Economic Critique of the Boulding Ballad

I came across this "Ballad of Ecological Awareness" by Kenneth Boulding that has a couple of economic points that sound misleading, perhaps even incorrect, but at the least require clarification. Since it is trying to make a political point (I suppose), I take it as being worthy of critique. Here it is:

The cost of building dams is always underestimated -
There's erosion of the delta that the river has created,
There's fertile soil below the dam that's likely to be looted,
And the tangled mat of forest that has got to be uprooted. (1)

There's the breaking up of cultures with old haunts and habits loss,
There's the education program that just doesn't come across,
And the wasted fruits of progress that are seldom much enjoyed
By expelled subsistence farmers who are urban unemployed. (2)

There's disappointing yield of fish, beyond the first explosion;
There's silting up, and drawing down, and watershed erosion.
Above the dam the water's lost by sheer evaporation;
below, the river scours, and suffers dangerous alteration.

For engineers, however good, are likely to be guilty
of quietly forgetting that a river can be silty,
While the irrigation people too are frequently forgetting
That water poured upon the land is likely to be wetting. (3)

The the water in the lake, and what the lake releases,
Is crawling with infected snails and water-born diseases.
There's a hideous locust breeding ground when water level's low,
And a million ecological facts we really do not know. (4)

There are benefits, of course, which may be countable, but which
Have a tendency to fall into the pockets of the rich,
While the costs are apt to fall upon the shoulders of the poor. (5)
So cost-benefit analysis is nearly always sure,
To justify the building of a solid concrete fact,
While the Ecological Truth is left behind in the Abstract.

Criticisms:

1. This part would be true in the absence of property rights (or their violation via eminent domain). Assign property rights and the opportunity cost of fertile soil will be reflected in the purchase price of the land.
2. This must only apply to outside the United States where they have subsistence farmers instead of subsidy farmers. Again, if this was a problem it would be a result of poor property rights. Why would farmers sell their land only to become permanently unemployed? Interestingly, it is often the opposite argument invoked for making dams a public works project with eminent domain. The argument is that the holdout problem artificially raises the costs because small property owners hold an enormous amount of bargaining power that undermine "the greater good."
3. Why is everyone so bad at their job? Why are there systematic errors? This comes off as intellectual elitism to me, and dams seem to be doing their job (Katrina notwithstanding) just fine.
4. These appear to be a true externality if they exist, which are again a property rights problem. The "million ecological facts" are hypothetical but an interesting point of discussion for how things are valued. Economists adopt a fairly judgment-free view of value in their analysis, and it is frequently criticized by those who think things should be valued differently (usually in the manner they value them).
   
5. This class warfare statement is difficult to make any sense of for me. Is it a public choice critique? That special interest groups (the rich, in this case) subvert the will of the masses (the poor, in this case) in the political process leading to the public works project (the dam). Please tell me Boulding is not suggesting he believes the silly "rich get richer, poor get pooper" saying as a statment of fact?
   

I think if you look for who becomes a fan of this ballad, it would reveal to you an interesting schitzophrenia. The point of the author is that costs are underestimated, and therefore dams (or other large infrastructure projects) are going to be oversupplied. Nonetheless, this ballad will find its favorite audience in the same camp that is currently favoring government spending on new public infrastructure. Also, there is the reverence for the rural farmer and disdain for the urban centre, despite the ecological and environmental advantages of urban density.

More Children's Books For Economists

Find the entire series of posts here. The concepts of money and investment, as well as the virtues of thrift are presented in If You Made a Million by David Schwartz (with illustrations by Steven Kellogg). I have half-heartedly toyed with the idea of including it as recommended reading for the syllabus of my upcoming Cost-Benefit Analysis course for undergraduates because of its excellent demonstration of compounding interest and bank loans, but you will also find the demonstration of income tax and relative value to be helpful for youngsters. (Tip: Help indoctrinate your child with good habits by pointing out the "Save" and "Be Wise" slogans on the banks during the story.)

If You Made a Million is really a sequel to the author's previous book How Much is a Million? that is also well worth sharing with your kids, and both books are narrated by the delightful Marvelosissimo the Mathematical Magician. Even adults will enjoy the demonstrations of the magnitude of a million, billion, and trillion dollars. I highly recommend both these books.

Also, for $13 you can order the Chicka Chicka 1 2 3...and more stories about counting DVD from Scholastic that includes both of these books as bonus extra stories. I think 1 2 3 is not nearly as good as Chicka Chicka Boom Boom, but the Million series included makes the DVD well worth it and it gives you an idea of what inflection you should use in your voice when reading 1 2 3.

Happy Holidays!

My presence here recently has been downright Skarbek-like (Williamson-like even?), but I'm still here! I just wanted everyone to enjoy a happy holiday season.

My charge to you? Convince one person you encounter through your holiday activities to be just a bit more freedom loving. It doesn't have to be much, but if everyone took a small step in that direction, the world could be a much happier, healthier, and wealthier place. (Collective action problems of my advice be damned.)

How Much Media Bias Is To Make You (The Reader) Happy?

