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.)

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!

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.

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.

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.

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.

The Fed's Balance Sheet: Size and Composition

Here's an illustration of the Fed's balance sheet from the Cleveland Fed.

A lot of talk has focused on the expansion of the Fed's balance sheet since Sept 2008. The big question: why no inflation? Bob Higgs writes:

Ordinarily, one would have expected this development to produce hyperinflation of the general price level. However, the price level has increased quite moderately, and for a while many analysts warned that deflation was the greater risk. [...] Not only has hyperinflation failed to appear; even garden-variety inflation of prices in general has been extremely low by the standard of recent decades.
[...]
The most obvious answer, of course, is that the banks are simply sitting on the reserves, rather than lending them to customers. And why are they doing so? The usual answer is that since late 2008, the Fed has paid the banks a rate of interest on their reserves at the Fed. This interest rate has recently been in the range 0-0.25 percent. Although this is not nothing, it verges very closely on nothing. And if one notes that the purchasing power of money has fallen at least a bit, it is clear that the banks are realizing a negative real rate of return on their holdings of excess reserves at the Fed.
[...]
Moreover, they are doing so notwithstanding that they appear to have the option of lending at 3.25 percent to their best corporate customers and at higher rates to their less creditworthy customers.

So we haven't seen much inflation yet. But if (when?) banks start lending out reserves, we should see it pick up. Right?

Good question. The standard view is that the Fed can simply sell its assets to keep the money supply from expanding when the money multiplyer picks up. But the Fed's balance sheet ain't what it used to be. It is not only larger, but also differs in terms of composition. Note that traditional security holdings have actually fallen since Dec 2007. The net increase stems from loans to financial institutions in 2008 and 2009 (much of which has already been repaid) and then large scale asset purchase programs associated w/ Freddie and Fannie starting around Jan 2009. The Fed can certainly sell these assets. But at what price? Will they be able to suck up enough money when the time comes? We will soon find out.

Addendum: Check out this Barron's article by Walker Todd and Bill Ford.

The SPEA Research Paper Series

The series is now available online through SSRN. Here is the announcement, but I think they should have led with something about Lin Ostrom's papers being available through the series:

INDIANA UNIVERSITY-BLOOMINGTON: SCHOOL OF PUBLIC & ENVIRONMENTAL AFFAIRS RESEARCH PAPER SERIES
View Abstracts: http://www.ssrn.com/link/Indiana-U-Bloomington-Public-Enviro-PUB.html
Subscribe: http://hq.ssrn.com/jourInvite.cfm?link=Indiana-U-Bloomington-Public-Enviro-PUB

The Indiana University School of Public and Environmental Affairs (SPEA) is a world leader in public affairs and the environmental sciences and is the largest school of public affairs in the United States. In the most recent "Best Graduate Schools" rankings by U.S. News & World Report, SPEA ranked second and was the nation's highest-ranked graduate program in public affairs at a public institution. The School's curriculum and research are distinguished by a vigorous interdisciplinary approach to education and problem-solving. SPEA will celebrate its 40th anniversary in 2012. The SPEA working papers series eJournal contains works in progress from our faculty.

Lucas on the Recovery

Robert Lucas gave a talk recently at University of Washington on Macroeconomic recovery in the US. His slides are available.

Lucas argues that, by imitating European policies on labor markets, welfare, and taxes, the U.S. has chosen a new, lower GDP trend. If this is correct, the weak recovery we have had so far may be all the recovery we will get. He uses these two slides to support his argument. The first shows the spread in growth rates which Lucas describes as the cost of the welfare state--note the lower trend for most of Europe. The second shows the US recovery in the recent recession.

What do you think?

[HT: PJB]

GeoFRED

I just learned about GeoFRED, which allows one to create maps shaded to reflect Federal Reserve Economic Data. (Justin, Matt: Tax collections by state are available in a variety of categories.) This could be a useful addition to classroom or public lectures.

Blockquoting X

X = Ben Bernanke.

The reason the Federal Reserve was founded a century ago was to try to address the problems arising from financial panics, which did, by the way, occur in an unregulated environment in the 19th century.

Discuss.

The Political Economy of Coin Images

This story is old news-- a combination of free shipping on U.S. Mint coins and credits cards giving frequent flyer miles for spending yields free flights-- but this bit was new to me:

Native American coins bear the likeness of Lewis and Clark guide Sacagewea. By law, Sacagewea must appear on one in every five dollar coins manufactured, the legacy of political dealings on Capitol Hill.

The latest example of Luther's Juicing the Mitchell...

...and not a moment too soon!

Line of the Day: China

China has no fewer than 428 think tanks involved in policy formulation—a number second only to the United States.

That's from a bit on China's foreign policy in the Boston Globe.

Math in Sports

Here's a bit from Bill Simmons' new writing project (the piece is not by him). It feels familiar. Some thoughts:

1. I've never understood sabermetrics to be about "solving" sports. It's a tool to gain an edge on some margin by which you generate for yourself an information advantage. Sports and management decisions are not solvable; find an edge, exploit it.

2. Sabermetrics developed with baseball; it's evolution into basketball and football seems to overlook the nature of separability in the baseball production function (and the lack thereof in the production functions for basketball and football). I'm not sure that this is completely intractable but it's a hurdle, and not an insignificant one. "Finding the right metrics" in basketball and football doesn't get at the root issue.

