Wednesday, April 30, 2008

TPS: Where the experts really do go first!

Good to see that CNN is an avid follower of TPS!

Headline on CNN at the moment here.

Our post on the exact same topic yesterday morning here.

College Sports Potpourri

Two recent articles of interest concerning college sports today:

- No surprise, but the BCS format won't be changing any time soon. The BCS is a very accessible example to use in the classroom to highlight entrenched interests and the transitional gains trap. I'm always surprised that announcers and studio analysts, year after year, put forward their most dire ploy to change the system with the mindset that change is on the horizon. Thanks for the optimism, but do you know how much money these people make? And they're going to vote for something that (partially) eliminates these rents? Really? Yes, the old system was worst, yes, the BCS is better but flawed, and yes, a playoff would, in all likelihood, be better still. The only thing that really displeases me about college football is that Congress has intimated at possibly getting involved. Yikes. Keep my government out of my college sports!

- I'm a big baseball fan, so this story about the College World Series staying in Omaha was of interest. My uncle pointed this out to me, and it's a valid point-- why doesn't the College World Series rotate like the Final Four? I can understand the traction that it has in Omaha, but look at the following the Final Four gets in different cities-- I'm not saying the College World Series will become the Final Four, but imagine the traction the Final Four would have if it were in one city year after year. No one argues against the Final Four moving around because it has been moving around-- baseball can do just fine moving cities year after year.

The closest big city I live near is Pittsburgh-- I would absolutely drive the hour or so to watch some of the games. (Hell, I'd drive an hour to watch the Pirates, so figure the revealed preference there.) There are plenty of beautiful stadiums in the country to hold this in. I would venture to say that the NCAA could make more money doing this too. The only downside would be forcing a major league, or AAA team, on the road for about a week and a half...but that happens to the AAA affiliate of Kansas City every year anyway, and even that isn't a particularly long road trip.

What if you held the College World Series at Wrigley one year? You don't think people would show up to that? Or Yankee Stadium? Or Dodger Stadium? Or in San Francisco right on the bay? Or Seattle in a carport? People would absolutely go to these-- and cities would love to host it.

Iran Dumps the Dollar

Story on CNN here. Let us quickly pass through the economics of the effect:

Decreased demand for U.S. currency --> Lower U.S. exchange rate --> U.S. goods and services become relatively cheaper --> U.S. Exports Increase, Foreign Capital Investment in the U.S. Falls

If I had to pick, I'd prefer to have higher foreign capital investments, but I'm mostly agnostic on the topic. From what I can tell (correct me if you know otherwise), the U.S. does not buy much oil directly from Iran so there will not be much in the way of higher transaction costs as buyers and sellers realign themselves. If Iran's customers are truly clamoring to pay in something other than U.S. dollars than this is likely in the best interest for all parties concerned.

Let us also remember what the value of a dollar on the global currency market largely represents, which is how confident foreigners that they can make a secure investment in our country. That will depend positively on our openness to free trade, taxes, and security.

I can't think of a witty title, but Rob sent this and it deals with Cleveland and schools

You are always affected by the region in which you live; believe you me, moving from the San Francisco Bay Area to Morgantown, West Virginia hammered that one home. As such, since I'm in West Virginia, a decent amount of blog posts here on TPS (more in the past, but still somewhat true today) deal with West Virginia. As my TV gets Pittsburgh local channels, I can cover that as well. Justin covers the same ground as I do at the moment, though he will be moving to Bloomington, Indiana here in the near future, and I suspect he will comment on the unique happenings there.

But TPS readers can also thank loyalist Rob Holub for making this blog a place for Clevelanders (Clevelandites?), too. We're becoming a regional force. Watch out, Columbus!

Rob sent forth this piece about the Copley-Fairlawn School District in Ohio. In short, since the C-F schools are more highly regarded than their neighbors, parents have been using fake addresses to get their children into the district. This is nothing new-- but the solution to the problem is: Offer $100 to anyone to rat out an illegal member of the school. Only four people have taken the school's $100, though others have come forward and refused the reward. More still have preemptively left for fear of being caught. All in all, 45 students have left since September. I'm curious what the attrition rate was before the program began. This could be a very normal number. If it's not, the momentum from the program driving out students ahead of them being reported has to make the school district happy.

The most shocking part: Six students have decided to stay and pay the $7600 tuition. Wow. Is there that much of a shortage of private schools in Ohio? I guess 6 isn't a lot...but $7600?! For a public school?!

First off, public school choice would all but eliminate this problem. You could still have school district lines that couldn't be crossed, but if public school choice evolved, I could similarly imagine a cross-district move to be worked out as well. Especially since funding is largely at the state level.

Is there an arbitrage opportunity here? Probably not; there could be charges of perjury brought upon you, or you could be sued for back tuition. Otherwise, register away and split the reward money! Do it once a semester!

And would it kill the district to sit the kids down and explain to them that incentives work and make an economics lesson out of this?

Per the public school choice issue-- maybe we should start a list of unseemly behavior that could easily be cured by letting markets work. Public school choice cures district jumping. Allowing sports teams to auction tickets cures scalping. Any others?

Questions I've been pondering recently...

This one came up over drinks last night: If you could institute one law (presumably in an attempt to fix the shortcomings of the current system), what would that one law be?

Hayek was asked this question late in his life, and responded with something to the effect of "The law should apply to everyone equally." I think that's a little broad; we thought his intention for that was something like "no subsidies because they don't go to everyone," but you could argue that everyone could get a subsidy if they did the subsidized activity. We also didn't have the exact words-- perhaps it was framed better than that. (Anyone?)

The challenge here isn't just the intention-- I think most people have the right idea-- but structuring it, like every good law, so as not to be manipulated or worked around.

My answer's in the comments...

Tuesday, April 29, 2008

Lies from My History Teacher: Henry Ford

I've been tallying these up lately...little historical tidbits I learned from my history teachers that my education in economics later undermined. I'm going to gradually post them as they come to me. So the first lie is some version of the following:
Henry Ford revolutionized the business model by paying his workers enough to afford the automobiles they helped assemble.
Ah, the demand curve is upward sloping! Of course, the truth is Henry Ford found a way to make his workers much more productive. He had to hire workers in a competitive market, so wages inevitably rose. The myth itself is self-defeating, how could Ford know how his employees would buy Model T's? Why not just give them a Model T's rather than income at retail value of the Model T?

Addendum: Within 1 minute of posting this, I Googled the myth and came across this article from the Mises Institute.

Ken Jennings and Tuesday Trivia

When I posted about betting strategies in Final Jeopardy a little while back, a guy by the name of Andy Saunders left a couple of useful comments. After going to his blog, I noticed that he helps out Jeopardy legend Ken Jennings in a weekly trivia contest over email that he calls Tuesday Trivia. Well, I signed up and temporarily forgot about it, but it's Tuesday today so the email came through. Needless to say, I have nowhere near the trivia aptitude of Ken Jennings. Here are the questions, sent with the following disclaimer:

As with all good trivia, it would take you about 30 seconds to Google the answers to the first six questions above. So you're on the honor system here: no peeking, and only send in the answers you knew off the top of your head. Answers will appear in next week's mailing.

1. What Cincinnati rabbi opened his first matzo bakery in 1888, though his company didn't own a vineyard until the 1940s?

2. If you find yourself in "gen pop," where are you?

3. The specialized neurons in what part of your body come in two distinct types: cylindrical and flask-shaped?

4. What longtime PBS hit is currently hosted by The X-Files's Gillian Anderson?

5. In 1959, a British engineer led Jumbo from Montmelian, France, to her home at the Turin zoo, in an attempt to recreate the historical route taken by whom?

6. What body of water does the Jordan River end by flowing into?

7. Based on the unusual distinction they share, who's the only U.S. president who could be added to this list--and why? Winston Churchill, Charles Dickens, Mel Gibson, James Joyce, Lisa Kudrow, Justin Morneau, Samuel Morse, and James Whistler?

