highest quality of walking opportunities.  Not many cities in Asia do well on this score, mostly because of congestion and pollution.  Los Angeles is an underrated walking city and Sao Paulo used to be; maybe it is too dangerous now.

China Fact of the Day

China is the world's largest importer of chicken feet and the United States is the world's largest exporter.  Tyson Foods alone send some 2.8 billion chicken feet to China every year.  The chicken feet are sold at Chinese Wal-Marts (among other places) which in China are upscale and appreciated for their high quality American goods.

All Tyler, All the Time

The tyler-city blog is a computer generated blog of gibberish meant solely to generate links (can readers explain the economics?).  It is drawn from all over, including quite a bit from Marginal Revolution.  It's gibberish but as Tyler might say even a million monkeys occasionally generate some very good sentences.  Here are a few, I've provide links but please don't encourage them too much.

I thought both were tyler cogent, for quite complex topics.

The Ton Ball That Keeps The Taipei tyler Tolerant Is Pretty

and it is good to know that "besides his many talents, Tyler was also a really nice kid."  But my favorite posting is this one:

Small steps toward a much better tyler.

The Liberal Hour

The authors are G. Calvin Mackenzie and Robert Weisbrot and the subtitle is Washington and the Politics of Change in the 1960s.  Everyone interested in social change, or for that matter American political history, should read this book.  It doesn't unearth new material but it is a good summary of what is known.  The jacket flap sums it up:

For a brief period in the 1960s, more progressive legislation was passed in Congress than in almost any other era in American history.  Demands that had lingered for decades on the political agenda finally entered the realm of possibility.  Reform has seldom come with such speed, such sweep, and such consequence.  What drove this political sea change?...[the authors] argue that the primary force behind it was not the counterculture, but those in the traditional seats of power.

If you study the history portrayed in this book, you are more likely to believe that an Obama victory would not bring radical change to American economic policy.  It's hard to find the comparable "shock troops" in Washington right now.

"Customer only" bathrooms

Ilan, a loyal MR reader, asks when a restaurant decides to make its bathrooms "customer only."  I see a few factors:

1. Fear of drug use or illegal drug dealings in the bathroom; the importance of this factor seems to have declined over time.

2. The belief that some people will buy a drink just for bathroom rights.  We did this in Brooklyn on Saturday and it was worth it.

3. The desire that only paying customers shape the ambience of a restaurant; this is important in areas with gangs.

On the other side of the equation is fear of Jack Henry Abbott, the realization that any restriction is not fully enforceable, the desire to cultivate good will among potential customers, and giving the visitors a chance to look at the food and atmosphere. 

Overall I've found that restaurant restrooms are more available to non-customers than ever before and I attribute this to the aging of America and the greater likelihood of a sharply declining marginal cost curve.  In other words, at least until this year raw materials expenses weren't so important so the profit value of an extra customer was pretty high and restaurants would do a lot to cultivate good will.  In general rising commodity prices mean decreasing margins (retail prices don't rise by full offset) and thus adjustment on other margins, such as portion size and service quality.  The bathroom isn't as clean as it used to be either.

Supply or demand?

Prices are here and the pointer is from Elizabeth Pisani.  Comments are closed!

Stuffed Shark review -- the link

Sorry for the mix-up, for my review here is the missing link, so to speak!  The book was excellent.

How can a stuffed shark be worth $12 million?

It was a bargain, I say.  Here is my review of Don Thompson's excellent The $12 Million Stuffed Shark: The Curious Economics of Contemporary Art.  Here is one excerpt from my review:

Should we think such purchases are silly or noble? Many people recoil from the contemporary art market as the home of pretension and human foible, but as expensive pursuits go, the art market is a relatively beneficial one. The dead shark cost $12 million to buy but, of course, it didn't cost nearly that much to make. So the production process isn't eating up too many societal resources or causing too much damage to the environment. For the most part, it's money passing back and forth from one set of hands to another, like a game — and, yes, the game is fun for those who have the money to play it. Don't laugh, but we do in fact need some means of determining which of the rich people are the cool ones, and the art market surely serves that end.

Geo-engineering to cure global warming?

