Tuesday, August 30, 2011

Non-discrimination in the NFL labor market

One powerful argument in favor of free markets that I like to incorporate early in the Micro Principles semester is that market forces help mitigate discrimination. If you choose to indulge personal preferences based on race, sexual orientation, disability status, age, whatever-- you bear the cost of your decision. Peter Leeson's The Invisible Hook has a nice chapter on the issue as it pertained to pirates. I think I've now got a new example.

Michael Vick signed a sizable contract yesterday with the Philadelphia Eagles; 6 years with approximately $40 million guaranteed. The overall deal could be worth upwards of $100 million. Michael Vick is still considered by some to be un-signable-- fan bases would rise up in discontent and protest the move. As such, some teams choose to discriminate-- rightly or wrongly, whatever your moral compass, it's still holding a bias-- against Michael Vick on the basis of his past troubles.

What's this get the Eagles? In theory, a better-than-replacement player because they choose not to indulge their preferences against certain individuals. I'm a 49ers fan-- and a particularly poor season this year that would reunite Andrew Luck with Jim Harbaugh wouldn't be the worst thing in the world-- but I wouldn't have any qualms with the Eagles winning the Super Bowl this year, as this example becomes that much better.

Monday, August 29, 2011

The Game Theory of Usain Bolt's False Start

Usain Bolt was recently disqualified for his now infamous false start at the World Championships, and it has generated controversy for the recent rule change which eliminated the allowance of one false start. What you might not be familiar with is the game theory behind the rule change, and how the ancient Greeks created an incentive compatible rule to solve the same problem.

The essence of the problem is the ability of racers to collude against the heavy favorite, favorites like Usain Bolt. If every runner is given one permissible false start, then in an 8-man race, then a group of 7 colluders can create 7 false starts without resulting in a disqualification. This allows the colluding runners to essentially create a "snap count" in which they cycle through false starts, knowing that some certain number will be the "true start." Of course, the front-runner knows this, which makes them hesitant and more conservative coming out of the starting blocks, shifting the advantage to his slower rivals. This also makes for slow television drama, which reduces the popularity of the sport among those more interested in world record times.

So the IAAF's solution was to ban false starts altogether, which still subsequently damaged Bolt's opportunity (and seems to have backfired on making the sport more popular). Now, the Ancient Greeks devised a different rule altogether to circumvent this problem: they beat anyone who committed a false start.

Sure, it sounds (and arguably is) barbaric to physically abuse an athlete for jumping the start. However, this undermined the incentive to cartel against front-runners. The current cartel system works because there are not particularly strong incentives against being the first false-starter, and it shifts the advantage away from the front-runner. Under the Greek rules, however, being the first false starter meant that you would be beaten and would be in a physically worse condition to compete than your co-conspirators, who have an incentive to free-ride on the first mover. Only a sucker to cheap talk volunteers to be the first false starter in that conspiracy.

So the Ancient Greeks devised what, on the surface, appeared primitive, but was also an incentive compatible rule, and one that the modern sophisticated members of the IAAF presently would like to emulate without the violence.

Andolfatto on Fiat Money and Somalia

David Andolfatto, from the Research Division of the Federal Reserve Bank of St. Louis, summarizes the interesting work of Ostroy, Kocherlakota, Wallace and others, who highlight the role of money as a record keeping device. He then links this literature to my paper with L.H. White on Somalia. Since we here at TPS relish in shameless self-promotion, I thought I'd send this along.

Thanks to Andolfatto for linking to our paper!

Shocking finding of the day

Wait-- let me get this straight: If you lower taxes, then you see strong growth?

Go figure.

(Though I love the "problems" discussed in this bit-- the local economy is so strong that it's hard to find qualified people for expanding businesses and residential vacancy is remarkably low.)

Saturday, August 27, 2011

Menu Costs

I'm trying out a new meme, wherein I'll post examples of menu costs captured as I wander about (or, as in the case below, attempts to avoid or defer higher menu costs). Enjoy!