Every academic article I have ever come across on media bias has concluded two points - 1) Media bias is present and 2) It is consumer driven. What #2 implies is that the dominant segments of readers prefer to read something that confirms their pre-existing world view. What is not always clear if this means that there is actual bias by the newspapers. Markets would flush out newspapers that weren't produced in a way that was pleasing to its readers, and the paper that emerges may appear to have have a political bias when it may simply be coincidence. However, new from the NBER:

We analyze the coverage of U.S. political scandals by U.S. newspapers during the past decade. Using automatic keyword-based searches we collected data on 35 scandals and approximately 200 newspapers. We find that Democratic-leaning newspapers -- i.e., those with a higher propensity to endorse Democratic candidates in elections -- give relatively more coverage to scandals involving Republican politicians than scandals involving Democratic politicians, while Republican-leaning newspapers tend to do the opposite. This is true even when controlling for the average partisan leanings of readers. In contrast, newspapers appear to cater to the partisan tastes of readers only for local scandals.

So, this paper shows that even after controlling for reader partisanship, that you have an newspaper bias delivering biased coverage. In fact, the paper presents some evidence that runs against claim #1. For those interested in media bias, the paper looks to be well worth the read.

However, I wonder if this is a result of a prisoner's dilemma for the newspapers with an ideological bent. If you have >1 local paper covering the scandal that shares your point of view, perhaps coverage of the scandal is a competitive point and newspapers go overboard to ensure they have "the most complete coverage." My expectation would be that this would swamp out the regression's ability to pick up the consumer demand result.

Secondly, I am not familiar with the methodology used by the authors (it appears to be some variant of an IV/2SLS approach), and I'm not sure how it separates the reverse causality of the scandals causing the newspapers to be endorsing the opposing party. Since the editorial endorsements are used as a proxy for the the partisanship propensity of the newspaper, the number of scandals would seem to be a causal factor rather than an exogenous one.

P.S. The literature review is well worth opening the pdf on it's own.

On the Division of Labor Numbers

According to the Washington Post (Hat Tip: Russ Roberts), Obama plans on spending $670 to $850 billion dollars to save or create 3 million jobs (in an economy that destroys and creates 30 million jobs annually). Let's ignore the absence of evidence on government spending to create the growth necessary for jobs, and instead just do the division:

$670 Billion/3 million = $223,000 per job
$850 Billion/3 million = $283,000 per job

So the cost per job will range somewhere in the neighborhood of $250K, and I think it is fair to assume that these jobs will likely pay less than that on average. According to the Census, in 2007 there were 75.3 million people in the U.S. between the ages of 18 and 64. Let's assume that the burden falls entirely on them, in which case the average person would be individually paying $8,900 to save these jobs.

Even if we actually believed their job saving claims, what about this proposal could possibly seem appealing? It feels right to leave with a quote from Bastiat:

"The State is the great fiction through which each of us tries to live at the expense of all of us."~French economist Frederic Bastiat

A Brief History of "Too Big To Fail"

I was thinking about this statement and how it has changed in meaning over time but remains relatively constant in purposed solution. I think this concept can be thought of in two parts:

Early "Too Big To Fail": I think this would be epitomized by John Kenneth Galbraith's 1952 book American Capitalism: The Concept of Countervailing Power. My reading of his arguments were that the industrial revolution gave away to oligopolies who broke the previous laws of markets and competition. Now oligopolies, like GM and Ford, were so big and powerful that the only way consumers and labor could share in prosperity was if they became institutionalized in democratic government. I think this version had solid footing into the 1970's, perhaps even into the 1980's. Diagnosis: Firm's became so big, they were not capable of anything except utter dominance of the marketplace. Solution: Heavy and direct government intervention into the management of these firms.

Modern "Too Big To Fail": This is the argument we are confronting now, which I think started to become a more dominant view with the Savings & Loan's crisis of the 1980's, along with the struggles of the oligopolies confronted with Japanese competition. Diagnosis: Firms, like Ford and GM are so big that their failure is unaccpetable because their extended reach into the economy would have too large of a spillover effect. Solution: Heavy and direct government intervention into the management of these firms.

'Tis the Season for Deadweight Loss

What would Christmas be if some economist didn't point out the social inefficiency of the gift giving season? Or discuss it as a signaling game?

What is the deadweight loss of Christmas? In short, economists think of a good that goes unpurchased because the consumer does not value it at market price. Thus, when you buy someone a gift, it's cost was greater than the dollar value of the utility gained to the recipient. A study of Yale students revealed that they valued the presents they received 10% to 30% less than their estimated market price.

My criticisim of this analysis is that I think that the saying "it is better to give, than to receive" holds extremely well here. In short, you have two consumers of the same product but the 10-30% estimate only measures the recipient's consumer surplus. When one purchases a gift, they believe it carries positive consumer surplus at a zero price for the recipient, and then the giver draws utility as some function of that consumer surplus. So even though individually neither of them may value that item at its market value, collectively it may be enough to offset the deadweight loss.

This Semester's Best Quote from a Student

Made about me, today, but I think applies to many economists:

I think it is funny that you try and make yourself less of a human being so that you can be a better scholar.

Where Do Farm Subsidies Go?

Where the farming is done, of course. Like New York City (Legend at bottom):

Los Angeles:
Chicago:
Washington D.C.:
Legend:
Hat Tip: Wilson Mixon of DOL

Illinois's 4th Congressional District (Chicago)

I can't imagine having the courage to draw a congressional map in this way. Politicians in Chicago must have enormous huevos.

