Marginal Revolution

China fact of the day

It's not quite a fact, but here goes:

According to China Mobile, there were already 400,000 cracked iPhones using its cellular network by the end of 2007. That number, if accurate, is astonishing. It would mean that there are more unauthorized iPhones in China than there are authorized iPhones in Europe. It would account for the largest part of the so-called “missing” iPhones.

It's a fact if you believe China Mobile, which I do.

Claims my Russian wife won't even deign to laugh at

If you get up late in the morning on weekends, you must think sleep is very valuable.  And if sleep is very valuable, that means we should go to bed early.  Because if you go to bed early, you always have the option of sleeping later -- that is sleeping more -- and getting even more sleep than if you had gone to bed late.  (You can't just shift your sleep into any hours block you want, given the coordination issues.)  And if sleep is very valuable, the option to sleep more must be valuable as well.  Therefore it's time to go to bed.  Now.  Early.

No response was forthcoming.  The argument, of course, gets at whether "sleep" or "postponement" enters the utility function as the final good.  There are some economic papers on procrastination, but overall postponement, or for that matter its closely allied cousin "preemption," is an understudied topic in economics.

Don't burn it

Tom Stoppard weighs in on the burn it/don't burn it debate about Nabokov's unfinished work: "It’s perfectly straightforward: Nabokov wanted it burnt, so burn it."

That is from Bookslut, but Stoppard is wrong.  Dead people don't count in the social welfare function. (If they did, how many of them would prefer non-democratic or racist outcomes?  And would we count that?  We shoudn't and we don't.)

Don't destroy the output.  Nor is there an incentive problem.  If we release Nabokov's papers as a book, maybe the next Nabokov will burn the manuscript in the first place.  We're no worse off, compared to not releasing such manuscripts.  Kafka told Max Brod to burn his works, but we're all glad Brod didn't.  Think of the current generation as a player in the multiple selves game of the author (he could have burnt it himself long ago) and then the right answer is obvious.

Johannes Fedderke and the importance of good governance

File him in the category underappreciated economists.  Does good governance matter for growth?  Could there be a more important question for economists? The standard cross-sectional growth tests do not show much of a robust effect.  But Johannes, along with co-authors Robert Klitgaard and Kamil Akramov, has a 150-page paper showing that if you take all the relevant heterogeneities into account yes, Adam Smith and Doug North were right after all.

Or do you prefer simple regressions which meet the eyeball test?

Here is the full paper.  Here is Johannes's long paper on South African economic history.

What I've been reading

Descubre al Economista que llevas dentro.  That's the Spanish language translation of my Discover Your Inner Economist, due out in Spain February 19.

You can order copies through some of these sources.

The translation is very well done and accurate, though it is odd to read myself sounding like a Spaniard instead of a colloquial Mexican.  Whenever I go to Spain I am in fact shocked to discover that there is an entire European country in which the people speak Spanish.  And they speak it well.

If you want to come to my talk in Madrid next week, here is the link.

Simple theories of the business cycle

...during a period of pretty stagnant incomes, people have been ratcheting up consumption based on increased wealth derived from their homes. People weren't, however, actually selling their homes to get money and buy stuff. Instead, they borrowed. But with home values plummeting, now there's big trouble.

That is from Matt Yglesias.  If you're looking to apply "Austrian business cycle theory" to the current crisis, this point is a better place to start than by blaming Greenspan's admittedly over-loose monetary policy.  No one made homeowners treat rising asset values to be the same in value as accumulated monetary savings.  But many of them did.  And the mechanism may be this: in private terms people treat accumulated money and rising asset values as the same.  But in social and macroeconomic terms the implications of those two forms of savings are very different.  In particular the social risk of saving through asset values is higher, given the correlation of market values and returns.  Nor are their liquidity properties the same if everyone needs to "rush for the exits."

Insofar as you think people are tricked by "savings that aren't really there," asset values are the most likely the relevant mechanism.  This idea has played a surprisingly small role in business cycle thinking over the last century, although it has been floating around since at least the 1930s.

Right now everyone in London is wondering if a real estate bubble is about to pop.  Or does UK tax law, combined with greater international mobility, mean the new prices are more or less permanently high?