3. Since we're here-- here's the trailer for Moneyball. Jonah Hill playing Paul DePodesta (I understand he's a composite of individuals, but nonetheless) has to be one of the most surprising movie castings in recent memory, though the more I consider it, I think it may work out well. And is it mandatory that Kevin Costner be cast in any and all movies concerning baseball?

Blockquoting Whom?

Can you guess which Nobel Laureate recently penned...errr typed...these words?

The trick, always, is not to take your equilibrium stories too seriously, to understand that they’re aids to insight, not Truths; given that, I don’t believe that there’s anything wrong with using equilibrium analysis.

If the hint didn't give it away, follow the link or check below the fold.

+/-

Paul Krugman

Q & A

Here's a Q & A I did concerning the gambling work I've been doing and will be doing.

A few betting market notes...

Here's a fantastic story-- in 2003, a Mr. Nick Newlife put £1,520 at 66-to-1 odds that Roger Federer would win seven Wimbledon titles. (He currently stands at 6.) Unfortunately, in 2009, our bettor passed away...yet made the appropriate arrangements for his bet to be claimed should it pay off. Should Federer get his seventh, Oxfam benefits to the tune of £101,840.

Also-- here's a brief summary of our latest work on MLB betting markets.

On Hayek's Proposal

My colleague Nick Snow asks, "What's so funny about peace, love, and a free market in money?" He uncovers this 1977 WSJ article, where Hayek presents his Denationalisation of Money proposal to a wider audience.

I have written critically on Hayek's proposal. Nicolas Cachanosky provides a summary of my paper.

Before asking whether there is something funny about a free market in money, a distinction should be made between inside and outside money. Under free banking, private banks provide inside money (banknotes and demand deposits) redeemable for the prevailing outside money (gold and/or silver, historically). Under central banking, private banks provide inside money (demand deposits) redeemable for the prevailing outside money (Federal Reserve notes).

After making this distinction, it is possible to see what is so funny about Hayek’s proposal. He wants private issuers to provide outside money. He wants the monetary system to work without the very constraint that made episodes of free banking successful: a contractual obligation to redeem notes for some scarce commodity. That, I believe, is laughable.

The Future Monetary System of Zimbabwe

I blogged recently about Zimbabwe's now defunct 100-trillion-dollar note. Currently, citizens of Zimbabwe are free to use US Dollars and South African Rand for their transactions. Since inflationary finance and seigniorage are often key political tools in developing countries, one should not be surprised if Zim notes make a return in the near future. New Zimbabwe reports:

Finance minister Tendai Biti says the country needs at least six months import cover and a sustainable track-record of economic growth, inflation stability and above 60 percent capacity utilisation in industry before the Zim dollar can be brought back into circulation.

However central bank chief, Dr Gideon Gono said the country should consider adopting a gold-backed currency.“There is a need for us to begin thinking seriously and urgently about introducing a Gold-backed Zimbabwe currency which will not only stable but internationally acceptable,” he said in an interview with state media.

Whether Zimbabwe will adopt a commodity-backed system remains to be seen. I think it is highly unlikely. But it is encouraging to see that option on the table.

Blockquoting X

X = Hal Varian:

But where to get ideas, that's the question. Most graduate students are convinced that the way you get ideas is to read journal articles. But in my experience journals really aren't a very good source of original ideas. You can get lots of things from journal articles--technique, insight, even truth. But most of the time you will only get someone else's ideas. True, they may leave a few loose ends lying around that you can pick up on, but the reason they are loose is probably that the author thought about them a while and couldn't figure out what to do with them or decided they were too tedious to bother with--which means that it is likely that you will find yourself in the same situation.

My suggestion is rather different: I think that you should look for your ideas outside the academic journals--in newspapers, in magazines, in conversations, and in TV and radio programs. When you read the newspaper, look for the articles about economics...and then look at the ones that aren't about economics, because lots of the time they end up being about economics too. Magazines are usually better than newspapers because they go into issues in more depth. On the other hand, a shallower analysis may be more stimulating: there's nothing like a fallacious argument to stimulate research.

Emily Skarbek on Reason TV

Blockquoting X

X = John Taylor, as quoted in this WSJ article on Zimbabwe's now-defunct 100-trillion-dollar note:

No self-respecting monetary economist goes around without a 100-trillion-dollar note.

Being a trillionaire ain't what it used to be.

[HT: Dan Smith]

Blockquoting X

X = J. Bradford Delong:

The fact is that we need fewer efficient-markets theorists and more people who work on microstructure, limits to arbitrage, and cognitive biases. We need fewer equilibrium business-cycle theorists and more old-fashioned Keynesians and monetarists. We need more monetary historians and historians of economic thought and fewer model-builders. We need more Eichengreens, Shillers, Akerlofs, Reinharts, and Rogoffs – not to mention a Kindleberger, Minsky, or Bagehot.

I am pleasantly surprised that he feels this way.

What I've Been Writing

In my latest working paper, I consider the debate between Friedman and Hayek in the 1970s and 1980s following the publication of Hayek's Denationalisation of Money. Here's the abstract:

Hayek (1976, 1978, 1984, 1990) is often credited with the resurgence of interest in alternative monetary systems. His own proposal, however, received sharp criticism from Friedman (1984), Fischer (1986), and others at the outset and never gained much support among academic economists or the wider population. According to Friedman, Hayek erred in believing that the mere admission of competing private currencies will spontaneously generate a more stable monetary system. In Friedman’s view, network effects, to use the modern term, discourage an alternative system from emerging in general and prevent Hayek’s system from functioning as desired in particular. I offer new evidence provided by recent events in Somalia as support for Friedman’s initial doubts.