The seventh is designed to be the hardest to Google, though I think I've made headway by noting that not all of them have won the American League MVP. I knew #5 right off, and my brother should know #3, and I can guess at #1 and #6.

To sign up, go here and then down to the bottom left corner of the page to the red box.

Substitution Effects and Grand Theft Auto 4

Now, I'm not much of a video game player, but Grand Theft Auto 4 hit the shelves at midnight this morning. Evidently this is a very big deal-- I remember the first Grand Theft Auto being comical in its forwardness combined with its generally clunky graphics (always a good combination, by the way, and it was a while ago). The CNN article quotes someone that claims this could be one of the top three selling game of all time. Given the success of the Madden series, and Halo, even Super Mario Brothers back in the day...that seems like a big statement to me.

But I heard an interesting possibility on the radio this morning. Ironman, the new action flick featuring Robert Downey Jr., is set to be released into movie theaters this Friday, and people are predicting that the movie will take a nontrivial hit to its sales due to the release of Grand Theft Auto 4. Now, equivalence tells me that in the long run, everyone that wants to see the movie will end up seeing it-- I don't think people exist that want to see it in the first weekend or not at all. (Am I wrong? Perhaps other new movies would crowd it out down the line, but if you're watching that many movies in the first place, you'll find time to watch a movie you want to watch.) This may end up with more people watching it on DVD instead of in the theaters-- I'm guessing that on net that may cost studios. The biggest impact, though, would be the fact that the studio can't advertise for the second week that it was the top grossing movie in the first week. I think movies can generate some momentum based on previous sales, and if the game has the impact that people think, it prevents the movie from generating any week-to-week push in the first place. I'd say this would be the largest impact.

It impossible to make an accurate estimation of the impact, of course, since we don't know who would have otherwise seen the movie. But substitution effects are oftentimes a lot wider than we describe in our lectures.

Monday, April 28, 2008

Time Value Transitivity and TPS

If a transportation or labor economist wants to determine the value of someone's time, they typically use that person's wage. An average day for The Perfect Substitute (TPS) gathers about 120 hits (and 200 viewings). However, weekends are about 60% lower than weekdays. Thus the following transitivity property must hold for a minute of the average TPS readers' time on the margin:

weekend minute > TPS minute > work minute

Perhaps reading TPS is always shirking, and it is just that monitoring is more effective at home than at work. That would be true for me, anyway.

Information costs and student deaths-in-the-family

I enjoy playing poker; it satisfies a lot at one time. Competition. Interaction. Deception. Strategy. Asset management. Game theory. There's just a lot there.

I've got a (likely bad) habit of translating interactions in life to similar situations in poker. It can only get so far, of course, but it does help me rationalize decisions ex ante. I feel better about outcomes good or bad if I know I made a well-rationed decision.

After reading Justin's piece on cheating in the classroom, and a once-off line concerning the seemingly well-timed death of students' family members (very last line) from our good friends at Division of Labour, I got to thinking...

In poker-- especially in games with people you don't know-- if someone bets at you, sometimes it's worth matching the bet even if you're fairly certain that you don't have the best hand, just to see what hand they are playing. Poker is a game of information, and information is scarce, so if the price is right, it can be very valuable in the long run to acquire this information. In part, this information helps keep people a bit more honest throughout the game as well.

Along these lines, isn't there an optimal amount that I need to "call down," or challenge the claim that the student in fact does have a relative who recently passed? And isn't this percentage strictly greater than zero? By never challenging a student, they know they can always get me in a position of never questioning their claim-- get me to fold, in poker terms. At some point, somewhere, it has to be beneficial to challenge one of them.

The devil is in the details, of course.

- How do I time this? (Earlier would be better, in my opinion, and I think first would be ideal. If it weren't first, students could always come back with the "You didn't question Sally last week" rebuttal.)

- Which student do I choose? (Obviously, a student exercising this explanation more than once would seem to be an ideal potential challenge, but this necessarily pushes it towards later in the semester. I've been given the death-in-the-family explanation a lot, but I don't think I've ever had the same student give it twice in a semester. [By the way-- isn't that pretty compelling evidence that all of these can't be real? If you had two deaths in the family over a semester-- unlikely, but plausible-- you could use the excuse twice, but who would dare use it twice as a lie?])

Further, what are the overarching goals of the challenge? The idea is to instill an idea of credible threat-- a misleading death-in-the-family claim, if caught, would hopefully instill a pretty large sense of shame. Hopefully this will reduce its use in the future. Even if the challenge were unsuccessful-- that is, a death in the family actually occurred-- I would bear the cost of coming across as an ass (recommendations and all), but would this deter future uses of the excuse? If there were a deterrence effect, would the student simply shift to another type of excuse, or would this shock them into taking a test on time?

Perhaps most importantly; given the potential costs, which all-inclusive could be sizable even when long-run benefits may outweigh them, am I risk loving enough to take the chance?

Zoning As A Means to Voluntary Transactions

Tyler Cowen at Marginal Revolution laments zoning, though he speculates on the cases in which it would still be preferable. I have written before on my admiration for Fischel's Homevoter Hypothesis, which is the basis for two points: 1) Despite its costs zoning may be a net positive on the whole and 2) even if 1 is wrong, it is not so deep in the red that it should steal focus away from libertarians on other more pressing concerns.

In short, zoning gives us a near vertical supply curve in housing, which is already more stock than flow, hence deadweight loss is likely to be extremely small. Caplan (2001; Public Choice) and Powell (2006; Public Choice) have been overly pessimistic about the role of capitalization and taxes, viewing it as a means for local government exploitation because, in their view, once taxes are raised property values fall and there is no sense in "voting with your feet." That is just the point though, at the local level voters feel the pain and gain of their politicians actions. Since property values represent a long time-horizon, even short-sighted politicians must think long-run to get reelected.

Why is rent control not more prevalent? My guess is if you survey people they would tell you that rent control is good. They abandon this belief though when their own property values are on the line. NIMBYs can only locate in municipalities if they provide enough compensation to the existing residents to offset any depreciation of housing values. The EPA need not worry itself about locally polluting firms, as they will have to negotiate a compensation package with a municipality, and attempting to control that firm's waste will both be unnecessary and will undermine voluntary transactions between communities and firms.

Sunday, April 27, 2008

Would I Have Better Students If I Let Them Cheat?

No, I'm not invoking the b.s. idea that other professors use. ("You'll end up spending more energy trying to cheat than you would if you studied." I sincerely doubt it, or else we would not have to monitor against cheating.) Rather I'm thinking about a scheme that might increase the number of students with retention of the knowledge. Robert Frank has often decried the inability of former econ students to answer econ questions any more accurately than someone who has never taken a course. So if my intention is solely to increase the number of students retaining long-term economic knowledge, could I institutionalize cheating in a manner that would accomplish this?

Suppose I tell the students that during exams they are allowed to copy the answers of whoever they sit next to, provided they have the permission of the student they are copying from. In most classrooms, a copier would be able to sit on either side of a test-taker, so you would have a 2-1 ratio of copiers to test-takers. Now, instead of appealing to the lower ability students I target the content of the course to a higher level of difficulty and I test more frequently (maybe 4 or 5 per semester). The good students would then sell the rights to copying their exams, and would have a strong incentive to continuously do well in the course. I would provide credible enforcement of contracts. I would expect then, that 1 out of 3 students would develop a superior command of economic principles, while the other 2 would have forgotten them anyway within a few months of the course.

So, tell me where I go wrong in my logic, or what corrections would be needed to make this system work. No need to point out that the University would never allow this, as it undermines their principal reason for existing -- to signal productivity.

Saturday, April 26, 2008

File this Under Papers I Want to See Written

CNN is currently doing a Quick Vote from their homepage asking "Do you Agree with the Judge's Ruling in the Sean Bell Verdict?" Many people are upset with the verdict and over 207,000 at the time of this post have voted. This reminds me of something that is a curiosity to me: Why do uninformed third parties form strong opinions on topics of fact, especially in court cases? I understand passions on issues where there is no clear right or wrong, but what about matters of true or false?