Strange Bloggingheads episodes

It is a cook off: on one side was Megan McArdle and Will Wilkinson, on the other side was Ezra Klein and Spencer Ackerman.  The five-person panel of judges includes Natasha and yours truly.  I deliver the final verdict at the end, citing Benthamite, Perfectionist, and Rawlsian standards for the food.  If there is one lesson, it is taken from the cooking of Megan: for most of you frozen cherries will, for cooking, be tastier than non-frozen cherries which in fact are not so fresh at all.

Cryonics: both sides of the story

As one cryonicist puts it: "We didn't evolve to be frozen."

But:

"It's pretty well accepted that at the point at which the usual human being gets pronounced dead, all their cells are alive. It's a very eerie question: if all their cells are alive, what is death?" says Becker. Besides, if all the patient's cells are alive, why can't the patient recover and walk out of the hospital?"

Here is the full article, which covers recent advances in cryonics.

Addendum: Or try YouTube on related issues, hat tip to Robin Hanson.  Maybe that is the right way to do philosophy, namely by cartoon.  Definitely recommended.  It also presents a solution to the current subprime crisis.

Valentine's Day in Saudi Arabia

Every year, officials with the conservative Muslim kingdom's Commission for the Promotion of Virtue and Prevention of Vice clamp down on shops a few days before February 14, instructing them to remove red roses, red wrapping paper, gift boxes and teddy bears. On the eve of the holiday, they raid stores and seize symbols of love.

Here is more, with a thanks to BZ for the pointer.  Yes, this morning I was crying at Heathrow, and not just because they didn't have an open gate to receive our flight.

What an Economist gets his Wife for Valentines

Even though I explained that only someone who truly loved her could afford to give her a gift of this kind, she appeared not to be as impressed as I had hoped.

 

If you dare to test the theory yourself you can find more here.

Book Forum: Harford and Caplan on Statistical Discrimination

The Logic of Life contains an excellent chapter explaining statistical discrimination but does the theory hold up?  Bryan Caplan says no. 

...[Tim] heavily emphasizes a few experiments showing that statistical discrimination could be a "self-fulfilling prophesy." For example, he describes a resume experiment where otherwise identical fake resumes with "black names" were less likely to get a response. "High-quality applicants were more likely to be invited for an interview, but only if they were white. Employers didn't seem to notice whether black applicants had extra skills or experience." If that is how employers treat black applicants, what's the point of trying? As Tim asks, "Why bother to get a degree or work experience if you are young, gifted, and black?"

But is it really true that the market fails to reward blacks for getting more education? Is it even true that the market rewards them less? I tested these claims using one of the world's best labor data sets, the NLSY.  The results directly contradict Tim's self-fulfilling prophesy story.  Blacks actually get a substantially larger return to education than non-blacks! The same goes for experience, though the result is not statistically significant. The real lesson of the data is that if you are young, gifted, and black, you should get a ton of education, because it has an exceptionally large pay-off.

Why would this be so?  I'm not sure, but one simple story is that counter-stereotypical behavior stands out. When my sons were young, my wife was working a lot, so I often took my kids places on my own. Funny thing: Time and again, strangers came up and said, "Wow, you're such a great dad!" But there were moms of young kids doing the same thing in plain sight, and the strangers rarely praised them.  Why not?  Because a dad taking care of two babies is counter-stereotypical, which grabs people's attention. 

Purely anecdotal, yes. But it is consistent with the small academic literature on counter-stereotypical behavior. If you clearly violate expectations, people not only notice; they often over-react.

The upshot is that stereotypes may actually be self-reversing rather than self-fulfilling. The marginal payoff of distinguishing yourself from the pack is high if people think poorly of the typical member of the pack.

Bryan has much more on the unpleasant truths about discrimination.  Read the whole thing.

Department of "No"!

Yet the rich devote a smaller percentage of their earnings to buying things than the rest of us... They already have most of what they want. Instead of buying, and thus stimulating the American economy, the rich are more likely to invest their earnings wherever around the world they can get the highest return.

That's Robert Reich, here is much more.  How shall I put it?  Savings are good for the economy!  Savings are invested!  (and this is about the long run)  Arguably Americans don't save enough!  America is a net importer of capital, not a net exporter!

Etc.

Addendum: This, from Barack Obama, belongs to the same department.

Know Thyself

Felix Salmon points to the declining price of self-knowledge.