Robin Hanson summarizes one case for it.  I don't know much about the technologies but my worries are mainly political.  Won't the Russians benefit greatly from a warming world, both because they are a bit cold and because they will access a warmer Arctic?  Would the UN Security Council approve climate engineering?  Probably not.  If the United States did it on its own, could that be perceived as an act of war?  If geo-engineering is cheap (which is part of its very promise), and unilateral action is acceptable, don't other countries also get to take their shot at influencing the environment and moving us toward an optimal climate?  What does the resulting equilibrium look like?  Who moves last?  How would we feel if someone changed the U.S. climate to make many parts of the country colder?

Should the driving rules favor cars or bikers?

Not everyone likes DC drivers and more here, both from Megan.  I am more sympathetic to the position of cars and their drivers (NB: I don't ride a bike.)  I see two major arguments:

1. Riding a bike is dangerous no matter how considerate the drivers, at least in the car-intensive cities of the United States (maybe not in Amsterdam).  Furthermore accidents and potential accidents impose costs on both parties and more generally Coasian externalities are symmetric.  The first best equilibrium involves less mutual contact and the cheapest way to bring that about is probably to discourage biking.  (After all, they're the ones who can be scared off with risk of death and dismemberment.)  That means road rules which discriminate against the interests of bikers.

2. If a bike has to stop and wait ten seconds for a car, that biker loses ten seconds of travel time.  If a car has to stop and wait ten seconds for a bike, the driver loses ten seconds of travel time.  The expected loss in distance traveled is much greater for the car, especially in areas where cars are going fast (i.e., the disputed areas when safety is a concern).  Furthermore the cars are more likely inhabited by people with a higher value for their time, at least on average if not for every biking blogger. 

The case for favoring the bikes is that taxing the privileges of cars will lead to truly safer behavior through greater driver caution.  Maybe.

Will chimes in, Arnold too.  Arnold is unhappy.

Vroom!!!

Assorted links

1. Via Bookslut, check out the Walter Benjamin book cover (scroll down a tiny bit).

2. Are CD boxed sets disappearing?

3. Price discrimination

4. New libertarian and right-wing blog on culture, YeahRight.

5. The carbon tax in our future, details revealed.

Food bleg

Is there anywhere good to eat right off the road between Phoenix and Sedona?  I won't be there long, it really must be along the way.  And it must be tasty.

China fact of the day

There are already more Chinese living in Nigeria than there were Britons during the height of the empire.

Here is the link, which includes more.

Competition for my ethnic dining guide

Yet another [new iPhone program], Urbanspoon, is “a cross between a magic eight ball and a slot machine:" you shake the phone, and it randomly displays the name of a good restaurant nearby, using the iPhone’s G.P.S. and motion sensor.

Here is a longer review of the new iPhone.

A Girl Named Florida

I've been reading Leonard Mlodinow's The Drunkard's Walk: How Randomness Rules our Lives.  The book covers the Monty Hall problem, Bayes's Theorem, availability bias, the illusion of control and so forth.  If these are unfamiliar, look no further for an entertaining account.

On the other hand, I can't say that I learned much I didn't already know.  Nevertheless, I still enjoyed reading the book - it's well written and filled with interesting nuggets (Did you know that the great mathematician Paul Erdos refused to believe that you should switch doors?).  If you teach probability theory or intro stats you will find lots of good examples to brighten up your lectures. 

One problem did intrigue me.  Suppose that a family has two children.  What is the probability that both are girls?  Ok, easy.  Probability of a girl is one half, probabilities are independent thus probability of two girls is 1/2*1/2=1/4.

Now what is the probability of having two girls if at least one of the children is a girl?  A little bit harder.  Temptation is to say that if one is a girl the probability of the other being a girl is 1/2 so the answer is 1/2.  That's wrong because you are not told which of the two children is a girl and that makes a difference.  Better approach is to note that without any additional information there are four possibilities of equal likelihood for the sex of two children (B,B), (G,B), (B,G), (G,G).  If we know that at least one is a girl we can remove (B,B) so three equally likely possibilities, (G,B), (B,G), (G,G), remain and of these 1 has two girls so the answer is 1/3.

Ok, now here is the stumper.  What is the probability of a family having two girls if one of the children is a girl named Florida?