Remember the Michael Jackson fury where hundreds of people lined up on both sides of the fence and protested! Time is costly, they had to have something else to do. Why did they feel like they had to be there? Either he did molest that kid or he did not, and only the parties involved know for certain. We have a jury system set up for independent third parties to carefully examine at all the evidence, so why are others so compelled to take such strong positions? Did you enjoy "Thriller" so much that you just have to believe he couldn't be evil/good?

I would like to see a paper written where sociologists investigate this more closely and learn about who the protesters are. What occupations do they have? How old are they? Why do they say they feel so strongly on the topic? Do they have connections to the involved parties? What should we infer about the size and frevor of the crowd on each side? Should we infer anything at all? Does it have any impact on the judge or jury? Does it have any impact on public opinion?

Congratulations to Clare DiSalvo

Actually I should be congratulating the University of Minnesota, who along with every other top public policy program in the country wanted her as an MPP graduate student for the coming fall. I had Clare as a student in my principles of microeconomics last summer, where she was the best student I ever had. Sharp, inquisitive, and challenging, Clare pushed me to be on top of my form for every class I taught. Already holding a Bachelor’s Degree in Religious Studies from Yale, she took several economics and statistics courses while she applied to all the top public policy schools. She hopes to pursue a career in the nonprofit sector advocating policy at the state and local levels of government.

For classical liberals such as myself, who so often bemoan the absurd Hollywood stereotype of the policy maker or bureaucrat who is selfless and caring, Clare is a fresh reminder that occasionally these people do actually exist. She cares a lot about the big important topics facing society, and while she may not agree with you she will always keep an open mind during a rational discussion.

Congratulations and best wishes to Clare.

Questions I've been thinking about...

There was a story on CNN recently about jobs in which you don't make a whole lot of money; I think they limited it to somewhere in the $20,000 range. I can't find it or I'd link to it.

While it wasn't the first time I'd heard it, I'm constantly surprised that ambulance drivers/medics make a salary in this range. How is it that their salary isn't higher? They are in constant demand, they are needed 24 hours a day, and they require a skill set that is costly to acquire. Presumably, as the population ages more, we'll demand them even more...on the assumption that older folks tend to use their services more often (and from personal experience, I think this is true).

High (and rising) demand and what I perceive to be a short supply. What gives? Are there a lot of people that can be ambulance drivers/medics? Shouldn't their wage be higher? Personally, I'm surprised it's not a lot higher.

One possibility is that people don't tend to stay in these jobs for a long time. They could use them as a stepping stone to a better paying job in medicine. (It's not unlike the situation with the minimum wage-- you have to take statistics about how many people work in minimum wage jobs with a grain of salt since people do not tend to persist in minimum wage role for a long time.) If this is the case, the value gained from being a paramedic offsets the low monetary compensation. That would make sense...but do they?

Do paramedics do this job along with another one?

Anyone have an answer?

Friday, April 25, 2008

Atlas Unleashes Sir Antony Fisher Award on West Virginia

We're happy to report that Unleashing Capitalism has won the Sir Antony Fisher International Memorial Award for Best Traditional Publication! The award is given annually by the Atlas Economic Research Foundation, and is actually awarded to the Public Policy Foundation of West Virginia. Two of your bloggers, Justin Ross and Matt E. Ryan, contributed to the effort.

All in all, it has been an enjoyable process introducing and furthering the concepts of a free market society into West Virginia. We're surprised just how much latent free market support there actually is here! West Virginia is the benchmark example of what happens when government gets involved in a state's economy. On every conceivable margin-- economic performance, health, achievement, wealth, etc.-- West Virginia ranks at or near the bottom of the country. We have legislators that regulate every aspect of the economy and congressional representatives that shovel pork into our state. The results are crystal clear. It's not working.

Sadly, some people feel that the solution to too much government in West Virginia is...more government. Like many in the foreign aid community believe, it is not foreign aid-- or government, in our case-- that is the problem, just that it hasn't been done correctly up until this point. It's bad economics, blind of the simple economic litmus tests of incentives and information.

The bulk of the resistance to Unleashing Capitalism and the benefits of a free market economy have not come from those with an admittedly brief understanding of economic reasoning; these individuals have been genuine in their intake of the ideas, thoughtful in their challenges to them, and from our end, a joy to interact with.

Instead, the opposition has come from those with little economic clarity to speak of, yet are convinced otherwise. I am now certain that no worse harm can be done in the public arena than by an individual claiming economic scholarship when they have none. It is those that can write with the illusion of economic rationality, that can twist economic dead-ends into plausible solutions to our state's very real problems, that cause the most damage. Without a base level of economic rationale across the population of West Virginia, I feel this will be a battle that will continue to be fought. I am pleased, however, that Unleashing Capitalism is fighting the good fight to help educate West Virginians in proper economic reasoning.

Nearly 5,000 copies later, we couldn't be happier.

EDITED: The press release is here.

My Next David Skarbek-esque Post: The Federalist Papers and Legislative Tenure, Part 2

It's Friday morning, that means more Federalist Papers! I'm still on the topic of legislative tenure, so today's post supplements the last time I blogged on the idea.

Onwards! Scroll past the quotes if you just want to read what I have to say.

- Federalist 62 (Madison):

"The mutability in the public councils arising from a rapid succession of new members, however qualified they may be, points out, in the strongest manner, the necessity of some stable institution in the government...From this change of men must proceed a change of opinions; and from a change of opinions, a change of measures. But a continual change even of good measures is inconsistent with every rule of prudence and every prospect of success. The remark is verified in private life, and becomes more just, as well as more important, in national transactions."

"To trace the mischievous effects of a mutable government would fill a volume."

"In the first place, it forfeits the respect and confidence of other nations, and all the advantages connected with national character. An individual who is observed to be inconstant to his plans, or perhaps to carry on his affairs without any plan at all, is marked at once, by all prudent people, as a speedy victim to his own unsteadiness and folly. His more friendly neighbors may pity him, but all will decline to connect their fortunes with his; and not a few will seize the opportunity of making their fortunes out of his...Every nation, consequently, whose affairs betray a want of wisdom and stability, may calculate on every loss which can be sustained from the more systematic policy of their wiser neighbors. But the best instruction on this subject is unhappily conveyed to America by the example of her own situation. She finds that she is held in no respect by her friends; that she is the derision of her enemies; and that she is a prey to every nation which has an interest in speculating on her fluctuating councils and embarrassed affairs."

"The internal effects of a mutable policy are still more calamitous. It poisons the blessing of liberty itself. It will be of little avail to the people, that the laws are made by men of their own choice, if the laws be so voluminous that they cannot be read, or so incoherent that they cannot be understood; if they be repealed or revised before they are promulgated, or undergo such incessant changes that no man, who knows what the law is to-day, can guess what it will be to-morrow. Law is defined to be a rule of action; but how can that be a rule, which is little known, and less fixed?"

"Another effect of public instability is the unreasonable advantage it gives to the sagacious, the enterprising, and the moneyed few over the industrious and uniformed mass of the people. Every new regulation concerning commerce or revenue, or in any way affecting the value of the different species of property, presents a new harvest to those who watch the change, and can trace its consequences; a harvest, reared not by themselves, but by the toils and cares of the great body of their fellow-citizens. This is a state of things in which it may be said with some truth that laws are made for the FEW, not for the MANY."

"In another point of view, great injury results from an unstable government. The want of confidence in the public councils damps every useful undertaking, the success and profit of which may depend on a continuance of existing arrangements. What prudent merchant will hazard his fortunes in any new branch of commerce when he knows not but that his plans may be rendered unlawful before they can be executed? What farmer or manufacturer will lay himself out for the encouragement given to any particular cultivation or establishment, when he can have no assurance that his preparatory labors and advances will not render him a victim to an inconstant government? In a word, no great improvement or laudable enterprise can go forward which requires the auspices of a steady system of national policy."