Friday, August 26, 2011

Three Important Points on Deficits, Debts, and Taxing the Rich

I've been meaning to weigh in on a number of issues as of late on a number of policy proposals on how to deal with swelling government debts. Between debt ceilings, Warren Buffett's call for higher taxes to balance the budget, and calls for the possibility of a federal balanced budget, there is plenty to say. While each deserves a deeper treatment, I think there are a couple of important points the deeply vested should keep in mind:
  1. On Debt Ceilings and Government Default: Apparently, the debt ceiling has been the political $20 bill nobody has tried to pick up over the last few decades, until now. Now it is being used as a tool to restrain government spending growth. I am sympathetic to the view that we should restrain government spending (an understatement), but it is important to remember that the economic cost of this spending is largely due to the fact that it can missallocate resources and encourage political rent seeking. Would that be improved if the government defaulted on its existing debt obligations?

    Well for all intents and purposes, the Federal government does not appear to have any comprehensive system for dealing with arrears. So, if we reach the date where we decide that all those with claims on Federal cash are not going to be fully paid, we do not have a way of deciding who is first in line for the cash we do have to distribute. (Private sector bankruptcy, by comparison, has well defined rules and guidelines.) Russia once dealt with this with "the first in line" approach. If they happened to have the cash one day, they handed it out to whoever was first in line at that moment. In the United States, this would likely be very political and there would be a lot of resources devoted to being first in line. I don't see that as being a improvement in the allocation in resources or rent-seeking over the normal rate of government growth.

  2. On Buffett's call for higher tax rates on the rich: Buffet complains that his tax rate is lower than that of his staff, demonstrating once and for all that expertise is truly non-transferable. Regardless of what his effective marginal tax rate is, you simply cannot ignore the fact that his income derived from after tax corporate profits. Simply ask, "would Buffet become richer if the corporate income tax rate (39.3% average combined federal and state) were reduced to zero?" As a Berkshire Hathaway shareholder, he absolutely would because more profit would be available for owners equity and retained earnings. Employees are compensated on a pre-tax basis, and since their payments are (statutorily) independent from the CIT, you cannot selectively ignore this point.

  3. On Balanced Budget Amendments: Some states have them, and there are calls for a Federal equivalent. Often lost in this debate is what this actually means to "have a balanced budget." For instance, when Miron points to the future expansion of state debt, Arnold Kling says "For me, this is counter-intuitive, because many states have constitutions that require balanced budgets." It is counter-intuitive because budget balancing requirements are less impressive than they often sound.

    Specifically, what does it exactly mean for "the budget to balance?" Does it mean that the proposed budget is in balance? In which case a deficit may be run if planned expenditures exceed expected revenue. Does it mean spending should equal revenue? Well, if the state of Indiana decides to build a $100 billion in infrastructure, it could spend $100 billion in cash this year, OR it could take out a $100 billion loan and spread the spending over 10-30 years. Both could be accomplished while balancing the budget, but the latter approach adds significant debt while not necessarily striking anyone as irresponsible. Alternatively, revenues could fall and we could meet our planned expenditures with reserve cash, not adding to the deficit but not balancing the budget either.

    These are the kind of details that get people overly excited about the powers of a balanced budget requirement. Oh, the woes of stocks versus flows!

Wednesday, August 24, 2011

Insuring $12 billion in gold

MR pointed to a fantastically intriguing article yesterday on Venezuela's intentions to transport $12 billion in gold-- 211 tons of it-- back to Venezuela, presumably Caracas. Before we get into it, this is a great phrase:

"...the market in physical gold is tiny, and largely comprised of nutcases."

Not sure if that became the case when Chavez got involved or if he just reinforced that characteristic. Anyway, experts estimate that this could take 40 trips. (Sorry, one more diversion-- but who is an expert in transporting 211 tons of gold?) Naturally, insuring this transfer is something that needs to be considered. The article claims that no company would be willing to take that contingency onto its books (though I think that's more a function of dealing with Venezuela than the sheer value of gold, though both certainly do matter).

As a side note: If Venezuela considers itself socialist-- either in practice or doing what they can to get there-- doesn't the government play the role of providing insurance? Why hasn't anyone brought this point up? Insuring your own transfer makes about as much sense as anything Chavez does anyway.