• Cost of sequencing Craig Venter's genome: $3 billion, over 10 years.
• Cost of sequencing James Watson's genome: $1 million, over 2 months.
• Cost of sequencing an anonymous African's genome: $100,000, over 1 month.

Was there a Housing Bubble?

The conventional wisdom is that there was a housing bubble which has now popped.  The data, however, tell a different story.  Remember, that the evidence for the bubble was that real house prices had increased tremendously since around 1997 leading to prices that were far above any seen in the past one hundred years.  Here's Robert Shiller's famous chart.
 
The clear implication of the chart is that normal prices are around an index value of 110, the value that reigned for nearly fifty years (circa 1950-1997).  So if the massive run-up in house prices since 1997 was a bubble and if the bubble has now been popped we should see a massive drop in prices.

But what has actually happened?  House prices have certainly stopped increasing and they have dropped but they have not dropped to anywhere near the historic average (see chart in the extension).  Since the peak in the second quarter of 2006 prices have dropped by about 5% at the national level (third quarter 2007).  Prices have fallen more in the hottest markets but the run-up was much larger in those markets as well. 

Prices will probably drop some more but personally I don't expect to ever again see index values around 110.  Do you?  If we don't see the massive drop back to "normal" levels then the run up in prices should be described as a shift to a new equilibrium - much as happened during World War II - see the chart.  (It's an important question to ask what changed and why?).  In the shift to the new equilibrium there was some mild overshooting, especially due to the subprime over expansion, but fundamentally there was no housing bubble.

Here's a nice picture from The Mess that Greenspan Made.

Consumption vs. income inequality, revisited

Numerous bloggers, often from the left, are jumping on the recent Cox and Alm NYT Op-Ed on consumption inequality.  Via Greg Mankiw, here is one excerpt:

...if we compare the incomes of the top and bottom fifths, we see a ratio of 15 to 1. If we turn to consumption, the gap declines to around 4 to 1.... If we look at consumption per person, the difference between the richest and poorest households falls to just 2.1 to 1.

Here is Mark Thoma and here is Paul Krugman, both of whom offer good criticisms on the particular numbers.  Nonetheless it would be a mistake to go back to focusing on income inequality, or for that matter rising income inequality.  Keep in mind a few points:

1. Global income inequality is way down over the last thirty years.

2. Inequality of welfare, even within the United States, is way down over long time horizons, such as the last century. 

3. We do not know how inequality of welfare in America is faring over say the last thirty years.  This is a point of overriding importance.  Just in case you missed it, let me repeat: when it comes to the kind of intra-nation inequality that we should really care about (if we are going to worry about intra-nation inequality at all), we "do not know."  As in "know" and "not" put together.  "Not" is the word of negation, by the way.  And the last I looked, not = not, as it usually does on most Wednesdays.  Would you like to hear more on what is implied by the conjunction of "not" and "know"?

4. We do know that welfare inequality doesn't track income inequality in any simple way, especially when new goods are being introduced, there is mass production, there is diminishing marginal utility, and non-marketed benefits and costs are important in human life.

5. Here is the latest and most serious attempt to weigh the problems with consumption data; overall it reinforces the importance of looking at consumption.  And it is not denied that consumption inequality is much less than income inequality and also consumption inequality rising less rapidly over time.

Here are some previous MR posts on consumption inequality.  Here is Andy Warhol on consumption inequality.

In general, when you see cherry-picking -- or lemon-picking -- of these numbers, you should be very suspicious.

How off is InTrade?

David Leonhardt weighs in.  The other day John Nye and I were discussing that de facto limits on the size of effective bets are the biggest problem hindering effective price discovery.  When you can become a millionaire on InTrade, that's when its prices will become much better forecasters.  Nonetheless I agree with the piece's conclusion:

If you have any better ideas of where to look, let me know.

But some inefficiencies need to be taken with a grain of salt:

Mr. Ravitch has made a nice profit betting against Ron Paul, the libertarian who late last year was, amazingly, given almost a 10 percent chance of becoming the Republican nominee. “If you asked anyone in politics whether there was ever, at any point, a 10 percent chance of Ron Paul being the nominee,” Mr. Ravitch said, without finishing the sentence. “That sort of makes my case for me.”