As some of you will no doubt recognize, this builds on my earlier work with Larry White.

Did Intrade Forsee Bin Laden's Capture?

Intrade might have foreseen the capture of Saddam Hussein, but it doesn't look like that was the case this time:

And the prediction market doesn't appear to be waiting around for a long-form death certificate to close the deal.

Round Two

Title IX Shenanigans

Hey, it's my first "The War on Duh" post!

The title: Schools distort figures to meet Title IX

The shocking truth: "Many Division I schools are distorting the number of students participating in sports so they can comply with Title IX..."

The fantastic quote: "Among the tactics is to pad rosters of women's teams with unqualified players or even men. The [NYT] found schools counted athletes who no longer wanted to compete or never played for that team, listing male practice players as women..."

Who would have guessed?!

Hedge Fund Managers and Sports

I'm not convinced that the causality is there, but here's a nonetheless intriguing bit from Business Week (which, by the way, is orders of magnitude better than when I started getting it a few years ago) about the poor performance of hedge funds when their managers purchase sports teams.

Buchanan and Wagner (1977)

[HT: Josh Hall]

Aid is a success! No, it’s a failure! Wait, it depends.

Aid evaluation is all the rage. But how is successful evaluation possible if we don’t know the benchmark? Some aid advocates argue that aid can end world poverty while some critics of aid are more modest stating that aid can not increase growth but may ease human suffering. In a recent debate in the Cato Journal, Peter Leeson and David Skarbek argue, in their article 'What Can Aid D0?', that foreign aid is both a success and a failure:

“Foreign aid’s advocates claim aid has been successful. Aid’s critics claim aid has failed. We explain why both camps are correct. Aid can, and in a few cases has, increased a particular output by devoting more resources to its production. In this sense, aid has occasionally had limited success. However, aid cannot, and has not, contributed to the solution of economic problems and therefore economic growth. In this much more important sense, aid has failed” (page 392).

They go on to argue that, on its best day, aid can provide more ‘stuff’ but not find the solutions to the economic problem of poverty:

“So, what can aid do? Like other forms of central planning, aid can increase X by devoting additional resources to X’s production… If planners pick a specific outcome, such as more immunizations, aid can provide additional resources to produce immunizations. All of the “success stories” that aid’s advocates highlight are of this nature (page 394)…Solving the economic problem determines whether a country’s economy develops. It is strange, then, that professional economists have had trouble distinguishing the positive relationship between inputs and outputs from solving the economic problem when it comes to evaluating foreign aid” (page 391).

In a critique, Gustav Ranis claims that “. . . Skarbek and Leeson are ready to throw the baby out with the bath water,” but that different forms of aid, such as grants for projects, can be more effective than past aid. However, Leeson and Skarbek remind us in a follow up piece of the important distinction between positive versus normative analysis:

“The thrust of our original paper, which asked the simple question, “What can aid do?”, was that no foreign aid initiative can solve the economic problem societies must solve to climb from poverty. That problem requires identifying the resource allocation that maximizes resources’ value to society. “Grants for projects” don’t help us identify this. They’re an example of what aid can do—increase a predetermined output by devoting more resources to its production—not what aid must do to make poor countries rich, which is to solve the economic problem stated above. Whether developed countries should use aid to increase a predetermined output by devoting more resources to its production is a normative question. Our original argument analyzed a positive one” (pages 1-2).

So the next time a shouting match breaks out between those who claim aid is successful and those saying aid is a failure, perhaps we need to first agree on what aid can achieve and evaluate aid in this context.

HERE IS WHERE YOU PLACE THE HIDDEN TEXT.

Depression Era Housing Prices

Caplan at EconLog asks why housing prices held their ground for the most part during the Great Depression. Obviously, no one can say why prices are what they are, but my suspicion is that the mortgages played a role somehow. In fact, early mortgages were made interest deductible because it was primarily a business expense, and mortgages did not become a major homeowner vehicle until after the Great Depression began. From the NYT:

It was not until the 1920's and the spread of the automobile that home mortgages outnumbered farm mortgages. In the 1930's, the mortgage industry got a huge assist from the feds — not from the tax deduction, but from agencies like the Federal Housing Administration, which insured 30-year loans, and, over time, the newly created Federal National Mortgage Association, or Fannie Mae. Before then, the corner bank would issue a mortgage and wait for the homeowner to pay them back; now savings and loans could replenish their capital by selling their mortgages to Fannie Mae — meaning they could turn around and issue a new mortgage to someone else.

So in part, the stability of housing prices might have been partly due to FHA induced demand for housing stock, relative to other assets and consumption possibilities.

I'll leave it to my Austrian co-bloggers to decide if this fits into a Austrian/Recalculation story of explaining the prolonging of the Depression by changing the relative prices of capital, or if this aided as a form of liquidity the Fed failed to provide.

Gresham's Law and Zombie Banks

From TC at NYT:

ALL of the ways forward look ugly but, sooner or later, some variation of at least one of them is likely. Unfortunately, they all share the property of lowering European bank values, whipsawing currencies, hurting business confidence and possibly ending the European Union as an effective institution for collective decisions. That’s all because the euro, in retrospect, appears to have been a misguided attempt to equalize the values for some very unequal assets, namely the bank deposits of strong countries and those of weak countries.