At first it seems impossible that knowing the name should make a difference.  Surely, the answer is 1/3 just as before?  After all, every child has a name.  But knowing the name does make a difference.  Here's a hint, Florida is a rare name.

I don't know how to title this post

Via Mark Thoma, Joseph Stiglitz makes lots of claims.  Here is one of them:

For a quarter-century, there has been a contest among developing countries, and the losers are clear: countries that pursued neo-liberal policies not only lost the growth sweepstakes; when they did grow, the benefits accrued disproportionately to those at the top.

He does not name the countries.  Is Chile supposed to be a loser?  Or does he have the more corrupt Latin American states in mind?  How about Ireland or for that matter the economic policies of Mrs. Thatcher?  Was it a mistake for so many states to drop communism?  How many African nations -- the real losers -- have adopted neo-liberal policies?  Do Singapore and Hong Kong count?

Presumably China counts as a winner and of course it has a relatively strong state.  Oddly some of the communists saw capitalism as building the economic superstructure for socialism and then communism.  In reality the nominally socialist and communist government of China built the public sector superstructure to support a later capitalism.

Here's another claim Stiglitz makes:

One senior Chinese official was quoted as saying that the problem was that the US government should have done more to help low-income Americans with their housing. I agree.

In my view, while the private sector is largely to blame for what happened, the U.S. government has, over the years, done far too much to encourage the housing sector.  I guess Stiglitz thinks it should have done even more.

I find the content of his essay difficult to understand, on a number of levels.

Markets in *everything*

Both the action and the substance, in fact:

The remote town of Musiri in the Tamil Nadu state has hit upon a unique idea to teach its residents proper hygiene: pay them money each time they use the toilet.

Users can make up to $0.14 a month to relieve themselves in a specially constructed toilet. Not a princely sum, but it's extra cash flow that low-income residents can make just for answering nature's call.

The government-backed program serves two purpose: It encourages people to discard age-old practices of urinating and defecating in the open, leading to diseases. And the waste product goes into research to test their effectiveness as fertilizers.

Here is the full story and thanks to Marco for the pointer.  One point is that both the income and substitution effects predict the villagers will put on weight.

Sentences to ponder

If one believes Grogger’s effects are causal, then investing in the ability to not “sound black” looks to have a huge return — roughly of the same magnitude as getting one more year of schooling.

Here is much more, by Steve Levitt, all of interest.  Two other points: "sounding southern" is almost as bad for your wages as is sounding black and blacks who "sound white" earn the same wages as whites, of course adjusting for education, work experience, and so on.

Should you buy a used car to be carbon-friendly?

Megan McArdle shows at least four hands:

The supply of used cars is pretty well fixed--they have to be in pretty horrible condition before they're junked rather than resold for a pittance. So the correct calculation is not how much you will emit by driving one, but how much you will emit compared to the person who would have bought the car.

But then, that person would probably have bought another car. If they would have bought a Prius, you've simply swapped places. If they would have bought another car, you've increased demand for a less fuel-efficient option.

On the third hand, as far as I know most industry analysts still believe that Toyota breaks even, or loses money, on the Prius, and so the normal price signal sent by buying a car--"increase supply of that model"--may not operate. If the person who would have bought a used Corolla instead buys a new Corolla--or someone far down the purchase chain does--you've probably done more for the environment than you would by buying a Prius, because you've actually increased the supply of fuel-efficient cars.

In fact, it seems to me that the best option is to buy a used SUV and drive it very little. But I have a feeling that this would not give a potential Prius owner everything they are looking for in a car.

What is mystery ingredient X?

Arnold Kling writes:

I don't think we have a recipe that says, "Take a child of two non-college educated parents, add primary education ingredient X, bake, and out comes a college-capable high school graduate." The mystery ingredient X has yet to be discovered.

Some Asian cultures or immigrant groups come close to finding this ingredient.  It involves total parental commitment to the educational ideal and a willingness to enforce the notion that a non-educated child is shaming the entire family, not just the child.  That said, I'm not sure that college education per se is the key here (and probably Arnold would agree; read his phrasing carefully).  If you can bake up some low rates of time preference, you're coming pretty close to the real mystery ingredient. 