Anyhow, I think people are thinking of this as a financial issue and not quite enough as a practical issue. Does there exist a risk premium by which, say, Lloyd's would be willing to take this on? I'm sure there is-- in the only previous instance of even beginning to approach this level of gold transfer, the rate came to 3.3%. Chavez' rate would undoubtedly be higher since there's a decidedly non-zero chance that he'd be involved in any nonsense that arises in transporting all that gold. Then again, it's presumably an international deal-- between Venezuela and an insurance company-- so the insurance company can decide not to pay and there's really no legal recourse towards claiming a settlement.

But it would seem that a superior risk/reward tradeoff could be achieved by simply arranging a very large number of transfers-- like in the thousands? I didn't see anything in the article saying that Chavez needed all of the gold quickly, so time's not a large problem. Let's say the going risk premium is 10% for Chavez to keep the numbers easy. That means he's paying $1.2 billion in premiums. What if you didn't pay any premiums and made any of the following arrangements:

- 1 million transfers of $12,000 in gold. Plus: That's a small amount of gold and could be transported in just about any way possible-- civilian aircraft, boats, anything. At current prices, that's what, about 6 or 7 ounces. Minus: That's a whole lot of transfers; coordination costs would be high.

- 100,000 transfers of $120,000 in gold. It's still a fairly small amount of gold-- 60 or 70 ounces, maybe 4 or 5 pounds-- so much of the benefits remain from above while the number of transfers is reduced by an order of magnitude.

- 10,000 transfers of $1.2 million in gold. At this point, that's a considerable sum of money and a lot of transfers to arrange-- the coordination costs here probably outweigh the benefits from spreading the money around.

I think the middle one provides the best characteristics-- yes, it's a lot of transfers, but you'd need more than 10,000 of those transfers to encounter trouble in order to outpace the risk premium (I know I came up with 10% to keep things easy, and that's where 10,000 comes from, but even at 3.3% you'd need 3,300 thefts.) So why not break it up and take your chances with not being robbed thousands of times? You're effectively insuring yourself this way (not in the facetious way I alluded to above). Plus, incentives are high to make certain nothing bad happens to the gold since it's coming right out of your pocket every time the gold never makes it.

And yes, I realize that hiring shady people may be a problem-- but if that's the concern, you can't automatically assume that away at any point in the process. So that impacts all plans. In fact, if you assume that shady people are more likely to get involved when there's more money to be had, then it would be MORE of an issue in large-scale transfers like the ones described in the article.

Tuesday, August 23, 2011

Thiel, Friedman and Seasteading

I apologize for my lack of presence over the last few months-- with the start of school and the start of college football season (and thus the third incarnation of the Gus Rankings!), I should be a more frequent commentator.

In the meantime, here's a fun article about Peter Thiel, Patri Friedman and seasteading. I think this was my favorite line:

Margaret Crawford, an expert on urban planning and a professor of architecture at Berkeley, calls it "a silly idea without any urban-planning implications whatsoever."

Indeed.

Tuesday, August 16, 2011

Paul Krugman: Sci-Fi Fan Boy

At the Beacon Blog, Mary Theroux posts an amusing video wherein Paul Krugman states that the US could get out of the slump by faking an alien attack.
If we, If we discovered that space aliens were planning to attack and we needed a massive build up to counter the space alien threat and, really, inflation and budget deficits took secondary place to that, this slump would be over in 18 months. [...] There was a Twilight Zone episode like this in which scientists fake an alien threat in order to achieve world peace. Well, this time we don't need it, we need it in order to get some fiscal stimulus.
Seriously. It was on CNN. Of course, this isn't the first time Krugman has shown is Sci-Fi side. Here's the abstract from his paper titled "The Theory of Interstellar Trade":
This article extends interplanetary trade theory to an interstellar setting. It is chiefly concerned with the following question: how should interest charges on goods in transit be computed when the goods travel at close to the speed of light? This is a problem because the time taken in transit will appear less to an observer traveling with the goods than to a stationary observer. A solution is derived from economic theory, and two useless but true theorems are proved.

Tuesday, August 09, 2011

Keynes on the London Riots

Via a friend on facebook. The characterization of JMK himself might be unfair, but knowing that some will buy into it makes this funny nonetheless.


Wednesday, August 03, 2011

Debate @ LSE

The much anticipated debate between George Selgin, Jamie Whyte and Lord Skidelsky, Duncan Weldon will air today at 3PM EST. You can listen online.