When it comes to the long shots, remember that InTrade takes deposits in non-interest-bearing cash rather than T-Bills.  In the meantime observers need to adjust their expectations accordingly and not interpret all the prices are pure percentages.  I recall Paul trading at about 7 or 8 percent.  Let's say you shorted Paul last December.  You're locking up your cash for quite a while at zero percent interest and when Paul fails you're not going to net as much as you thought.  In other words, there is a partial short sale constraint on this market and its prices need to be understood accordingly.

Of course there is a reason why InTrade insists on earning the float and that directs our attention back to the zero-sum property of the bets.  That's another reason why prediction markets probably won't ever forecast as well as the stock market: their users have to be charged or taxed at a higher rate.  The expected rate of return in InTrade is negative; the expected rate of return in the stock market is seven percent minus commissions.  Where would you rather put your smarts to work?

Free trade websites

Here is a meta-blog on free trade from the Netherlands, but in English.

Here is translation by Wiki, in this case translating Bastiat into German.  How long will it take?

Here is my podcast with Ha-Joon Chang on free trade, courtesy of the Chronicle of Higher Education.  Chang is the author of Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism.  I believe in that myth and I try to hold his feet to the fire.

Who won the Writers' Strike?

Here is one answer, here is another.  Here are 2,503 other answers.  I believe "We still don't know" is the correct answer.  I do know I can expect to see 13 of a planned 16 episodes of Lost, which, given their long-arching plot lines, is probably a welfare improvement all around.  Battlestar Galactica should do OK.  In other words, I won the strike.

Department of Unintended Consequences, a continuing series

A rigorous statistical examination has found that smoking bans increase drunken-driving fatalities. One might expect that a ban on smoking in bars would deter some people from showing up, thereby reducing the number of people driving home drunk. But jurisdictions with smoking bans often border jurisdictions without bans, and some bars may skirt the ban, so that smokers can bypass the ban with extra driving. There is also a large overlap between the smoker and alcoholic populations, which would exacerbate the danger from extra driving. The authors estimate that smoking bans increase fatal drunken-driving accidents by about 13 percent, or about 2.5 such accidents per year for a typical county.

That's coming out in the Journal of Public Economics, so it might even be true.  Here is the short source article, which surveys other interesting results as well; worth a read. 

Why is competition between health insurance companies useful?

Kevin Drum (and Matt Yglesias) asks an excellent and important question:

Tyler is arguing for keeping the insurance industry competitive. But I simply don't see what that buys us. Even if the health insurance industry were dramatically improved, this wouldn't especially make healthcare any more efficient. It would only make the insurance industry more efficient. That would be nice, but hardly earthshaking...

Let me be clear: the incentives today are screwy.  Let me also tell you my ideal world.  Insurance companies are judged by honest third party intermediaries.  Insurance companies compete like heck to make customers satisfied.  Insurance companies monitor doctors, read Robin Hanson, and require evidence-based medicine.  Insurance companies which fail at these pursuits either go bankrupt or they must abide by an ex ante contract to permit the exile of their CEOs to Greenland.  Every year prices would fall in real terms, quality would improve, and coverage would be expanded.  Imagine the whole health care sector working like laser eye surgery or cosmetic surgery.

This is not the world we live in, but it is the world we should aim for and I am more than willing to consider how government might get us there.  (Mandating greater price transparency is but one step.)  But if we institute a single-payer system, or highly regulated mandates, we will never have much chance of arriving in that world.  Ever.  We will have a fairly static sector with high coverage levels but rising costs long term and less innovation. 

I believe we know why insurance companies don't work this way, namely monitoring problems; they screw you over instead of serving you and they can get away with it.  Go ahead, call me a pollyanna, but modern information technology and measurement can indeed resolve many monitoring problems.  We can now monitor central bank performance quite well or show up in Sicily with a credit card and rent a car.  Neither was the case forty years ago.

Here is one summary of how health insurance companies are improving information technology for claims processing, medicine itself, and promoting evidence-based medicine.  I don't mean this industry-supplied link to be a good summary of the current truth; take it as one vision of what might be possible.  To put the point another way, insurance companies are not just risk assessors or dollar transfer mechanisms; they also can be monitors and buyer agents and that is why competition is potentially so useful.

The policy point is not: "you must die today so that the reign of Milton Friedman can arrive in forty years' time."  It is more like: "whatever transfers we wish to do today, let us proceed so that such a future remains someday possible."