Note, again, the line Madison has to walk in the first part. He feels stability is good-- and has to argue as such, because a six-year appointment of a Senator is an eternity in Revolutionary America. But underlying all of this is the fact that, in part, the stability of the British monarchy was something they didn't like. It's funny to see the ebbs and flows throughout the papers.

The second part is currently a favorite quote...with or without 'mutable.'

It's very interesting the connection between stability in the political sphere and vitality in the economic sphere in the third part. I suppose it's all a matter of degree; having just overthrown their colonial government ten years prior, stability and international recognition might have been exactly what the country needed most. But lack of national character comes from mutability? Aren't some countries known for nothing but mutability? It's hard to imagine what level of turnover they speak of, but even in the worst, most severe cases...are neighboring countries left imagine their unrealized gains from trade? Is Iran bemoaning the potential gains from trade they aren't realizing from Iraq? Perhaps. I do like how political instability is pinned to international economic shortcomings.

Implicit in the fourth part is that more laws come from higher turnover. I'm not certain there's any reason to believe that's true. Poisons the blessings of liberty? That's a bit much. Undermine long-term confidence in the stability of law in the most extreme case, perhaps.

Part five is public choice Publius! I love these parts. Another testable hypothesis...more turnover, more rent seeking?

Part six talks more about the shortcomings, again, of an unstable political climate and it's skewing of investment away from long term projects.

Ultimately, I think the impact on the economy of a presidential change in the late 1700s is far, far greater than a change in more recent days, and it's important to remember that grain of salt when going through the quotes.

Depression Era Gas Prices

Here is a condensed version of Bryce’s comments regarding my previous post on gas prices:

In the linked 'Percent of Income' graph, what caused the steep decline in the mid 1930s? That's still smack dab in the middle of the depression and before any WWII efforts, right? Starting in 1935 or so, the % income goes down sharply (from 48% to 35%). I wouldn't have expected the sharp decrease until WWII in '41.
I felt this astute observation deserved more than just a comment, because it took me a day to think about what happened. Looking at the data for the percent of income graph, in 1935 it is indeed we see that plunge as income raced ahead of gas prices, we might ask what happened in 1935? I first thought there was an earthquake just prior that may have disrupted things, but that was not true.

As it turns out, 1935 is the year the U.S. Supreme Court unanimously ruled in favor of Schechter in Schechter Poultry vs. the United States. This was a devastating blow to FDR’s new deal policies and hamstringed his ability to push his economic policies. When problems first surfaced, both Herbert Hoover and FDR engaged in endless experimentation with the rules of the game, causing the economic actors to freeze their behavior. The Schechter case undermined much of FDR’s policy experimentation and price fixing policies. The Schechter’s were guilty of lowering prices in the mind of FDR and his followers because they thought the problem was deflation. Once the supreme court ruled these policies unconstitutional, as well as undermined much of what would have ended up in the Wagner Act (1935) and the Fair Labor and Standards Act (1938), we saw the Dow Jones turn around in the Spring of 1935.

For more info on this case and the Great Depression, I would like to recommend this Podcast from EconTalk and this book.

Thursday, April 24, 2008

Why are Gas Prices Rising?

$4 Gas is all the talk and everyone wants to know why. How much gas are consumers demanding? The answer is the top graph (recall quantity demanded equals quantity supplied). Are they responding to changes in price? The answer is comparing the top to the bottom graph. Why are they not responding to rising prices by decreasing their demand (much)? See here. Download the data for the graph here.

Wednesday, April 23, 2008

Loitering teens a problem?

This story about an anti-teen-loitering device put a kick into my late afternoon. My thoughts:

1) First off, the product is The Mosquito and it's made by a company called Kids Be Gone. If this doesn't reek of an April Fool's Day article, I don't know what does. Looks real from the website, though.

2) The Mosquito Fact Sheet (pdf) tells me that "it's not a weapon, it is not violent, and it does not hurt." When data has been collected, police calls have been reduced by 80%-100%. (No police calls at all? We could substitute police with Mosquitos?) The real kicker comes in the lower right hand corner of the first page-- "increases the quality of life of those affected by anti-social behavior." I think they meant social behavior, but nonetheless, this device is all about the redistribution of quality of life! Is the redistribution of quality of life all about imposing externalities on others? A loud stereo does that; so do anti-drinking and anti-smoking laws. What else has the same effect?

3) Is there really a frequency that only teens and young adults can hear? I'm not buying this. I'd agree that your hearing generally declines with age, but everyone loses the same frequency at roughly the same age? (They mention blasting your iPod could help you out against the Mosquito...) Biologists of TPS, that one's on you. Also, unknown possible long term health effects? I don't see that being an issue, especially if you could iPod blast yourself away from it affecting you at all. (That would have a long term effect, but that's quite known.)

4) I can understand the uproar over installing these in public places; equal protection under the law, of course. If you have trouble with people loitering in public places, don't make it a public place. But private companies using it to protect their property? What's the problem here? I suppose the largest issue would be spillovers beyond their property line, but that's not addressed as an issue in the article. Could it really be upheld in court that a harmless device (up for debate, I'm sure) used to defend your property would be illegal to use? Lawyers of TPS, that one's all you.

5) By the way, I've been to that movie theater in Great Barrington, and I can't imagine loitering being a problem...though I suppose it has been a few years. But if there's any town in America that can act collectively and ban something, it's Great Barrington. They've banned cell phone towers for a while now; this article speaks about it briefly near the end. Have fun this summer, Dave!

Choice and Education Across the States

The Heartland Institute is one of the more active free market think tanks out there, at least in terms of emailing me to let me know what they are doing. When I think Heartland, I think "furthering the fight against this Al Gore nonsense." They do a lot more than that, too, to be certain, so check out their site.

Anyhow, they just came out with a new report, Choice and Education Across the States (pdf), results start on page 8. It's basically an Economic Freedom of the States in terms of education, based on vouchers, charters, tax credits and public school choice. Arizona, Florida and Wisconsin top the list, and look at that-- West Virginia got the best score...amongst those states receiving the lowest grade possible. Washington and Montana bring up the rear, but is West Virginia any better getting a score of 8.7% versus 4.3%? Heartland gives both an F, and rightfully so.

I wonder if there's a way to work in 'strength of the teacher's union' into the rankings...

Allegiance To Dirt

The locals of Morgantown love to tell the history of how they landed West Virginia University. The story has variations, but it generally goes that the state was trying to figure through the political process where to locate a prison, a university, and the state capital. Apparently towns coveted the prison most, the capital second, and the university the least of these three projects. Morgantown’s politician was only influential enough to land the university. This is the part of the story where the locals laugh -- that the Morgantown residents would be so upset that they landed a university instead of a prison, how ridiculous! Obviously the university was the “right” choice.

This story makes me think that we do not even have the correct language to think about economic growth because we think about it in terms of these artificial geopolitical borders, whose long-term livelihood is something that needs to be concerned about rather than that of flesh and blood human beings. Think about the Morgantown residents of the 1860’s….the prison was better for them. They weren’t going to get jobs teaching geography or philosophy, and probably didn’t care for the people who were going to move into town to take those jobs. The character of Morgantown residents has changed over the last 150 years in such a way that the current locals do probably value the university more, but this is because of generations of gentrification and self-selection.

Having recently attended the Southern Regional Science Meetings, where many discussions including the keynote address rested on “saving” this or that region from population loss, I kept thinking to myself that our time would be equally well-spent discussing how to save the typewriter. Not every tract of land should have resources drawn from other areas devoted to sustaining a population.

Tuesday, April 22, 2008

File this under...unintended Earth Day consequences

TPS regular and Kellogg grad student Thomas Johnson reports that, in honor of Earth Day, the Kellogg cafeteria did away with cardboard trays and straws for the day...

...blind of the substitution effects of possibly the former into more napkins, and definitely the latter into more bottled drinks. (Not to mention the loss on a high-margin item like fountain sodas.) Here's to saving the grassroots policy at a time.

Any other good Earth Day observations?

Check Cashing Nonsense

We're always happy to have articles forwarded our way. TPS regular Rob Holub sent along the following piece on the regulation of check cashing businesses in the Cleveland area.