Why Is LeBron James in 2010 is so Coveted in 2008?

Many sports enthusiasts are complaining about the vetting for LBJ in 2010 (see here and here). Here is a common sentiment about what is happening from Peter King:

10. I think these are my non-football thoughts of the week:

a. If I read one more story about where LeBron James might play two years from now, I'm going to puke.

b. Really: In what other sport are the next two seasons rendered totally meaningless for a cornerstone-of-the-league franchise like the New York Knickerbockers?

c. It's everywhere -- on talk radio, on SportsCenter, in columns, endlessly in every New York paper and Web site. I keep reading how smart and prescient the Knicks were for decimating their current team (playing with seven players Friday and Saturday night) and clearing out enough cap space for this great player, LeBron James.

So, why are teams willing to crash and burn for 2 years to make way for the possibility of signing King James? Rather than treating NBA teams like they are being irrational, lets think of a rational reason to engage in this behavior. I think this strategy would make the most sense if the NBA were more dynasty prone than other leagues (to win more than one championship over consecutive or nearly consecutive years). Here are lists of Championships on the NBA, MLB, and NFL championship lists. Consider the last 20 years of the NBA (07-08 is missing, but Celtics beat Lakers):
As we can see, not only do teams that win one tend to make a reappearance in the following years, but their MVP's tend to be repeating as well. So one fantastic player seems to be very key in not just getting to the big dance once, but it also seems to have lasting value. Is it worth giving up 2 years of good play for the shot at someone who can bring you many good years? Probably if you don't expect to be much of a contender anyway. Eyeballing against the other major leagues, this seems to be considerably less prevalent in MLB and the NFL.

My judgment is that LBJ-seeking is probably a very rational strategy, but unfortunate probably for fans.

Are Health Insurance Markets Competitive?

New working paper from the NBER, by Dafny:

Although the vast majority of Americans have private health insurance, researchers focus almost exclusively on public provision. Data on the private insurance sector is extremely difficult to obtain because health insurance contracts are complex, renegotiated annually, and not subject to reporting requirements. This study makes use of a privately-gathered national database of insurance contracts agreed upon by a sample of large, multisite employers between 1998 and 2005. To gauge the competitiveness of the group health insurance industry, I investigate whether health insurers charge higher premiums, ceteris paribus, to more profitable firms. I find they do, and this result is not driven by cross-sectional differences across firms or plans: firms with positive profit shocks subsequently face higher premium growth, even for the same healthplans. Moreover, this relationship is strongest in geographic markets served by a small number of insurance carriers. Further analysis suggests profits act to increase employers' switching costs, and insurers exploit this inelasticity where they have sufficient bargaining power. Given the rapid industry consolidation during the study period, these findings suggest healthcare insurers possess and exercise market power in an increasing number of geographic markets.

The existence of price discrimination is interesting, as well as the observation that it seems to be geographically expanding market power. (I wonder if the reason behind such an expansion rhymes with the words "shmate shmegulation.") I still stop short of associating price discrimination with a direct lack of competition, especially because health insurance does not seem to be a particularly profitable industry itself.

However, if these markets are not competitive and lagged employer profit margins (see Table 2) are positively correlated with insurance premiums, then this is all the more reason to not encourage/subsidize employer-based health care, correct? Firms' profit margins are more easily attainable than household income shocks, price discrimmination would be more difficult. (The author actually points the policy implications in the direction of antitrust and reduced private sector expansion, but I'm left wondering what the public premiums are comparable in the ceteris paribus cases.)

I Want More Ethanol Statistics Like This

From Bloomberg:

Mike Vis hooks a pump to a grain silo in Minnesota and siphons out enough of his corn to feed 91 people for a year. This batch will fuel vehicles in Houston for 21 seconds.

Note that this behavior might make sense in some environments, but probably not the current one.

How Does Utility Vary with Tip $ for Servers?

In lecture last week, I mentioned my suspicions that tipping is an important part or our self-identity, that "I like thinking that I am someone who tips well." I demonstrated the idea with the hypothetical example of the difficulty one would face with the prospect of placing their tip on a different table, leaving the server no financially worse off but thinking you were a jerk (I know I picked this example up from somewhere else on the blogosphere, but where eludes my memory).

A student wrote me today with this:

While I do think that part of the reason people tip is to make ourselves feel good, I think there is something else going on too. If you have ever spent time with waitresses, a lot of their conversations surround tips and tippers. They feel insulted if someone doesn't tip or justify that the person is a bad individual, and they are happy if people leave them a 'big' tip. Anything in the middle is just routine and not newsworthy.

I don't know if these things things cause = amounts of happiness and anger, but if you are trying to reward a waitress by giving them a tip, although the financial outcome of the deal would be the same if you left your tip on another table she was waiting, would she get the same number of 'utils'? Would she get just as much happiness of getting a big tip and no tip vs. two medium sized tips? Would she wonder what she did wrong that you decided not to tip her? If part of your goal of tipping is signaling that she did a good job serving you, than this aspect of your tip would be lost if you left it on another groups' table.

Now, my wife has 3 years experience as a server, and she insists that for a regular meal order a tip of $1 or coinage actually creates negative utility (disutility) for servers. "The person wasn't just forgetful, absent-minded, or philosophically opposed to tipping, they just choose to tip little)" is the explanation I am given.