Medical care is just starting to cure human beings, so don't think the future will look like the past.  I know that preaching the virtues of insurance company competition is not a popular position in the blogosphere but like Arnold Kling, I see the single-payer advocates and mandate advocates as the conservatives, not the visionaries.

Addendum: A month or two ago, one MR reader left a long and very good comment about all the innovations provided by private health insurance companies.  I can't find it, can any of you?  Please let us know in the comments or email me.

Addendum: Kevin Drum responds.

Please do your calculations in the margins

Which do you think takes a bigger toll on the environment, owning a dog, or owning an SUV? My bet would be on the dog. I'm thinking of all of the resources that go into dog food.

That is from Arnold Kling.  And if you believe in a zero or very low discount rate, don't forget to count all those puppies too.

The costs and benefits of long-distance relationships

From The National Post, the main sources are Tim Harford and yours truly.  Excerpt:

The answer, says Mr. Cowen, lies in the Alchian-Allen Theorem. Developed in 1964 by economists Armen Alchian and William R. Allen, the theorem states that adding a per unit charge to the price of two substitute goods increases the relative consumption of the higher price good.

In layman's terms, "you don't take a long trip unless you are going to make it worth your while," he says. Very few people in a long-distance relationship are going to fly across the country just to hang out in sweatpants with their sweetheart.

The result is overblown expectations ("are we having fun now?") and excess pressure on the relationship.  Here is a previous MR post on this topic. 

China fact of the day

Like many developing countries, China gets little money from the personal income tax, which provides 6.5% of government revenue.  Most Chinese have never filed a tax return.

One implication is that a Chinese business slowdown and stock market crash would put a big dent in Chinese government revenue.  That is from today's Wall Street Journal, p.A12, "In China, Collecting Income Tax Proves Problematic."

Book forum: Tim Harford's chapter six on Schelling's segregation model

Tim Harford has the best exposition of Tom Schelling's segregation model I have read.  Maybe no one prefers segregation, but if you mind being a minority in a neighborhood an invisible hand process can lead to segregated outcomes.  Individuals will move closer to their compatriots, giving rise to an overall separation of groups.  This paper has some good models and fills out the main conditions behind the result.

But is it true?  Schelling would be the first to admit he created only a partial model.  Human genetics show more and more out-breeding over time.  Those first cousins just don't cut it any more.  No, the earth isn't flat but outmigration is increasing and many more people are choosing to live as minorities in foreign lands, most of all in the EU.  I live in Northern Virginia, one of the most successfully integrated regions of the United States, whether it be along lines of race, religion, or nationality.  Latino arrivals are concentrated in the American Southwest but over time they are spreading out to many other states.  What is the segregation model missing?

Gains from trade, in a nutshell.  If I'm the first Mexican to arrive in North Carolina, yes maybe I feel lonely.  But I also can fill some empty economic niches and overall it may beat East L.A.  Other immigrants will follow, but if too many come some of them will move on to South Carolina.  And so on.

High levels of inequality often bring more integration, at least in terms of spatial proximity.  Even with high rents there is a large community of Latinos living just outside of Aspen, Colorado.  Guess why.  They don't live right next to the very rich but they do live among non-Latinos.  And the greater availability of cheap services is one reason I prefer life in the United States to Western Europe.  Cheap shipping of goods means I still can get French cheese and German books.

It is harder to ship services.  The more we become a service economy, the more you have to live near the people you trade with.

So what's the problem in Newark, NJ or for that matter Northeast Washington?  Schelling's model seems to work better there perhaps because of high unemployment and fewer services.  That said, both areas have seen considerable Latino integration over the last twenty years, as well as outmigration to the suburbs.

Thus the more general model starts with the idea of gains from trade and then asks when those gains won't be especially strong, or when they won't require much physical proximity.  Note that Schelling's original paper, published in 1971, very much represents a 1960s perspective on its topic.

Addendum: Tim Harford also discusses urban crime and its control; here's a good new paper on that topic.