Assorted links

1. Be skeptical of medians.

2. The pattern recognition theory of humor, via GeekPress.com.

3. AmateurEconomist, a new on-line magazine.

4. Victor Niederhoffer on worry; see the comments for a partial summary of my talk.

5. A superb post on charity, from Freakonomics blog.

Onion Futures

There are none.

The bulbous root is the only commodity for which futures trading is banned. Back in 1958, onion growers convinced themselves that futures traders (and not the new farms sprouting up in Wisconsin) were responsible for falling onion prices, so they lobbied an up-and-coming Michigan Congressman named Gerald Ford to push through a law banning all futures trading in onions. The law still stands.

And yet even with no traders to blame, the volatility in onion prices makes the swings in oil and corn look tame, reinforcing academics' belief that futures trading diminishes extreme price swings.

Amazing, onion farmers and Congress panic in 1958 with the Senate Committee arguing that

...speculative activity in the futures markets causes such severe and unwarranted fluctuations in the price of cash onions…[that a] complete prohibition of onion futures trading [is necessary] in order to assure the orderly flow of onions in interstate commerce...

and for going on fifty years onion futures are banned.  Makes me want to cry.

More here on the banning of futures markets .  (A report from 1956 indicates that the fluctuations at that time were due to an attempted swindle.)

Hat tip to Newmark's Door

The young and super-wealthy go to therapy

Not long ago, a young titan of New York real estate sat in his psychotherapist’s office. An art collector, he was thinking of bidding about $8 million for a painting, and something about the deal made him uneasy.

The therapist thought the patient was merely trying to impress him. This happened whenever the man felt unsure of himself, which was most of the time.

But instead of trying to explore the patient’s anxiety, the therapist encouraged him to buy the artwork: “This is what you want; you should go get it.”

The therapy fees can range from $400 to $600 an hour and the therapists are often too impressed by their patients.  The whole article is interesting.

Statement of 300 economists supporting John McCain

I don't always have something to say, sometimes it is just a link and a list of names.  Do you think maybe they had the movie in mind?

Evidence of Absence

Here is China's new 10 Yuan banknote.  Notice what is missing?  It's not on the back either. 

Hat tip to Metafilter.

Robin Hanson and Will Wilkinson

On BloggingHeads.TV, self-recommending.

Stoking the fires

Ken Rogoff writes:

I am puzzled that so many economic pundits seem to think that the solution is for all governments, rich and poor, to pass out even more cheques and subsidies so as to keep the boom going. Keynesian stimulus policies might help ease the pain a bit for individual countries acting in isolation. But if every country tries to stimulate consumption at the same time, it won’t work. A general rise in global demand will simply spill over into higher commodity prices, with little helpful effect on consumption. Isn’t this obvious? Yes, there is still a financial crisis in the US, but stoking inflation is an incredibly unfair and inefficient way to deal with it.

In other words, if the initial shocks are real, boosting aggregate demand won't have much of a positive effect plus it will worsen inflation.   Maybe it's a good thing the stimulus package is too small to be very "effective."  Mark Thoma adds comment.  I am, however, puzzled by Rogoff's distinction between a single-country stimulus package and the global combination of such packages.  If nominal stickiness is a binding problem in enough sectors, a large enough stimulus can work no matter how many countries do it.  If nominal stickiness is not a major binding problem (and I suspect this is the relevant case), then even a single-country stimulus plan will be ineffective.

Bargaining with your roommates

Joseph, a loyal MR reader, asks:

I recently leased my first apartment...with a friend who just graduated from college with me. It's a nice apartment, and spacious, but it has one bedroom that is larger and nicer (better views, bigger closet, more windows) than the other.

We're looking for the most equitable way to allot the good bedroom without resorting to cash transfers (too crass). We've come up with a few strategies so far:

1. Bid on the good room with chores (meaning the person who is willing to do the most domestic chores to compensate wins the auction and the room)
2. Best out of seven rocks-papers-scissors
2. Series of challenges submitted by close friends.

#1 seems like the best option we've come up with so far, but I'm afraid of winner's curse. I don't want a resentful roommate.

Do you think there's a better solution?

Adam, another reader, asks, in a separate email, how friendly roommates should allocate the rights to joint furniture purchases.

I suggest the crass cash transfers!!