ATSRTWT

iPad = Job Killer

Phallocracy

It's a government ruled exclusively by men. And, according to Cracked, it is George Lucas's ideal future.

You've got all these species and races living harmoniously--jawas, ewoks, fish monsters, people--all working together. But almost no women.

I know what you are thinking: "What about Princess Leia?" Just watch the clip.

Why 'Star Wars' Is Secretly Terrifying for Women -- powered by Cracked.com

The Elasticity of Supply of Air Traffic Controllers

If you'd asked me before this air-traffic-controller-sleeping bit came about, I'd have told you that I believe the supply of air traffic controllers to be rather inelastic; I presume it takes some amount of specialized training and at current wage levels there aren't a lot of unemployed air traffic controllers. (Perhaps I'm wrong.) But as I read the reports of a new FAA regulation requiring two air traffic controllers at night, I'm having some elasticity doubts.

In an interview this morning the head (or perhaps just a representative) of the Department of Transportation said that they've got the air traffic controllers to fill this new regulation and the money to do so. Now, granted, when a government agency says they've "got the money" to undertake an expansion, that has a little different flavor than when Wal-Mart or FedEx says they've got the money. But in light of the tight budget situation now (and, in fact, budget cuts projected for the Department of Transportation were mentioned in the interview), it seemed like this wasn't an expansion-in-expenditure scenario.

So what are the possibilities here?

1. My assumptions above are wrong; there is slack in the air controller labor market and the new regulation will reduce it.

2. The government is putting on a front that this won't cost money when in fact it will cost more money. Relatively speaking, I would guess this money number is small, but still this is a solve-it-with-money scenario, not a utilize-untapped-resources situation. If there's not a large amount of unemployed air traffic controllers, then this is also a raise-wages-to-incentivize-entry-into-the-industry situation. But what's the latency in assuming a job in this industry? 6 months of training? 3? 12? More? I don't know, but I feel it's got to be at least a number of months. Again, not saying it should be-- but I'm guessing that it is.

3. They are only requiring 27 towers to abide by these new rules. Compared to the number of overall air traffic control centers (of varying sizes), this is small. However:

a) These sites are geographically separate; we're not taking a pool of laborers and requiring extra hours at a variety of locations. Along the lines of issue #1, are there spare air traffic controllers to be had, or are more hours required of the existing working pool?

b) Not unrelated to this is the fact that air traffic controllers are thought to be over-worked right now as it is (not judging the merits of that claim, but that's still relevant), so where exactly these extra working hours comes from is still unclear in my mind.

Something--somewhere-- is off, either my perceptions of the state of the market or in the stories being told. Knowing me I probably gravitate to #2 but I think that oversimplifies the problem.

Justin, will you be leaving for your new air traffic controller position soon?

What I've Been Writing

As Walter Williams often remarks, “It's a poor dog that won't wag its own tail."

.tailwag

Title:
Positively Valued Fiat Money after the Sovereign Disappears: The Case of Somalia (w/ L. H. White)

Abstract:
Economists commonly invoke sovereign powers to explain the acceptance of unbacked paper money at a positive value. The government accepts or compels taxes paid in the money (makes it publicly receivable) or compels creditors to accept it (grants and enforces legal tender status). Thus fiat money is thought to rely on enforcement of a literal fiat or decree. The case of Somalia defies this account: following the state’s collapse in 1991, unbacked paper Somali shillings continued to circulate at a positive value. We explain how historical acceptance, or “inertia,” can sustain the ongoing acceptance of unbacked money even in the absence of ongoing sovereign support. Although sovereign power might be necessary to launch a fiat standard, we conclude that it is not a necessary condition for its survival.

You can download the full version here. Also, my book review of Jimmy Stewart is Dead appears in the most recent issue of Economic Affairs.

./tailwag

Torture Supply Curves Slope Up

I suppose, when all things are considered, that is good news. From Wired:

But in FeldmanHall’s study, things actually happened. “There are real shocks and real money on the table,” she said. Subjects lying in an MRI scanner were given a choice: Either administer a painful electric shock to a person in another room and make one British pound (a little over a dollar and a half), or spare the other person the shock and forgo the money. Shocks were priced in a graded manner, so that the subject would earn less money for a light shock, and earn the whole pound for a severe shock. This same choice was given 20 times, and the person in the brain scanner could see a video of either the shockee’s hand jerk or both the hand jerk and the face grimace. (Although these shocks were real, they were pre-recorded.)

The article is actually about how this result differs from cases where subjects are given similar hypothetical scenarios. To me, this is evidence in favor of relying on revealed preference approaches over surveys in social science.

Slay Which Tax 'Monster'?

Veronique de Rugy argues here that we should eliminate the Alternative Minimum Tax.

Her points are fair enough, but if we are going to argue for such a large move in the tax code, I would instead suggest that we eliminate the traditional part instead and put everyone on the AMT. That would broaden the base, and allow us to lower the rate, which offers better incentives all the way around.

Masticating

Arnold Kling reports:

Michael Mandel pointed out that the large increase in household debt is not consistent with the basic necessities becoming easier to afford. I have to agree. Something to chew on.