So, lets assume both my student and my wife are correct (pretty good assumption in my experience with these two, and my experience as a Bob Evans Bus Boy). If we normalize a $0 tip to 0 utils for a "regular meal order," then utility as a function of tip looks like the following:

where X > $1.

As signalers, what can we learn from this graph.

1. Terrible service warrants a small, but not zero, tip. Preferably coins.
   
2. Diminishing returns set in quickly and significantly. If we want to signal or "goodness" as human beings to servers, we do not get much bang-for-the-buck over the middle range of x. You can maximize your utility by staying on the lower end of the moderate tip and then use the tip-savings to spend on yourself.
3. To make an impression, you probably must go significantly above your regular tip, and yes the waitress will praise you when you are gone.

Why This Luxory at Wal-Mart?

My wife and I were talking yesterday about how unusual it is that Wal-Mart has a greeter. Wal-Mart is gloriously short of customer service employees and cashiers, which can be frustrating when you can't find an item you want. I'm not complaining, it is part of the trade-off for lower prices, and I accept. However, it is a fairly radical departure from the low-cost, no-luxuries approach to have a friendly face at the door to welcome you. I would expect that from expensive hotels, maybe a few very-upscale grocery stores, but Wal-Mart?

I looked into it, and came across this fascinating story of the first Wal-Mart greeter, which started as a voluntary program that employees did in their free-time:

They are as familiar as the yellow smiley faces, the blue vests and the "rollback" prices.

People who shop at Wal-Mart -- and with the world's largest retailer attracting more than 100 million shoppers a week at its stores, few haven't -- have no doubt seen them upon entering the store.

They are Wal-Mart greeters -- and proud of it.

"I love people. It's just fun," said Eugene Alberts about why he likes being a greeter. "I meet all kinds of people, and everyone's different. The kids are the best. If you don't give them a happy face, they will ask you about it."

Alberts is a greeter at the Rogers Supercenter. His comments were echoed by the woman who started it all, Lois Richard of Crowley, La.

"Just the expressions on people's faces " is what she liked about the job, she said. "They could have had a bad day and then someone out of the blue says, 'Hey, we know you're here' ... it made their day."

Although she doesn't bear the "official" title as the first paid Wal-Mart greeter -- that honor belongs to Ethel Mennard of Crowley -- it was Richard who came up with the idea and took the first watch, so to speak.

"I was the first greeter and initiator of the program," she said.

The Wal-Mart store in Crowley opened in 1980. Not long after, a local civic club and the police department joined together to do a "mock" shoplifting spree at stores in the city, Richard said.

They hit the jackpot at the Crowley Wal-Mart.

"Needless to say, the biggest loot was taken from the Wal-Mart store. Needless to say, our manager was not a happy camper," Richard said.

She came up with the idea of posting an employee at the door to check shoppers' items. Wal-Mart headquarters in Bentonville wasn't willing at the time to pay an employee just to do that job, Richard said, so she suggested employees take turns volunteering a half-hour each day without pay.

Richard offered to take the first shift. Once the program caught on, Wal-Mart decided to make it a regular paid position, she said.

Today, there are more than 30,000 Wal-Mart greeters at stores nationwide, said spokeswoman Sharon Weber.

"They greet people, identify items that need to be returned, give directions. During the holidays, it's not uncommon for them to be advice givers," Weber said.

According to article in MarketingNewz last year, many large retailers also use greeters, as do restaurants, hotels and other businesses. But the majority do not because relationship marketing is not as simple as it seems, the magazine said.

"It takes a type of commitment different than traditional marketing," the article stated.

Former Wal-Mart executive Don Soderquist may define that commitment in his soon-to-be-released book on the "principles that made Wal-Mart successful," he said.

Richard said Soderquist contacted her recently to talk about being a Wal-Mart greeter.

"I want to capture in one book the culture of Wal-Mart, which is clearly the distinction that has made it different from other companies," Soderquist said. "The thing that has set us apart is the culture we've held onto since the beginning."

While saying Wal-Mart's greeter program is an example of that culture, Soderquist declined to comment further about what he says in his book. It is set to be published next year, he said.

Soderquist worked for Wal-Mart for 20 years, most recently as vice chairman. He now heads the Soderquist Center for Leadership and Ethics at John Brown University in Siloam Springs.

The average Wal-Mart greeter is a retired senior citizen, and Alberts, 69, fits that bill. A former construction worker from Iowa, he has been a Wal-Mart greeter for eight years.

Alberts started part time at the Bentonville Supercenter and then was asked by Wal-Mart to become a full-time greeter. He works from 7 a.m. to 4 p.m., five days a week at the Rogers store.

In addition to welcoming shoppers, Alberts also helps the disabled find electric carts, checks items purchased by shoppers exiting the stores and puts stickers on returned items.

Alberts' blue Wal-Mart vest is covered with badges given him by company suppliers who have visited the store. Apparently, Wal-Mart's greeters can be a good source of advertising.

DSN Retailing Today once wrote about Wal-Mart supplier Lion Brand Yarn Co. asking greeters to wear scarves made from the company's yarn. According to Lion Brand, the promotional gimmick produced a "big time, significant" boost in sales in its first weekend.