In short, the town of Parma is limiting the number of check cashing businesses within its city limits to 1 for every 10,000 residents; this means there will be no more than 9 at the current population level.

The mayor sums it up pretty well: "Some of these businesses charge high interest rates and fees for a short-term loan," said Parma Mayor Dean DePiero. "We want to make sure our residents are not taken advantage of."

This is bad economics rooted in political popularity. There are no residents being taken advantage of in this scenario; no one is being coerced into engaging in business with these check cashing groups. To the contrary, these businesses allow for a degree of time preference that is unattainable to workers sans check cashing places. Some people want to be able to spend their income sooner; these businesses allow for this to happen. They can't charge too high of an interest rate, or they would price many of their customers out of the market. I would be very willing to bet that their rates reflect very closely the time preferences of their customers. It would be interesting to see how these rates change over time and in response to certain economic ebbs and flows.

A good response question to the mayor would be, "What would an acceptable rate of interest be?" Better yet, ask a group against check cashing places the same question in private, then have them defend their position to each other.

It's popular for the mayor to take a stance like this because, sadly, legislating morality is almost an American political pastime. Many people don't use check cashing locations, feel that they charge too much, also feel that this is fundamentally wrong given their moral code, and therefore desire to change the world to fit their personal preferences. Here is West Virginia, we see the legislation of morality in the arguments over table games and slot machines. Drug prohibition is much the same argument as well.

Also-- check cashing places tend to be in lower income areas, and eliminating check cashing businesses gives the perception of "fighting poverty." It's not unlike swatting all of the flies from the air and claiming you've gotten rid of the refuse heap.

Happy Capitalism Day

My favorite blogger, Don Boudreaux of Cafe Hayek, today celebrates Capitalism Day instead of Earth Day. Here is his explanation:
On this Earth Day, I celebrate capitalism -- the institution that, far more than any other, has made human lives clean, safe, dignified, and culturally rich. Capitalism is also responsible for giving people the wealth and leisure to permit them to mis-perceive nature as loving and bountiful, and to enjoy nature in a way that few of our pre-industrial ancestors could ever have enjoyed it.

Monday, April 21, 2008


I'm a big fan of strategy, and economics satiates a good deal of my desire for it. Poker does too. Nonetheless, I've yet to encounter a diminishing marginal return to more competition in my life, so I enjoy as much of it as I can get.

Betting in final Jeopardy fascinates me. Some ideas I've been tossing around (and I'm sure this has been written about somewhere else many times; feel free to link it up):

- If you're in the lead, do you worry at all about the person in third place? I'm leaning now towards no, but I could be convinced otherwise. I think it may involve all three people being pretty close.

- If you're in third, obviously you want to two people ahead of you to be close, as presumably they both bet large amounts trying to beat each other and, if they both miss, the first person can slide in for the win (which happened tonight...on a final Jeopardy question category of "Military men" and having an enlisted serviceman in third place. Rigged? You decide.). But couldn't the top two people recognize this and mutually lower the stakes to effectively eliminate the lower player regardless of outcome? I know, there's no communication, it's a one time game, and even if both of those weren't true, it's not a stable equilibrium...nonetheless, I'm surprised this hasn't caught on in small bits here and there.

- I would think that if you're confident in your ability to answer one question-- and given the selection bias in people that can actually get on this show, I'd sense this is probably more true than not-- you'd find the top person always betting such that if they get it right and the second person bets it all and gets it right, they win by a dollar. Of course, knowing this, the second place person has an optimal betting strategy themselves, and then the third person too. We don't witness these respective strategies every single night, so where does this break down?

- I could be wrong, but in the past, if contestants tied, they brought them both back the next night. Why wouldn't people go for this? It's a chance to build trust with another contestant and make Jeopardy a repeated game. I suppose there's the fear of having someone approximately your equal back in the next game with you, but if you build the trust, they're not trying to get rid of you-- they could also go for the tie. Shirking is always a possibility...I'm surprised people haven't at least attempted the tie and move on in attempt to make friendly with another contestant. All you lose is one dollar for the chance to be playing the game with someone else. Maybe they don't let ties move on together which case, strike all of this.

- Has the pattern of betting in final Jeopardy evolved over the years? There's totally a paper there. I'd suspect people learn and refine betting strategies; we may not be at the optimal betting solution, but given the path we took, I'd bet we're pretty near a locally optimal solution. Along the same lines, did Ken Jennings change his betting strategy throughout his run?

Divorce in the SWF: Part II

Shortly after my previous post on Divorce in the Social Welfare Function, a relevant NBER working paper has appeared. That earlier post was a result of a publicized study on behalf of a number of groups concerned about the tax effects of single parent families on children. Just in time for this study is the following NBER working paper by Kieth Findlay and David Neumark titled "Is Marriage Always Good for Children? Evidence from Families Affected by Incarceration." From the abstract:
Given that changes in the availability of men in the marriage market should affect marriage decisions, we use incarceration rates for men as an instrumental variable for family structure in estimating the effect of never-married motherhood on the likelihood that children drop out of high school, focusing on blacks and Hispanics. Instrumental variables estimates suggest that unobserved factors rather than a causal effect drive the negative relationship between never-married motherhood and child outcomes for blacks and Hispanics, at least for the children of women whose marriage decisions are most affected by variation in incarceration rates for men. For Hispanics, in particular, we find evidence that these children may actually be better off living with a never-married mother. [Emphasis provided by J. Ross]
I expect for this paper to carry no influence on the sponsoring child advocacy groups. As much as I like the result, I'll take it with a grain of salt.

Questions I've been mulling for the past couple of days

Which one company, today, will do the most good for the American public? The world as a whole? (I don't mean to emphasize the current day, April 21.)

Which company, to date, has done the most good for the American public? The world as a whole? (The question was originally asked to mean company still in business, but could be extended to include those that no longer operate.)

What scenario would you prefer: Good leaders in bad institutional structures, or bad leaders in good institutional structures? Who could do better? Who could do more harm? Who is prevented from acting like they want to the most? (Define "good" and "bad" as you wish, though as an exercise in reality, don't assume too violently either way.)

My choices in the comments...

Sunday, April 20, 2008

Inequality and Growth

Mankiw writes on the subject drawing mostly on the supply and demand of skilled v. unskilled labor. Why does it seem that economic growth and income inequality be so closely related? What is the correct way to think about this relationship? I’m open to comments, but here are my thoughts as well (beyond Tournament pay, marginal income tax rates widening pre-tax incomes, and the fact that we are not measuring the same people over time):

1) We do not really know what income inequality actually means. The most common measure is the Gini Coefficient, which would be comical were it not taken so seriously. Perfect Gini equality exists when everyone has the same level of income, while perfect Gini inequality exists when one person has all of the income. To restate perfect Gini “inequality” then is to say everyone has the same income except one person. Sure everyone with the same income has $0, but we already chose to ignore the absolute levels of income when we began discussing inequality.

2) We measure growth and inequality according to arbitrary geopolitical borders over arbitrary intervals of time, which give us arbitrary results. Growth has very important implications for cost-of-living via land prices which artificially inflate income inequality measures.

3) The poor are drawn to areas of high income growth where they improve their standard of living, but drive up inequality measures. Suppose there are two open check-out lines at Wal-Mart. One line has a highly motivated and efficient cashier where customers are moving very quickly through, the second line has a very very old cashier who is also partially blind so customers move through very slowly. Which line is the longest? The first line with the fast cashier, as people at the end of the line in the second move to the first.