If households get greater access to credit markets and necessities fall in price, then income effects can shift the preferences towards luxury goods.

I am far more likely to believe that households are buying more luxury goods than I am to believe that the price of necessities has increased. This would also be consistent with the observation that college students have nicer televisions and go to more exotic vacation spots than I.

The Circle of (Anti)Trust

It seems like just the other day, Microsoft was a darling of Schumpeterian competition, being chased by incompetent rivals who were better at choosing lawyers than figuring out what features consumers wanted on their desktop. Now, Microsoft seems to be prepared to come full circle:

In a European Commission filing this week, Microsoft asked European regulators to investigate the search giant on antitrust grounds, accusing it of pursuing "anti-competive practices." Microsoft accused Google of boxing out competitors by walling off content, signing exclusivity deals, and making it difficult for companies to move Google advertising campaigns to rival search sites.

Sounds familiar!

The Curious Task

"I don't understand this," he wrote. And he says about economics in general: "I cannot understand it, and I cannot believe that anyone else understands it, either. People may say they understand it...but I think it is all a fake."

That is Isaac Asimov, according to Julian Simon, being bewildered by Simon himself.

History of the Libertarian Movement...

...that I was unaware of. According to Will Wilkinson,

Charles Koch founded the Cato Institute in 1977 with Ed Crane and Murray Rothbard, an iconoclastic "anarcho-capitalist" economist and political theorist.

That's right, folks, Rothbard was a beltway libertarian! I am sure there are some juicy stories--perhaps a great falling out--that I have not yet heard. Feel free to post all the seedy details in the comments.

____________________
ADDENDUM:
I should have clicked a few more links before blegging for details.

New TPS phrase

One of my favorite parts of the blog? Juicing the Mitchell. It's a phrase that captures quickly and accurately a wide range of (usually) legislative activities. Effective...efficient...Will Luther! (Insert Bill Raftery voice here.)

Well, I'd like to add another line-- this one from The Simpsons-- to the TPS lexicon. During one episode, Moe become attached to Maggie and becomes a bit of a surrogate father. At Maggie's birthday party, her aunts Patty and Selma buy her a rattle as a gift, to which Moe replies, "Thanks for breaking a five."

It captures the feeling nicely-- an embarrassing modicum of effort usually overstated. I'm going to work it into the proceeds here as best as I can.

Sending two planes to an international conflict in the Middle East? Thanks for breaking a 5, France.

Cutting $100M from a $1.6T budget deficit? Thanks for breaking a 5, (insert politician here).

Onwards!

Radiation Chart

Just as understanding millions from billions from trillions is important, so too is understanding radiation and the risks from it. Here's a handy chart that gets at the latter nicely, many thanks to Greg Cooney.

The general lesson for those in America freaking out about radiation from Japan: Take a deep breath and understand the magnitude of things.

Sumner on Recessions and Policies to Combat Them

Scott Sumner at TMI hits the nail on the head:

We need to stop thinking about deep slumps as a sort of random “problem” that needs to be “fixed.”  They need to be prevented; if they aren’t, they probably won’t be fixed.

ATSRTWT

Q: Why Do We Need Pro Athletes?

A: Because politicians make poor role models. Consider Newt Gingrich, via the AP.

The twice-divorced former U.S. House speaker has said he had an affair with Callista, a former congressional aide, while married to his second wife. It happened at the same time he was attacking President Bill Clinton for his relationship with White House intern Monica Lewinsky.

Do as I say, not as I do.

TPS Bracket Challenge

March Madness is here! Fill out your bracket and see how you stack up against TPS bloggers. Picks must be submitted by 11AM on March 17. Good luck!

Collected Links

1. Is it even possible to soak the rich for all the new spending, from an accounting perspective?
2. The post tax price of a year's supply of "free donuts" is $1,000.
3. Prostitutes and Porn are not tax deductible medical expenses, and neither are these nine other things.
4. TSA nude body scanners produce 10x more radiation than they originally thought. And yet, it is only a minor objection I have to the device.
5. Ohio 13-year old entrepreneur.
   

Broken Window Fallacy?

Recent events in Japan have prompted discussions of the broken window fallacy. The typical chain of events goes something like this:

1. Natural disaster
2. Reporter (or, reporter citing an economist) notes GDP might increase because of disaster.
3. Economist (probably not the one cited by the reporter) yells "BROKEN WINDOW FALLACY!" And, presumably, scores points for being reasonable.

Today, I will venture into the land of heresy by suggesting those who point out that natural disasters might make people better off are not necessarily committing a fallacy.

A fallacy is a chain of reasoning whereby the premises do not support the conclusion. But consider the following chain of reasoning.

1. Individuals may have a bias whereby they do not upgrade appliances when doing so would make them better off by their own assessment.
2. Natural disasters force them to buy new appliances.
3. The net effect of natural disasters is ambiguous (i.e., it might be positive, negative, or zero)

Where's the fallacy? Note: I am not saying that natural disasters make us better off. I am saying they might make us better off if the behavioral problem identified is significant. I think it is unlikely that the benefits from upgrading our refrigerators would be so great that they would offset the buildings destroyed by the natural disaster. (Of course, if the underlying behavioral problem is significant, it might apply to more than just household appliances.) But this is an empirical question.

My suggestion: stop calling such claims a logical fallacy. Point out that an increase in measured GDP does not necessarily imply an increase in welfare and then move on. There is no need to paint those we disagree with as unreasonable, illogical, or stupid.