Alberts' vest also sports one large "Good Job!" button he earned from Wal-Mart. Employees have to earn four smaller Good Job buttons before they are entitled to a larger button and one share of Wal-Mart stock, he said.

Alberts has already had his share of publicity. Two film crews from France and Germany both included him in their documentaries about Wal-Mart. And his face is featured on a poster at company stores nationwide.

While most of the people he has dealt with as a greeter have been "wonderful," there are those few rude or argumentative customers who can make his job unpleasant sometimes, Alberts said. But all in all, he loves what he does and Wal-Mart as an employer.

"The company has been good to me. They're for real," Alberts said.

Richard worked for Wal-Mart 19 years before retiring five years ago. Now 60, she is proud that Wal-Mart's greeter program turned into something more than just a way to stop shoplifters.

"It became about greeting the customer and just making their day," she said. "They were just astounded someone would stand at the door and greet them. I wasn't there 15 minutes before I realized this idea was greater than what it had started out to be."

Crass Keynesianism

As Paul Krugman reports, Germany's finance minister has accused the British of engaging in "crass Keynesianism" - refusing to support a stimulus plan for Germany. Even better, Peer Stienbruck has denounced the collective policy of a European stimulus plan. Awesome.

What does Krugman have to say about this? In a typical disingenuous manner, Krugman characterizes the German leaders position as "seem[ing] to believe that their own economy is in good shape and in no need of major help. They're most certainly wrong about that."

Krugman is wrong. In fact, the Germans may be the only ones talking any sense at all. Prior to the statement quoted by Krugman, Chancellor Angela Merkel said that she was "deeply concerned" by the policy of cheap money and massive government stimulus being pursued in the United States, and that such actions could cause the very problems that caused the economic crisis.

Don't get me wrong, Frau Nein is no angel. Mekal is (weakly) politically constrained by efforts to rein in public dept and has already approved some public spending projects. It just so happens that her 4 billion of public spending plan is much, much small than the stimulus in other countries.

Which brings me to the last point - the coordinated fiscal stimulus policies of the EU and beyond. If I didn't convince you that the Germans may at least have the sense to be concerned by all of this government aid, spending, and inflationary policy -- consider Germany as a free rider in a costly situation of collective action and public goods provision. If capital flows relatively freely and the US and EU counties are pursuing massive inflationary spending policy, it pays Germany to maintain a relatively more stable currency and allow the markets to correct. These are outcomes which require a longer time horizon, and democracies do not incentivize politicians to take action which does not reap short term benefits. However, the faster the other countries act, the more politically feasible it becomes for Mekal to drag her heals (letting the market rebound) and free ride in the short run.

The recent events of the "financial crisis" (or as I like to call it: the outcome of government policy) have led me to reread Democracy in Deficit: The Political Legacy of Lord Keynes. Buchanan and Wagner provide a much more convincing explanation of the political economy within which these policies unfold. I would be interested to hear Krugman's thoughts on the book. Aside from the more obvious public choice reasons, how is it that the idea that the rules of private finance don't hold in the public sphere is so persistent?

Watch Jeopardy! on Monday

I've blogged about Jeopardy! here on TPS before, see betting strategies here and related posts here and here.

Well, one of West Virginia's own will be toeing the slab on Monday. (Handling the buzzer? Confronting Alex?) Cyndy Hawley, wife of Cliff Hawley, current economics department chair, will be on the show. Cliff notes that the taping happened in October. Make sure to tune in and root for the Mountaineer!

Best cities for recessions

BusinessWeek highlights the best cities in which to ride out a recession; the click-through list is here. Generally, cities with strong ties to government, education and health care (though the latter 2 are generally a function of the first) probably won't be hit as hard as those with closer ties to, say, manufacturing or financial markets.

I know West Virginia, as a whole, is fairing relatively well-- a combination of well-run banks (thumbs up) and close ties to the public sector (thumbs down). Pittsburgh is the closest town mentioned in the article; they would fall under the health care category.

Moral Hazard: Birthday Edition

From CNN:

But during a visit to her parents' house, Darling received news that sent her into a panic. A neighbor, who also worked at Archway, told them the plant was closing and their health insurance was ending two days later.

"I flipped out," Darling said. "It was five minutes after she told me, I was on the phone with the doctor," Darling said. "I told her, 'I need to be induced.'"

A few hours later, Darling was in the hospital. The next day, she had to have an emergency C-section.

A silver lining in the recession may be a reduced political demand for subsidizing employer provided health care.

Am I A Socialist?

Commentators on a recent opinion piece I published in the IndyStar seem to think so.

I may be the first person in history to point out that the welfare system creates a work disincentive and be called socialist for it.

Bailout Fails, Long Live the Bailout

Does this look familiar, from CNN:
Celebrate, right? Well, remember what happened last time a bailout failed? It came right back loaded with pork and easily passed. I'd put even money on the same outcome this time around.

File this under...famous babies, album cover edition

If you love free markets and you love Nirvana (Dana, that's you), then you'll love this bit on Spencer Elden, the now-seventeen-year-old who was the famous baby on the cover of Nevermind.

My favorite:

"Stuff happens like random cool situations where I get paid $500 just to go hang out," Elden said. "People just call me up and they're like, 'Hey you're the Nirvana baby, right? Well just come and swim in my pool and we'll give you some money.' "

And who said that one's lifetime income doesn't have at least a little bit of a stochastic element to it?