Saturday, April 19, 2008

File This Under Children's Books for Economists

While wandering the children's section of Barnes & Noble, I was shocked to see an dreary looking book titled The Wall: Growing Up Behind the Iron Curtain. I bought it and it is terrific. Here is the product description from Amazon:
“I was born at the beginning of it all, on the Red side—the Communist side—of the Iron Curtain.” Through annotated illustrations, journals, maps, and dreamscapes, Peter Sís shows what life was like for a child who loved to draw, proudly wore the red scarf of a Young Pioneer, stood guard at the giant statue of Stalin, and believed whatever he was told to believe. But adolescence brought questions. Cracks began to appear in the Iron Curtain, and news from the West slowly filtered into the country. Sís learned about beat poetry, rock ’n’ roll, blue jeans, and Coca-Cola. He let his hair grow long, secretly read banned books, and joined a rock band. Then came the Prague Spring of 1968, and for a teenager who wanted to see the world and meet the Beatles, this was a magical time. It was short-lived, however, brought to a sudden and brutal end by the Soviet-led invasion. But this brief flowering had provided a glimpse of new possibilities—creativity could be discouraged but not easily killed.

By joining memory and history, Sís takes us on his extraordinary journey: from infant with paintbrush in hand to young man borne aloft by the wings of his art.
Even if there are no folk songs, at least there is a children's book that gives collectivist action an accurate depiction.

Government Bumps Prices to Reduce Bumped Fliers

I don’t care for the trade-off. New regulations double the compensation to fliers who get bumped from overbooking. The obvious consequence is an increase in the price of airline fares and lower profit (thus consequences from lower profit as well). What are the other hidden unintended consequences? How would doctors, dentists, or restaurants respond if we imposed a similar regulation on them? Smaller planes? More red-eye flights? Larger first-class sections intentionally undersold to move the overbooked passengers so they won't complain to the Feds? As you can probably tell, I know very little about how the logistics and economics of this industry.

Friday, April 18, 2008

Caplan’s Myth of the Rational Voter

Bryan Caplan’s book, The Myth of the Rational Voter, is the most important book written in public choice this decade. It is a well-rounded argument that nicely blends elements of the Chicago and Virginia schools of public choice. The logic rests on a set of human biases that play against free markets in the policy arena (anti-foreign bias, make-work bias, anti-market bias, and pessimistic bias). In addition to further empirical testing for the presence of these biases, I believe the idea still needs a source or a reason for existence. For the anti-foreign bias, Caplan has an explanation already, that it may be a leftover evolutionary survival gene that was important in the cave-man days of hunter-gather groups.

Unless I missed it someplace else in the book, the other biases need a starting point as well. The existence of anti-market and make-work bias are the most perplexing to me, but I can think of a few possible explanations:

1. As economists, we pay attention only to the systematic bias when it is against the correct outcome and not when it is in favor. I’ve never seen a politician who made his way raging against the division of labor. Thus in survey’s we don’t think to ask questions about whether the economy is suffering from people developing skills in too few tasks.

2. The "informed" are endogenously determined by their bias. Beliefs are initially not systematically biased, but the mechanisms that cause those on the “wrong side” to avoid displeasing information also drives those who happen to be “in the right” to seek information pleasing to their bias and seek it out more often, making them also “in the know.”

3. People rationally ignore effects beyond the initial phase because of the lack of incentive, and much of economic intuition is appealing because the full chain of effects reverses the initial outcome. Minimum wage goes up is the initial effect and looks good so far, but with further cognitive effort we realize lower employment will also result. The lack of reward to thinking this far yields the systematically bad choices.

The Short Run of Long Baseball Games

Last night, the Colorado Rockies defeated the San Diego Padres 2-1 in a 22-inning game. Extra inning games in baseball are a somewhat frequent occurrence, though any game lasting longer than 13 or 14 innings is pretty rare. I went to an 18-inning game once that ended 1-0-- I think that's the longest 1-0 game in MLB history, or at least it was at the time.

Anyway, extra inning games are an interesting dilemma for the teams involved since pitching is scarce. Teams, naturally, want to win games. The game must go at least nine innings, sans weather irregularities, to determine a victor. If the game is tied after nine innings, your desire to win still remains-- winning in an inning or two is the best case scenario since you use up the least amount of your scarce resource. The problem is, should the game remain tied for the next few innings, you still want to win the game in the short term-- always the next inning or so-- but the supply of pitchers you have dwindles, as does the supply or pitchers you have for the next game as well. At some point, teams usually realize the increasing costs of playing in and trying to win a single game and resort to a "we're leaving this pitcher in until it's decided one way or the other" mentality, but by this point, the team has already hamstrung itself for the next day's contest...which is especially costly if you're playing a different team the next day. It's an issue of perpetual short run. These issues get a little more interesting in the playoffs, when the value of one win is a lot higher, as opposed to one game in 162.

Thus, you end up with a 22 inning game last night that neither side is particularly pleased about-- not the loser, since they expended so many resources for a loss, nor the victor, who is confronted with a Pyrrhic victory of sorts.

I'd be very willing to bet that if you presented to the managers after a tied nine inning game that the game would end up going 22 innings before being resolved, both would immediately agree to a coin flip to settle the outcome of the game.

Thursday, April 17, 2008

Innovations in Season Tickets

It's not often you see entrepreneurship with professional sports franchises in how they offer tickets to fans, but this is certainly an idea that should turn some heads. Thanks to TPS regular Rob Holub for the heads up.

The Minnesota Timberwolves, an NBA franchise, have 43 home games next year. They were one of the worst teams in the league this season, somewhat to mostly attributable to the fact that they traded their best player, Kevin Garnett, before the season started. When you don't make the playoffs in the NBA, you enter a draft lottery, a process due which the first three picks in the draft are determined by chance. The worst teams get more ping pong balls than the teams that barely missed the playoffs, but nonetheless, any team that fails to make the playoffs has a chance at the first three picks. Minnesota's record is sufficiently bad such that they should not end up with any pick worse that #6 in the next draft.

So what did the team do? They decided to offer season tickets next season for $43 multiplied by the draft pick they end up with. So if they win the lottery and end up with the first pick: $43 season tickets. #2 pick? $86 season tickets. And so on.

I'd jump at this in a second if I lived in Minneapolis. Let's assume they end up in the worst possible scenario-- #6 in the draft-- then season tickets are $258. And that's your bill if you go to every single game and sell none of them. What are the odds that no games throughout the year will be must-see games that will demand a high resale value? If nothing else, this is a tremendous investment opportunity. And what if the Timberwolves are actually good next year?

The curious thing is that the tickets cost less for a better draft pick. Assuming you'd want to watch better players, and those players go earlier, you'd think they could get away with inverting the pay structure and getting even more people to sign up. You're paying $43 to see the #1 pick, yet $258 to see the #6.

You do have to sign up for the deal before the draft itself, so I guess there is a moderate risk involved. A $43 deposit is the only requirement.

Very intriguing.

(And Justin persuaded me...I'm going to try to label posts henceforth.)

What is the optimal level of Gold-Digging?

I have a friend who is well-educated and good looking with two conflicting complaints regarding women he’d like to date. His first complaint is regarding women who date men with no discernible purpose or future and lack all manner of worthy objectives in life (he calls them "trailer trash"). His second complaint is with women who want him because of his professional success. So women should avoid men with no potential for professional success but not want men with professional success? Questions that need answering:

1. What is the optimal level of professional success a woman should seek?
2. How can she send the appropriate and costly-to-fake signal that she is both interested and not interested?

File this under...things that work: Profit Incentives

Obviously, this is a step in the right direction for Cuba...and one step closer to having Cuban cigars back in the United States?

Wednesday, April 16, 2008

Do Prostitutes Get Tips?

Why or why not? I believe not based on the following limited evidence: 1) I see no mention of tipping in a skim-reading of the recent prostitution working paper by Levitt and Venkatesh; 2) In my first college course I sat next to a woman I later learned to be a prostitute, and she never mentioned it, although she apparently was a highly specialized sort.