How the NFL labor situation will play itself out

As I'm not a lawyer nor a legal scholar, how the NFL labor situation stands to evolve is rather confusing to me. This article lays out the road ahead. Does this make it any less confusing? Maybe a little. But at least it's all in one place.

As with the sentiments of this blog, we can only hope the Congress gets involved.

Splitting the Bill? Impossible.

That is how I interpret this line from Paul Krugman's latest NYT article:

Think of it this way: Congress could, with a stroke of a pen, cut Social Security benefits in half. But it couldn’t do the same with health spending: Medicare can’t suddenly start paying to replace only half a heart valve or mandate that bypass operations stop halfway through.

Really? Because I am pretty sure they could. I've even drafted a short letter which they can use if they decide to make it happen (I'll waive my usual consulting fees).

___

Dear Medicare and Medicaid Recipients,

Henceforth, the government will only be paying for half of qualified medical expenditures.

Sincerely,

Congress
___

Happiest States in America

Nothing says good times like more happiness research!

TPS happiness guru Rob Holub sends along this survey, it ranks all 50 states and the pdf is here. If you follow this blog you already know who's at #50. They break it down further by city and Congressional district.

Finally, a concrete, water-tight ranking of the happiest places in America!

What if the government were a household?

One of my colleagues, Antony Davies, has created a fun pdf that translates the government down to household size. You can find it here-- enjoy!

Kansas Red Light Laws

TPS Cardinals fan Steve Miller sends along this bit about a potential new law in Kansas that allows motocycle riders to run red lights. I shook my head when I first read it, but now that I think of it, as long as the riders bear the full burden of their decision-- both legally (I hope so, not clear in the article) and physically (clearly)-- I think we'll end up with a Pareto superior outcome.

But the best part of that article?

The riders testifying in support of the bill belonged to a group known as ABATE, or A Brotherhood Against Totalitarian Enactments.

Peaceful protests and authoritarian regimes

Here's the best piece-- by a degree of magnitude-- that I've seen that gets after a question that's been nagging me during the Middle East upheaval: If dictators are capable of such atrocities to acquire power and to maintain their position, how can peaceful protests, of all things, bring all of this down?

What's Will's string of letters? ATSRTWT. That's five minutes of hunting those down that I won't get back.

Are the Poor Getting Poorer?

Marriage as Moral Hazard

From the Huffington Post:

Probably not the first thing you feel like doing, but you know what's really not romantic? Using marriage as an excuse to get lazy. Recent studies show that married people exercise less than singles do, and in our own survey, 56% of married people said they'd put on weight since the big day. We slack off in other ways, too: 46% said they were less affectionate with their spouses, and 54% said they wish they were having more sex--yet they don't seem to be doing anything about it. Thinking like an economist, marriage is a moral hazard, a situation that encourages people to behave irresponsibly because they know they can get away with it.

The authors have a new book, Spousonomics: Using Economics to Master Love, Marriage, and Dirty Dishes, which--as far as I can tell--is pretty much what it sounds like. I liked this:

Incentives motivate people to act. If you want your husband to listen, don't nag. If you want your wife to have sex with you, do the dishes.

Interesting. Might be worth reading the full version.

[HT: Astrid]

Re: Thoughts on Jeopardy! and Watson

I heard via the Scott Van Pelt Show that Watson crashed several times during the taping of the first episode--so many times, in fact, that it took 4 hours to complete the round. Wow. Not impressed. Matt is our resident Jeopardy! expert. But I imagine that the average human contestant could not delay the game for this amount of time.

I can only imagine the fatigue that comes with four hours of waiting for Watson to reboot. This could be a decisive advantage to the computer. Thoughts?

Quote of the Day

Courtesy of Ed Glaeser:

[T]here's nothing greener than blacktop.

Thoughts on Jeopardy! and Watson

We here at TPS are big fans of Jeopardy!, and I'm sure you've heard of the Watson vs. Ken Jennings and Brad Rutter event that took place last night and will continue today and tomorrow. A few thoughts (and just for ease of writing, I recognize that I've switched "answers" and "questions" in the framework of a Jeopardy! game):

- It's clear that Watson will do better with fact-based questions as opposed to interpretation-based questions; I'd attribute a large amount of its success last night to questions of the former type. I would guess-- unless it's been directly programmed to deal with it-- Watson would be helpless on before-and-after-type questions.

- There was a video going around a few weeks ago of a test round between the three contestants, with much the same result as last night-- Watson does well early, the remaining contestants perform better as the round progresses. One striking aspect of the practice round, however, was that when Watson felt it was confident enough to answer the question, it always rang in first. Every. Time. That's the big advantage of the machine, because Jeopardy! isn't just about knowing the answers-- it's being able to time the buzzer correctly so you actually get a chance to answer. A machine, naturally, will have a faster reaction time than a human. You've effectively eliminated the competitive portion of the game. So while it is impressive that you can design a machine to parse through mountains of data to come up with an answer in short period of time (more on that in a second), but don't look past the fact that you've basically given one player a massive advantage over the other two.

But last night, I believe only once, Ken Jennings beat Watson with the buzzer. (When Watson has a "green" answer, he's trying to buzz in.) In my eyes, that was the most surprising moment of the night. It's a risky move to try and anticipate the proper time to ring in (constestants can ring in once a light goes on; if they ring in too early, they are locked out for a few seconds), but up against a machine that's going to react faster than you, contestants don't have much of a choice.