On Infrastructure Multipliers at the Local Level

Susan Woodward and Bob Hall say it is probably 1 (a dollar of infrastructure spending increases total spending by a dollar). Marginal Revolution comments here.

I think it is worth mentioning that Charles Tiebout's 1957 doctoral dissertation at Michigan was on local multipliers in Midwestern cities, and he basically found the same result for any exogenous increase in spending.

One Can Only Imagine

Thomas Frank writes:

If surrogacy ever becomes a widely practiced market transaction, it will probably make pregnancy into just another dirty task for the working class, with wages driven down and wealthy couples hiring the work out because it's such a hassle to be pregnant.

Yes, imagine a world in which low-income people take jobs that are different from high-income people. What would that world be like? And I forget, what happens to earnings when a new labor demand curve is added to the old one?

Hat Tip: Stephenson at DOL

Quick hits

- Good idea: Reduce transactions costs for your potential employer.

- Better idea: Privatize sharks.

- Sark holds its first election to fill a democratic government in 450 years. Think constitutional reform is an 18th century topic? Not so. Here is the Wikipedia entry for Sark, "last European territory to abolish what some called classic feudalism in 2008"; note that the population is about 600, meaning that turning out "in their hundreds" could lead to a voter participation rate of...yup, 50%. I'd be curious to see the actual numbers when they come in, though-- since it's an event, you'd expect higher. Even more interesting-- 57 candidates ran, meaning that about 10% of the population was on the ballot. For the United States, that would equate to thirty million people running for office. Is it possible that everyone knows at least one person running, and would thus want to support them at the polls? Could be. Perhaps most interesting-- 28 seats are available, meaning about 5% of the population will hold public office. If the population of 600 is split over 28 seats, then all of the sudden the probabilty of being deciding vote rises considerably.

Public choice observations in the circumstance of (very) small numbers? I'm intrigued.

I've never laughed so hard...

...while watching a story about a tornado hitting a children's daycare center. It helps to know that the children were all safe. (Warning: Contains adult language)

Illegal...but efficiency enhancing?

The Illinois governor has been arrested and is charged with attempting to sell Obama's Senate seat.

Insert your Chicago-school joke here.

See Joab's Economic Theory of Rational Haunting

If you are wondering what to get a loved one for the holidays, consider tickets to the Morgantown Paranormal Conference, which will feature TPS friend and economist Joab Corey as a guest speaker. We've referred to or written about Joab several times now, but this may be my favorite Joab story yet. He plans on presenting his rational ghost hypothesis, which is a game thoery demonstration of when it is rational to fear ghosts (assuming they exist). We'll try and get him to send us the abstract when he's ready for that talk.

Baseball Hall of Fame

It's getting to be Baseball Hall of Fame voting time, so my mind always wanders down the path of figuring what is the best way to select Hall of Famers. Personally, I think too many people vote now-- it's a collection of sports writers, and it's in the several hundred. If the goal is to uphold the integrity of the Hall, then I say get a group of sports writers and a group consistening of the existing Hall of Famers, have them both vote, and both groups need to surpass 75%.

Here is this year's list, the smallest ever at 23 players. I'm an unabashed Rickey Henderson fan; he's a clear first-ballot Hall of Famer, and as I heard someone recently say, he would be even if he hadn't stolen one base. Bill James may have the most well-known quote about Henderson-- if you cut him in half, you'd have two Hall of Famers. I said this years ago, and I still think there's a decent chance-- Rickey Henderson will be the first Hall of Famer to play in a Major League Baseball game. It makes sense on so many margins. You watch. There's a better than decent chance he'll at least suit up and make it into a game.

Outside of that, McGwire should be in the Hall but probably will continue to receive a disproportionate brunt of the steroid black cloud, Jim Rice is right on the fence for deserving to be in but probably will fail in his final year of elgibility. Without looking at the stats, I'd say Lee Smith tops the rest, Trammell is underrated, and Dawson and Raines will all probably linger for the maximum 20 years.

Should Tommy John make it for having a surgery named after him? And should Jack Morris make it for the single best modern pitching performance?

Results should be announced about a week into January.

Here is Ron Santo saying that he doesn't like the Veterans Committee process; he got 69% of the vote from that committee this time around yet fell short of the required 75%. The Veterans Committee consists of all living Hall of Famers. There are actually two Veterans Committees-- one for post-1943 (the one Santo referred to) and one for 1942 and before. The latter group selected Joe Gordon. That group is a 12 person committe; 9 are needed for induction.

The Welfare Tax

Graduate student Fatima Carson and I will be publishing a short op-ed discussing the above table in the Indiana Business Journal (hyperlink forthcoming). It tells a familiar story, that the welfare safety net can be a captivity net. Notice that, due to the cut in transfer benefits, earning income over the $12K-$20K range only increases disposable income by less than $5K. That is quite a tax on gaining experience.

West Virginia, however, is much worse (See Figure 11.5 on page 8 of this pdf).

What's Up, g?

Nobody tell Larry Summers, but check out this from the Economist:

THERE are few better ways of upsetting a certain sort of politically correct person than to suggest that intelligence (or, rather, the variation in intelligence between individuals) is under genetic control. That, however, is one implication of a paper about to be published in Intelligence by Rosalind Arden of King’s College, London, and her colleagues. Another is that brainy people are intrinsically healthier than those less intellectually endowed. And the third, a consequence of the second, is that intelligence is sexy. The most surprising thing of all, though, is that these results have emerged from an unrelated study of the quality of men’s sperm.