So, assuming the norm is to not tip a prostitute following a trick, why is that the norm? Why would it be the case that a prostitute in the spirit of competition not offer potential Johns the opportunity to “pay” on merit after the transaction? I offer three explanations:

  1. The prostitution market suffers from adverse-selection, and Johns are more likely to stiff (pardon the pun) the ladies, making the dominant business model to offer an up-front fee.
  2. Consumers would prefer to pay up-front for psychological reasons. When I go to the restaurant and I am considering what the appropriate tip should be, I go through sort of a mental checklist: How was the service? How difficult was I? Did my kids spill drinks on the ground? Did my wife make a complicated order that required lots of amendments? I imagine that Johns would prefer not to reflect on what they just did with a similar checklist just like they may avoid a mirror for some time.
  3. Prostitutes can capitalize on a systematic male-ego bias by making them pay first. The male ego says “$xxx sounds reasonable for the hours I am about to have with her” only to then spend a considerably shorter time. If they tipped after the fact they would be tipping on a shorter duration than they would have paid for up-front.

I’m sure others have great ideas and I look forward to reading any of them in the comments.

Tuesday, April 15, 2008

Divorce in the Social Welfare Function

A study conducted at the request of a collection of marriage advocate associations found that divorced and out-of-wedlock parents cost $112 billion (about $373 per person) of federal spending. Their intention is for the government to spend more money so that fewer marriages end or that more people who decided they should not marry choose to do so instead. I’m curious about the logic of how divorce affects the social welfare function though, particularly through transactions costs and externalities.

The true motivation of these groups though is the effect of family disbandment on the children. The crux of their argument is that there exists externalities on children if the parents do not take their kin’s suffering into consideration. Divorce is a binary outcome (0/1), thus increasing transactions costs can be welfare improving if the externalities are greater than the transaction costs. The externality component is important, as typically economists think of reducing transactions costs as a means to increasing efficiency and thus social welfare. Thinking carefully about the existence of externalities in this circumstance raises a different point though, as they exist to the extent that parents do not consider their children’s feelings. Thus, if significant negative externalities do exist, wouldn’t those be exactly the types of parents we would want to have less time with their children and be prime candidates for seperation? What if only one of the two parents creates externalities?

Strength of Schedule Bias

Since the NFL is scheduling up right now, it's worth mentioning that strength of schedule measures are inherently biased. This is nothing groundbreaking-- good teams beat their opponents more than bad teams, so if the 49ers played the exact same schedule as the Patriots last season, the strength of schedule would seem less for the Patriots, simply because they're winning against them more often.

I'd assume you simply look at the games that don't involve your participation in them-- so 16 wins would be taken from the composite won-loss total for the opponents of the Patriots from last year to compute their year-end strength of schedule. I suppose calculating this year's before-season strength of schedule upon last year's win-loss results would be unbiased. I can't think of a large reason why they would be...unless considering a) you don't play entirely new schedules from year to year due to divisional games and b) there is some mild persistence of team ability across seasons. Take together, the bias would be presumably small. Previous season strength of schedule doesn't seem to predict much in the NFL anyway.

Of course, this issue carries a bit more weight in college football, where strength of schedules matter to determine which teams play for the national championship. I'm sure they adjust for this...right? How do they do that? (Holub, that means you.)

My preliminary guess as to the determination of SOS for college is this:

1) Spots 1-12 are reserved for SEC teams.
2) The next spots are reserved for teams that play against SEC teams.
3) The rest.

Campus Shootings and Corner Solutions

Here is a piece on the growing movement for allowing guns on campus.

On campus shooters, along with other extreme decision makers in society, are often referred to as corner solutions. The idea comes from a typical utility curve/budget constraint maximization procedure. Here's the general case for the uninitiated:

The straight line is the budget constraint, the curve is the individual's utility function, and they are tangent to each other at the point of utility maximization, which also happens to be the price ratio between the two goods. Small changes in prices-- changes to the slope of the straight line budget constraint-- lead to shifts in the utility curve. Basically, small changes in prices lead to small changes in behavior.

But consider that the utility curve is drawn such that it hits at one of the axes-- at the corner of the budget constraint. At this point, the curve need not be tangent to the budget constraint. This situation is known as a corner solution since...well, you're in the corner. More importantly, due to the lack of tangency, small changes in prices need not lead to small changes in behavior.

This makes all the difference. If terrorists and on-campus shooters are corner solutions, then making marginal changes to increase the cost of their activities isn't going to change their behavior. Only large-scale shocks to the system will generate a change in behavior. Marginal changes, such as longer searches at airports, won't do anything.

Which brings us to allowing guns on campus. If school shooters are resigned to dying in the process-- and, sadly, I think this is largely the case-- then I'm not sure this will be the cure-all that some of the supporters think it may be. It would likely lessen the impact of each shooting, and this shouldn't be undervalued. I suppose a shootout between an aggressor and an armed student could result in the case of fellow classmates taking more stray bullets than if only one person had a gun, but I find this awfully unlikely. I don't see the number of incidents going down. Of course, this can't be directly tested; no one knows what would have happened if the law had/hadn't changed, though if there is enough variance between states in on campus gun laws then this may lead to a testable scenario (though the time frame would have to be pretty long-- these shootings, thankfully, do not happen with great frequency).

I'm certainly in favor of allowing guns on campus; liberty is good, and limiting the scope of those attacks is good as well. But I don't think it's going to make them once-every-twenty-years occurrences.

My Next David Skarbek-esque Post: The Federalist Papers and Legislative Tenure

I always feel like fellow blogger David Skarbek when I post something that might contain academic value. (Emphasis on 'might.')

Anyhow, when I'm interested in a topic, I find it useful to break out the Federalist Papers and seeing what those three had to say on the topic. Currently, I'm interested in all things legislative tenure. Onwards!

- Federalist 39 (Madison):

"If we resort for a criterion to the different principles on which different formsof government are established, we may define a republic to be, or at least may bestow that name on, a government which derives all its powers directly or indirectly from the great body of the people, and is administered by persons holding their offices during pleasure for a limited period, or during good behavior."

"It is sufficient for such a government (MER: a republic) that the persons administering it be appointed, either directly or indirectly, by the people; and that they hold their appointments by either of the tenures just specified; otherwise every government in the United States, as well as every other popular government that has been or can well be organized or well executed, would be degraded from the republican character." (emphasis in original)

"According to all the constitutions, also, the tenure of the highest offices is extended to a definite period, and in many instances, both within the legislative and executive departments, to a period of years. According to the provisions of most of the constitutions, again, as well as according to the most respectable and received opinions on the subject, the members of the judiciary department are to retain their offices by the firm tenure of good behavior."

Nothing too surprising here. Remember, limited office is a big topic at the time-- monarchy and its indefinite rule wasn't the most popular idea at the time. It is interesting that judges pretty much get a free pass.

- Federalist 53 (Madison):

"The period of service ought, therefore, in all such cases, to bear some proportion to the extent of practical knowledge requisite to the due performance of the service."

"In a single State, the requisite knowledge relates to the existing laws which are uniform throughout the State and with which all the citizens are more or less conversant... The great theater of the United States presents a very different scene. The laws are so far from being uniform that they vary in every State...public affairs of the Union are spread throughout a very extensive region and are extremely diversified by the local affairs connected with them, and can with difficulty be correctly learned in any other place than in the central councils, to which a knowledge of them will be brought by the representatives of every part of the empire."

"...the business of federal legislation must continue so far to exceed, both in novelty and difficulty, the legislative business of a single State, as to justify the longer period of service assigned to those who are to transact it."

"A few of the members, as it happens in all such assemblies, will possess superior talents; will, by frequent re-elections, become members of long standing; will be thoroughly masters of the public business, and perhaps not unwilling to avail themselves of those advantages. The greater the proportion of new members and the less information of the bulk of the members, the more apt they will be to fall into the snares that may be laid for them."

The final quote has public choice written all over it. Should a gap develop between tenured, in-the-know legislators and the new, still-learning-the ropes legislators, then self-interested action will likely increase.

The earlier quotes in Federalist 53 concern the fact that most State constitutions at the time had tenure of representatives at one year, yet the Constitution was proposing tenures of two years.

Monday, April 14, 2008

What Should Be of Adam Smith’s Home?

Story here.

I say auction it to the highest bidder.

Which Economic Theory is the Most Underappreciated?