- It's natural to think that you tell a computer to do something, and it does it in the blink of an eye. But what the computer has to do here is titanic-- seconds matter, milliseconds matter. To that end, the more time Watson has to think, the better of a chance it has. I noticed last night that Watson did distinctly worse on short questions-- I remember one particularly short question where it struggled to formulate anything of a guess. Most of the questions last night were of the longer, factual variety-- right in Watson's wheelhouse. As long as both of those margins remain, expect Watson to perform pretty well.

Conservatives Ask Libertarians for Divorce

Kevin McCullough at Fox News is not happy about this year's CPAC. It seems Republicans were content with picking up a percent or so in the general polls. But now that these "disrespectful libertarians" are speaking up, they are probably more trouble than they are worth. McCullough explains:

Libertarians and Conservatives are as different as Libertarians and Liberals. The truth is libertarians are the worst form of political affiliation in the nation. Combining the desire of economic greed, with the amoral desire to promote any behavior regardless of its cost to our culture is a stark departure from the intent of the Founding Fathers.

I hope this means conservatives will drop the pro-market (read: economic greed) rhetoric. Good riddance, I say.

[HT: Steve]

State Tax Competition Among Neighbors

This would make for a nice bit of anecdotal evidence for someone wanting to write a paper on the subject:

The state of Indiana and the Northwest Indiana Forum are partnering on an increased effort to convince more Illinois businesses to move across the state line. An advertising campaign aimed at Illinois businesses, featuring slogans including "Feeling Squeezed by Taxes?," has been launched on the heels of the "Illinnoyed" initiative rolled out last month after lawmakers in Illinois approved massive tax hikes.

The Fragility of Estimated Effects of Unilateral Divorce Laws on Divorce Rates

And here's another! I've seen four papers today, Valentine's Day, and two of them focus on divorce. Good times! Here's the abstract:

Following an influential article by Friedberg (1998), Wolfers (2006) explored the sensitivity of Friedberg’s results to allowing for dynamics in the response of divorce rates to the adoption of unilateral divorce laws. We in turn explore the sensitivity of Wolfers’s results to variations in estimation method and functional form, and we find that the results are extremely fragile. We conclude first that the impact of unilateral divorce laws remains unclear. Second, extending Wolfers’s methodological insight about sensitivity of differences-in-differences estimation to allowance for dynamic response, we suggest that identification in differences-in-differences research becomes weaker in the presence of dynamics, especially in the presence of unit-specific time trends.

No-Fault Divorce and Rent-Seeking

That's the title, and what better topic for Valentine's Day? Here it is, and the abstract is below:

Couples filing for divorce in Belgium have the option to either opt for a no-fault divorce trajectory or a consensual trajectory. We analyse the determinants of divorce trajectory choice and of the resulting post-divorce transfers. The no-fault trajectory is more likely, if spouses are more specialised in either domestic or labour market production. This is consistent with a theory of divorce as rent extraction. Child support payments depend neither on the divorce trajectory nor on alimony transfers or relative incomes, but are driven by the payer's wage and the child(ren)'s residence. Partner alimony transfers are higher for no-fault unilateral divorces with pronounced self sacrifice.

Who is John Galt?

(Note: The size isn't quite right. Double-click the video to view in fullscreen.)

Behavioral Public Choice

Robin Hanson writes:

When folks expect to be able to evade a norm, they don’t mind making that norm stronger. This lets them sound more pro-social, while actually giving themselves an advantage over folks who can’t evade as easily.

I think this is a very attractive argument for those interested in behavioral public choice. Anecdotal evidence abounds. And it provides a mechanism for the Baptists and Bootleggers claim (i.e., asymmetric evasion costs). What do you think?

How Big is the U.S. Debt?

Here is a short clip from a colleague of mine, Antony Davies, putting debt into perspective.

AER Recognizes Hayek (1945)

An AER committee consisting of Kenneth J. Arrow, B. Douglas Bernheim, Martin S. Feldstein, Daniel L. McFadden, James M. Poterba, and Robert M. Solow has selected the top 20 papers ever published in the AER. Hayek (1945) made the cut. In the comments over at the Coordination Problem, an interesting back and forth is going on concerning the brief summary provided by the committee Here's the summary:

The author addresses the fundamental question of the nature of the economic system and, in particular, its role in dealing with resource allocation when a fundamental knowledge base is distributed in small bits among a large population. The knowledge needed includes consumer valuations, production relations, and resource availabilities. In particular, general scientific principles, where expert opinion might be best, are only a small part of the knowledge base. The author argues for the importance of a price system in achieving coordination and efficiency in resource use without implying an impossible aggregation of information in a central place.

What's the dispute? Well, some are saying it just illustrates that the committee doesn't understand Hayek. Others are saying a charitable reading of the summary is warranted. You can read the comments and decide for yourself.

Here's my challenge. The original summary was 97 words long. If you find the committee's summary wanting, provide your own summary (< 100 words) in the comments.

Made in the USA

That is the title of a recent Boston Globe article. Here's the take-away:

There’s just one problem with all the gloom and doom about American manufacturing. It’s wrong.