Free Riding

Taking a cue from the publisher, Amazon.com reports:

[Richard] Tuck presents a bold challenge to the skeptical account of social cooperation so widely held today.  If accepted, his argument may over time encourage more public-spirited behavior.

Richard Tuck, of course, is a Professor of Government and Harvard and a historian of early modern political thought.  This book has many complicated philosophic arguments, here are bites of three of them:

1. If your cooperative behavior adds positively to a Sorites problem ("how many stones make a pile?"), it can be rational for a self-interested person to see good reason to contribute.

2. Under a properly sophisticated theory of causality (with or without Sorites), you might see your contribution as helping to cause a good end to come about, even if your contribution is not "necessary" for the good end to occur.  The phrase "pre-emptive cooperation" is used.

3. Rule rather than act utilitarianism often has (rational) force on people's behavior.

Since there is more cooperation than standard models would predict, we can't dismiss these arguments, which by the way are used to claim that standard economic reasoning is historically contingent.  By the end of the book we are told that perfect competition may operate as oligopoly and that -- don't be surprised -- more government may be both necessary and desirable.   

Think of this as a kind of verbal game theory, written for people who won't read technical game theory or formulate a precise solution concept.  I don't think this looser approach is always worse, though the exposition could have been more to the point.

Here is a podcast for the book.  Here are the first twenty pages.

Squib

Franny's on Flatbush Avenue was possibly the best pizza I've had in the U.S., Gala Manor in Flushing was definitely the best dim sum I've eaten in this country, the projected fall in Wall-E box office is 61 percent (July 4th is a tough weekend but ouch!), and wars of independence are easiest to justify when the population is still relatively small and the nation state is not yet built.  Call it investment.  Quasi-independence or full independence was inevitable so the real question is whether North America would be better off if Florida remained a Spanish colony and the Louisiana Purchase had never happened.  That said, American independence was probably very bad for native Americans and blacks and of course that rent transfer is part of what motivated independence.  I am preparing a lecture on The Merchant of Venice and, via Eduardo Pegurier, here is All the Water in the World.

Very excellent sentences

Control systems and pecuniary incentives erode morale by signaling to the agent that the principal is not worth impressing.

Here is an earlier draft of the paper, "Pride and Prejudice: The Human Side of Incentive Theory," by Tore Ellingsen and Magnus Johannesson; a better version is in the June 2008 American Economic Review.

By the way, in my mental pantheon, "Very excellent sentences" are stacked somewhere above "Very good sentences."

The Gridlock Economy

How many popular economics books offer a message which is (mostly) true, non-trivial, and understandable?  Michael Heller's The Gridlock Economy: How Too Much Ownership Wrecks Markets, Stops Innovation, and Costs Lives satisfies that troika.  The key message is that the "tragedy of the anti-commons" is often a bigger problem than the better-known tragedy of the commons.  The tragedy of the anti-commons arises when too many veto rights are exercised.  Here is one simple example:

Tarnation, a spunky documentary on growing up with a schizophrenic mother, originally cost $218 to make at home on the director's laptop.  It required an additional $230,000 for music clearances before it could be distributed.

Or try tracking down orphaned copyrights or proceeding without explicit permission.  Furthermore many new drugs are more costly to market, or end up not being marketed, because there are so many possible patent infringement issues.  By the way about half of the patents litigated to judgment are not upheld.  Too many interest groups have veto power over infrastructure development, such as wind power or a new oil refinery (my examples).  The U.S. allocates its spectrum far less efficiently than either Japan or South Korea.  Holdouts lower the rate of property redevelopment; I learned that The New York Times used eminent domain to build its new headquarters because otherwise assembling such a large parcel of land in midtown Manhattan was very difficult.  It all boils down to the story of too many tolls on the medieval Rhine.

Yes, the author does give full credit to Buchanan and Yoon for their work on the anti-commons.

Heller does not cover the deeper question of whether a society can respect minority rights to the desired degree without encountering too strong a problem of the anti-commons.  Most of us are for the right to appeal, for the right to a fair trial, for various courses of redress, for the right to sue, for basic rights of intellectual property, and so on.  Some set of interest groups has to support those regimes.  Can those interest groups be so empowered without the excesses outlined in this book?  Would we still want to abolish the anti-commons problems if it led to a more general weakening of minority rights?