Ms Arden is one of a group of researchers looking into the connections between intelligence, genetics and health. General intelligence (the extent to which specific, measurable aspects of intelligence, such as linguistic facility, mathematical aptitude and spatial awareness, are correlated in a given individual) is measured by psychologists using a value called Spearman’s g. Recently, it has been discovered that an individual’s g value is correlated with many aspects of his health, up to and including his lifespan.

Punishment and Common Pools

TPS zoologist Bryce Ryan sends along this bit, it's from Science but has quite a bit of economics in it.

My thoughts:

- One thing that's missing is that cooperation is an expected outcome if the discount rate and difference in payoffs are structured properly. Punishment need not play a role. Repeated games + Realization that cooperation can help you = Cooperation, even in a selfish world. That's the folk theorem, basically, and it answers the question as to why games that look like typical prisoner's dilemmas don't cause the problems you'd expect. It's a function of repeated dealings.

- They test between the punishment and non-punishment groups and find more long-term income for the punishment groups...well, as a public choice guy, tell me about the collective action aspect of punishing the group?! They are groups of three...could you just buddy up with one other person in the group and blindly punish the third member for no reason? Also, realize that the structure of the punishment is such that the personal choice is "give to the common good or have it confiscated." Sure sounds Lenin-esque, huh? Not sure that approximates the choice for individuals in this society, but that's always the default criticism for experimental work. Also, one big problem with common pool problems are not that there's shirking (of course, that's a problem) but that it's oftentimes tough to tell who's shirking. If there's a can to chip in money for the local park-- how can you tell who put money in? Yes, it can be overcome, but it's still a problem-- it's not like common pool problems can't be overcome either, so it's valid to consider.

- By the way, this is a very common experiment to show the detrimental effects of poorly defined property rights.

Pardon Monsieur, mais education est le signaling tactique

Which is one reason why French college graduates will continue to have trouble, in addition to the government ownership problems. This is from a May 2006 article in the NYT, and it has numerous examples of poor economic logic:

There are 32,000 students at the Nanterre campus of the University of Paris, but no student center, no bookstore, no student-run newspaper, no freshman orientation, no corporate recruiting system.

The 480,000-volume central library is open only 10 hours a day, closed on Sundays and holidays. Only 30 of the library's 100 computers have Internet access.

The campus cafeterias close after lunch. Professors often do not have office hours; many have no office. Some classrooms are so overcrowded that at exam time many students have to find seats elsewhere. By late afternoon every day the campus is largely empty.

...

It was student discontent on campuses across France that fired up the recent protests against a law that would have made it easier for employers to dismiss young workers. College students were driven by fear that their education was worth little and that after graduation they would not find jobs.

...

One result was that the country's university system guaranteed a free — or almost free — college education to every high school graduate who passed the baccalauréat exam. University enrollment soared. The value of a bachelor's degree plummeted.

...

Tuition is about $250 a year, hardly a sufficient source of income for colleges.

But asking the French to pay more of their way in college seems out of the question. When the government proposed a reform in 2003 to streamline curriculums and budgets by allowing each university more flexibility and independence, students and professors rebelled.

They saw the initiative as a step toward privatization of higher education that they feared would lead to higher fees and threaten the universal right of high school graduates to a college education. The government backed down.

At Nanterre, Alexandre Frydlender, 19, a second-year student in law and history, complained about the lack of courses in English for students of international law. But asked whether he would be willing to pay a higher fee for better services, he replied: "The university is a public service. The state must pay."

A poster that hangs throughout the campus halls echoed that sentiment: "To study is a right, not a privilege."

...

Officials, entrepreneurs, professors and students alike agree that too many students are stuck in majors like sociology or psychology that make it difficult to move into a different career in a stratified society like France, given the country's troubled economy.

...

But flexibility is not at all the tradition in France, where students are put on fixed career tracks at an early age.

"We are caught in a world of limits where there's no such thing as the self-made man," said Claire de la Vigne, a graduate of Nanterre who is now doing graduate work at the much more prestigious Institut d'Études Politiques de Paris. "We are never taught the idea of the American dream, where everything is possible. Our guide is fear."

Intrade Defeats Expert Political Judgement

From TierneyLab:

The Intrade bettors expected Mr. Obama to end up with 364 votes in the Electoral College — one less than he actually got. None of the pundits came so close. Alan Abramowitz, a political scientist at Emory, came closest with prediction of 361; all the rest were off by at least 12 votes. Nate Silver, the much-talked-about statistician at FiveThirtyEight.com, underestimated Mr. Obama’s tally by 18 votes. Many of the pundits underestimated Mr. Obama’s total by more than 25 votes, like Chris Matthews, Arianna Huffington, and the strategists Paul Begala, James Carville and Alex Castellanos.

Now You Should "Give Local" Too?

Bruce Hetrick writes in the Indiana Business Journal:

Giving to non-local charities can do double damage. While these organizations may, indeed, be worthy, their worthiness goes elsewhere unless those good causes employ local people and return benefits to those in need right here at home.