Americans make more “stuff’’ than any other nation on earth, and by a wide margin. According to the United Nations’ comprehensive database of international economic data, America’s manufacturing output in 2009 (expressed in constant 2005 dollars) was $2.15 trillion. That surpassed China’s output of $1.48 trillion by nearly 46 percent. China’s industries may be booming, but the United States still accounted for 20 percent of the world’s manufacturing output in 2009 — only a hair below its 1990 share of 21 percent.

Stupid argument (They took err jeerrrbbbs!). Bunk stats. It's a double doozie!

WSJ on Regulations

The WSJ today has an article on occupational licensing, you can find it here. You can never have enough examples of stuff like this, so give it a quick read and add your favorites to the arsenal. The following, though, has to be the best part of the article-- you can't make this stuff up:

In Kentucky, the Board of Hairdressers and Cosmetologists has eight full-time inspectors who spend much of their time responding to anonymous tips about unlicensed manicurists. The inspectors rarely catch the alleged offenders, says Charles Lykins, the board's administrator, because "they take off running."

Mr. Lykins says it's in the public's interest to insist manicurists are well-trained. "Have you ever had a nail fungus? It's terrible," he says. "That's why we're there."

Super Bowl Impacts

Fresh off my victory in Propapalooza IV, I thought I'd send along this paper concerning the economic impact of the Super Bowl. Here's the abstract:

The Super Bowl is America’s premier sporting event. This paper details basic economic facts about the game and examines the controversy surrounding the purported economic impact of the game on host communities. While the league and sports boosters claim that the game brings up to a $500 million economic impact to host cities, a review of the literature suggests that the true economic impact is a fraction of this amount.

I've always thought that the appropriate question should be "How much better off are we because we make a large deal about the Super Bowl?", not drawing arbitrary lines and estimating accounting benefits for cities and/or states.

The NFL On Welfare Incentives & Credible Threats

A lot of good economic intuition coming out of the Super Bowl coverage in the shadow of the lockout:

Steelers veteran safety Ryan Clark also was critical of this week's special masters ruling not to stop millions in guaranteed money from television networks going to the owners if there is a lockout.

"If no football is played next year, the networks will have no games to show but are going to pay [the NFL] still," Clark said. "You don't put a contingency plan like that into place if you don't plan on using it. If someone told you this week, 'I will pay you a million dollars to not go to work, what incentive do you have to go to work?'"

Well said.

Propapalooza IV

Yes, it's time for this year's Super Bowl prop battle. See Propapaloozas I, II, and III for more information.

Here are this year's props, all 22 pages of them. Props are bets not directly concerned with the outcome of the game itself-- basically anything beyond "Team X will win" or "Team X will win by Z points." Every year, TPS stalwart Rob Holub goes toe to toe with yours truly and every year, realizes he's vastly over matched. Ok, that's not exactly true, but I'm feeling good about capturing my first victory this year.

The contest: Pick 5 props that are priced at roughly even money, i.e., anything in the -120 range and above. Most number right takes Propapalooza IV.

Feel free to add your own in the comments and join in the fun!

Some favorites:

What color will the Gatorade by that is dumped on the head coach of the winning team? Lime Green (11-2), Yellow (5-6), Orange (5-1), Red (12-1), Blue (12-1), Clear/Water (3-2). I think Orange has good value there. What if it's Powerade?

Who will the Super Bowl MVP of the game thank first? God (1-1), Family (4-1), Teammates (2-1), Coach (9-1), Does not thank anyone (3-1). I think God is mispriced here; that trend seems to have fallen off a bit. I see it like this-- odds on favorites to win the MVP are QBs, and they generally thank the teammates first, though I still don't feel that 2-1 is paying off well enough.

How long will Christina Aguilera hold the note BRAVE at the end of the Star Spangled Banner? Over/Under 6 seconds. Isn't the general trend to belt out "Free" and then finish with a crisp "Brave?" I'm going under.

How many times will FOX mention Brett Favre on TV during the Game (Live commentary only/anything taped does not count): Over/under 2.5. Boy that's low, but what counts as the live commentary only? What about halftime? You gotta figure once when Rodgers starts playing, mentioning how he succeeded Brett Favre, and then as the game goes along if he's nearing any Super Bowl team passing records-- I think the over is the sound bet but watch the technicalities.

Who will Barack Obama pick to win Super Bowl XLV? Steelers (-140) vs. Packers (+100). Pennsylvania has twice the electoral votes that Wisconsin does. Further, Obama won Wisconsin by almost 14% yet won Pennsylvania by about 10%. Pennsylvania is traditionally viewed being being "more battleground," though recent presidential elections have been closer in Wisconsin (2000 and 2004, thought not 2008). I think the Steelers are the good bet here, though they are slight favorites.

If Barack Obama picks a team to win Super Bowl XLV, will the President's pick be correct? Yes (-115) vs. No (-125). Independent of the political factors above-- and this line reflects that-- it's humorous to see a line that says the President is more likely to pick the wrong team to win the game...and he hasn't picked a team yet.

My selections:

Total Net Yards by both teams: 666.5, Over -115

Most Receiving Yards: Mike Wallace (+15.5) v. Greg Jennings, -115

Packers - Total Rushing Yards: 78.5, Under -115

Heath Miller - Total Receptions: 3.5, Over -135

Heath Miller - Will he score a touchdown? Yes +200

The Miller total receptions bet is a bit above the -120 cutoff, so I'll offset that with the Miller touchdown bet.