Which theory in economics deserves more attention and thought? One of the reasons I am such an avid EconTalk listener is that I get to spend time listening on topics like the division of labor or opportunity cost that seem to have a deeper level than I had previously realized. So I’d like to invite the readers to comment on which economic concept or theory they feel is underappreciated by the science.

My answer, by the way, is the Homevoter Hypothesis by William Fischel. To boil it down to the idea that homeowners vote based on the potential impact on their housing price sterilizes the real power of this idea. Empirical evidence by researchers not named Fischel is limited but very supportive. Classical liberals should use it as support for sharpening the focus of the EPA to non-local pollutants and push for greater replacement of Federal powers with local government control.

Milk Test 2008

This weekend, I had a taste test between organic 1% milk and "normal" 1% milk. I really didn't think I'd be able to to tell the difference-- nor would the person to which I directed the challenge in the first place. To my surprise, there is a mildly perceptible difference in taste, but they actually smell distinctly different. I'm still not sure I can support organic foods due to the fair-trade foolishness that usually comes with it, but organic milk does tend to last longer in your fridge. So they've got that going for them. Which is nice.

But it got me to thinking: My opponent drinks only organic milk. I drink only "normal milk." Obviously, we're both not immediately familiar with the milk foreign to us-- but does that mean we're in the same positional (dis)advantage for participating in the taste test? Presumably, my opponent switched to organic milk at some point-- does the memory of "normal" milk help in discerning the difference? Could "normal" milk in all its capitalist, mass-production evil have diminished my taste buds so as to render me useless in a challenge like this? Is the problem really symmetrical?

Sunday, April 13, 2008

Netflix and Price Discrimination

Third Degree Price Discrimination occurs when consumers are separated into different groups and charged different prices. I have discovered a clever ruse by that applies this concept by targeting Netflix customers (which I am). Now this will only work on your computer ONCE, so follow these instructions carefully.

  1. Open a new web browser, go to where they will offer you 50 free downloads to subscribe. Keep this open.
  2. Open another new web browser, go to This is the web address that I received on a flier with my Netflix DVD arrival. What is different?

With the /netflix11 extension, you will be offered 35 free downloads instead of 50 (i.e. a higher price). Emusic has apparently discovered (or they believe) that customers of netflix are willing to pay a higher price than the general internet music consuming public. We have been segmented, and are believed to have a higher willingness to pay. I should note that if emusic would not have been able to price discriminate and instead offer one single price, then they probably would have charged some middle price between 35 and 50.

Saturday, April 12, 2008

The Perfect Substitute Welcomes Justin Ross!

I'm not sure if you've noticed, but at times the posting here on The Perfect Substitute has been a bit sporadic. Alright, of course you've noticed...but towards that end, we've picked up another blogger! We'd like to introduce Justin Ross as a new contributor. He knows more about spatial econometrics than you do. He's finished his dissertation at West Virginia University and will be heading off to the School of Public and Environmental Affairs at Indiana University in the Fall. He's done a lot of work in Urban/Regional, though is increasingly merging into the Public field.

Anyhow, the last two posts were his, and we're looking forward to more great stuff from him! Welcome aboard, Justin.

In completely unrelated news, I'm currently reading the biography of Charles Schulz and A Splendid Exchange, both of which I recommend. I won't mention the Charles Schulz book again, but considering how widely known Peanuts is, I think the general public knows little to nothing about the creator. It's an interesting read. I will be posting concerning the latter once I get through it-- I'm a slow reader, but will try to finish it soon. A Splendid Exchange is nicely written and gives a great account of the historical roots of trade and early long-range commerce (for the first quarter of the book, anyway).

Why Experimental Methods in Education Are So Important

Full story here:

Vaughn learned that the regional pass rate for girls was low because it was rooted in the economic need of young girls to work at home. They begin missing classes, then failing exams, often ultimately failing or dropping out of school.

"I found every one a girl younger than she and said, 'You're responsible to make sure she learns.' I taught them how to teach each other."

It worked. In two years, the group of girls had grown to 80 -- and they were succeeding in school. With a grant, Vaughn was able to hire teachers, and the program continued to expand despite her attempt to set a limit of 100 girls.

"The girls wanted to take it to 10,000," says Vaughn.

To keep their "10,000 Girls" education program going, the girls asked Vaughn to teach them to bake. They began selling cookies and juice and were able to buy books and supplies.

Soon after, they got their older sisters, aunts and cousins -- who had already failed out of the school system -- involved in baking and selling goods. The entrepreneurial element of the program was born.

"We have girls who were told they'd never get through high school who are at university now," beams Vaughn. "We hope that if we get 10,000 girls out there, 1,000 girls will come back to Kaolack and work. It would revolutionize the whole region.

Fortunately Vaughn was in Senegal, not California, where home-schooling is a crime.

Friday, April 11, 2008

Limited Only by the Extent of the Market

The Perfect Substitute recently hit the 10,000 visitors mark. Such high demand and expanding market prompted Matt and David to divide and specialize a bit further by inviting me to join in production. So a brief introduction….I have defended my dissertation on Taxation and Space, and will soon take the post of Assistant Professor of Public Finance in SPEA at Indiana University in Bloomington. My fields are public, urban, and regional economics with my econometric interests in spatial, quantile, and Bayesian methods. I think of myself as a classical liberal, but I limit my political activism to small one-time donations to the campaigns of candidates I especially despise (a suggestion I picked up from Tyler Cowen’s Discover Your Inner Economist). I look forward to posting on the Perfect Substitute, where the experts go first.

Wednesday, April 09, 2008

Draws and Chess

I'm not completely ignorant of chess, but to say I've got any more than a passing knowledge of it would be a bit misleading. (I know for a fact that one reader of this blog knows a good deal about chess, so I'm curious as to their take on this post. We'll call him T., Tom J.) I enjoyed playing it sporadically when I was younger, and would still enjoy playing it now, but there seem to be matching problems and, of course, a limit on the hours in the day. Oddly enough, if I were to play ten games of chess right now, I think I'd perform better in the first game than the tenth...though that's another discussion for another time.

Anyway-- there seems to be a widespread problem with the chess world of too many draws in high level chess. Of course, this isn't a structural problem with chess per se, just people's preferences for the outcomes they'd like to see. Nonetheless, part of sport is spectator, so that aspect does need to be taken into consideration.

Hockey had this same problem a few years ago; people thought overtime was boring and resulted in too many ties. Back then, teams would play, and the winner got 2 points, if the two teams tied they each got 1 point, and the loser got zero points. At the end of regulation time, if the game were tied, teams became extremely risk averse. Settling for one point in most scenarios was better than risking for two and possibly coming up with none. Thus, overtime play became extremely defensive and fans were none too pleased.

How did the NHL deal with this? Modify the payoffs. (They also changed the number of players on the ice to enhance the openness, but I believe the rule changes to have had a far larger impact.) Instead of coming up with zero points for an overtime loss, teams instead retained their one point. Winners in overtime still get their two points. Basically, you've now got nothing to lose by going for a win in overtime. To think-- incentives matter! Ties went down, offensive play went up in overtime, and fans on the whole were pleased with the result. Changing the structure of the payoffs changes the outcome.

Why can't something similar to be done with chess? If people want to see more wins, why not make wins more valuable? At some point, I presume you could make wins so valuable such that no one would want to offer a draw. If it's really that big of a problem-- and maybe it isn't-- this seems like an obvious solution that maintains the integrity of the game. Though perhaps there would be a large resistance to a change even on this margin...

Could it also be that since a number of these draws occur when there are a lot of pieces on the board-- the only time I'd draw with my brother is when we each had a king and a king only left-- well established players are saving their mental acuity for a time when it is most valuable to expend a lot of it? Athletes oftentimes speak about giving 110% on every play, but that's pretty clearly not the case. Running backs could fight for every inch on every play, but sometimes it is best to accept the play for what it is (or isn't) and retain your energy for another opportunity. Pitchers don't put everything they have into each pitch-- starting pitchers, especially. Ultimate fighters aren't going all out at every second of the match either-- they wait for the right time to make the large expenditure of energy. Why should chess be any different?