Settling

The Atlantic Monthly had an interesting story on why women should settle for "Mr. Good Enough."  Eugene Volokh had some insightful comments.  I am sympathetic to the idea of modest expectations but I don't favor cheerleading for settling.  More precisely I worry about The Paradox of the Underrated (is Shawn Marion still underrated?  Nope, and by the way Phoenix had nothing to lose from that deal).  If this article talks you into the prospect of settling, settling will start to seem pretty good to you.  If your expectations were too high in the first place you'll keep your old set of unrealistic expectations (personalities and pathologies don't change so quickly) and simply apply them to a new option, namely a marriage to a dullard.  "Settling" works best when you are stuck on a desert island and you do not expect so much from your surrender to the inevitable.  The AM article would do more good if it tried to convince people how terrible settling would be.  You just have to plant the idea in people's minds, as they'll make their own decisions anyway.

In other words, "have modest expectations -- it will be great for you!!!" can't really be winning advice.

Buy, hold, and slow down too!

If you get speeding tickets, watch out: The chances are good that you will also engage in possibly dangerous investing behavior, too. That is the implication of a new study that found that individuals who receive more speeding tickets tend to churn their portfolios...They found that, other things being equal, an investor’s portfolio turnover rate rose 11 percent after each additional speeding ticket he received.

Here is the paper.  Here is a longer description of the piece.  The researchers do control for many variables, including age; the most likely conclusion is that there is a general propensity for thrill-seeking behind both speeding and trading behavior.  Do note this is a study of the Finns.

Addendum: Via Deron Bauman, here is a good article that sadness triggers consumer spending.

Interview with Paul Romer on Mauritius

Via Mark Thoma, here is an interview with Paul Romer about growth in Mauritius.  One question is how much Romer's growth theory was needed to generate this advice.  Second, I am surprised how little attention he gives to Mauritius being a small country.  I don't think that country size makes the advice much different, but perhaps expectations should be adjusted.  Most small countries aren't well-diversified and their growth rates depend heavily on real shocks.  Singapore is an exception, most of all because its citizenry is obsessed with accumulating human capital and thus it depends upon a general flow of foreign capital rather than specific sectors.  I don't see harm in Mauritius trying to follow this same path but I wouldn't expect them to succeed to a comparable degree.

Speaking of small countries, Fred Sautet has an interesting blog post on what happened to the New Zealand reforms.  Since the reforms starting in the 1980s, New Zealand has had excellent economic policies, probably better than Mauritius can expect to implement.  But New Zealand has not had stunning rates of economic growth.  A big part of the answer is simply that New Zealand still depends on the demands for dairy and agriculture.  Yes, many parts of the country are booming but the worldwide demand for commodities is a big part of the reason why.  The deregulation of agriculture helped but without rising food prices growth would be lower yet.  Earlier, it was Britain's removal of imperial preference in 1972 that sent the country tumbling over the edge in the first place.  Yes freedom is still better but in general small countries are less of an "economic laboratory" than we might think.  Conversely, while there are some good explanations for "the Irish miracle," a small country with a few million people can with good luck grow quite rapidly. 

Just think about the determinants of your own family income; probably for most years policy changes are not #1 on the list.  A country of 1.2 million people, such as Mauritius, is more diversifed than your family, but not as much more diversified as you might think.  When it comes to real factors, Say's Law does hold.  Demand for your labor depends on the production decisions of 300 million mostly wealthy and often quite diversified Americans.  That offers your income a great deal of protection, relative to what suppliers on Mauritius can expect.

Winter reading

Here is a short piece of mine on Slate.com:

The Long Embrace: Raymond Chandler and the Woman He Loved by Judith Freeman. This book is essential to anyone looking for a) a love letter to Los Angeles, b) a chance to cultivate an obsession with Raymond Chandler, or c) a new model for writing intelligent nonfiction. It's a colorful local history of the California metropolis in the first half of the 20^th century plus an erotic biography with lots of speculative commentary interspersed, most of all on how Chandler conducted his unorthodox love life (he married a woman 18 years his senior). Freeman often veers into the first person, yet she retains some level of objectivity by always presenting multiple hypotheses. The Long Embrace sheds more light on its subject than do most standard biographies. It turns out that Chandler's love for his wife, Cissy, is essential to understanding how he constructed his female temptresses. And in evoking a centerless Los Angeles, Freeman helps us appreciate the essential vision of the Chandlerian mystery: that people, like the vast cities they inhabit, are really unknowable.

Here is the whole winter books symposium.