The point is this: When you do your holiday shopping at a local store or make a year-end gift to a local cause, you’re not only giving generously to those you most care about, but also triggering a ripple effect. Your locally invested dollars support organizations that pay local taxes, buy or lease local property and employ local maintenance workers, construction workers, etc.

Those workers and their employers, in turn, pay even more taxes, and do business with your organization, and make contributions to your favorite causes, etc.
Finally, our local governments use all that tax revenue to police our neighborhoods, pave our streets, promote job growth and otherwise make our collective livelihoods possible.

If the buy local crowd wasn't pretentious enough with their zero-sum mentality for you, meet the "give local" crowd. They even see one as a form of the other...buying local is a charity case! Let's evaluate this new charity aspect of the buying local scam?

Claim #1: Buying local carries its own economic benefit.
See the previous link on the buying local scam. Intellectually bankrupt for 230 years and counting.

Claim #2: Buying local means paying local taxes.
So let me see, I can buy my Pizza from corporate Pizza-Mart or the locally owned and managed B-Town Pizza (both are fiction). To operate, they both pay (in the accounting sense) property taxes, wage taxes, and sales taxes. They are also both paying taxes on whatever income is earned at that establishment. Either way you pay into local taxes.

Now, the corporate chain might have lower prices, and therefore lower tax bills. Fine, but instead of paying higher prices so that you contribute more taxes, you could buy the cheaper product and just directly donate the difference to the local general revenue fund. You'd have the same out of pocket payment, but more would end up in the local treasury.

Hetrick alludes to the comparison of shopping online vs. buy from a local establishment. Online purchases might have $0 tax bill to the local. Fine, but then you could still just donate the price savings directly to the local government, if it is so important to you. There is a very good chance the local government would end up with more under this scenerio as well.

Claim #3: Giving charitably locally
There is nothing inherently wrong with choosing a local charity over a non-local one, but chances are you are not maximizing the good you can do with your charity, especially if you are an American. Your charity dollars go much further if you donate to those living in developing or 3rd world countries (Consider the websites KickStart and Global Giving). Otherwise, begin crafting your argument for your neighbors being more important and more in-need than than poor foreigners.

Update: Josh Hall sends me an old Landsburg slate article, which is on charity.

The Economics in The Office: "The Surplus" Episode

In case you missed it, last night's episode of The Office had everything an economist could ask for in a show. Below is the NBC Two Minute Replay and is well worth the watch, and as always it has the usual principal-agent problems. However, this episode went much further:

1. You got to see the bureaucracy model in action (spending the surplus or lose it).
2. The copier (commons property) is in terrible shape.
3. Michael Scott is looking for a way to spend $4,300 and all of a sudden he has lots of friends. It is perfect rent-seeking.
4. The problems of collective decision making.
5. Corporate's attempt to overcome the bureaucracy model with an incentive payment of 15%.
6. Michael foolishly puts his employees in a Rubinstein bargaining model, not realizing that the game ends in the first round of negotiations because of the perfect foresight and credible threat. He even does us the favor of stating the conditions of the game that generates this outcome!

Credible Deniability: NFL Steroids Edition

In game theory, when games are played under asymmetric information one of the rational strategies for the less informed players is to remain ignorant for the purpose of "credible deniability." The examples often used in teaching game theory often involve politics (e.g. The Bush administration has more information than Congress reps, but it could be the rational political strategy to maintain this asymmetry so that if the outcome is bad you claim ignorance).

Here's a new, non-politics example. The NFL is apparently trying to combat this credible deniability strategy in steroids:

In announcing the suspensions Tuesday, the NFL said it's not obligated to issue specific warnings about specific products. The league also reiterated the section of its policy that reads:

"You and you alone are responsible for what goes into your body. Claiming that you used only legally available nutritional supplements will not help you in an appeal. ... Even if they are bought over-the-counter from a known establishment, there is currently no way to be sure that they contain the ingredients listed on the packaging or have not been tainted with prohibited substances ...

"If you take these products, you do so AT YOUR OWN RISK! For your own health and success in the league, we strongly encourage you to avoid the use of supplements altogether, or at the very least to be extremely careful about what you choose to take."

Yes, when your job is to tackle 300 lbs piles of muscle charging your direction at 22 mph, health and safety is of the utmost concern!

Academia in the 21st Century

I have never seen this in use before, but the Chicago Manual of Style has a demonstration of how a blog and comments should be cited in a journal:

In Text:
(Peter Pearson, The Becker-Posner Blog, comment posted March 6, 2006)

In Reference:
Becker-Posner blog, The. http://www.becker-posner-blog.com/.

Google Quote of the Day -- Economists

A student actually sent this to me:

An economist is a surgeon with an excellent scalpel and a rough-edged lancet, who operates beautifully on the dead and tortures the living.
- Nicholas Chamfort

Priceless Wording

Anybody else see it?

Krugman has been awarded the Nobel Prize in Economics. And Norton has just published The Return of Depression Economics and the Crisis of 2008, a substantial revision of the book he originally published in 1999.

[Second hyperlink added by me.] Note to self...predict a depression at the beginning of every decade and write book.

Real World Leontief Production Function

Here is Kevin Carey arguing for universities to make labor more productive with technology. This reminds me of an experiment I tried earlier this semester.

I have two desks in my office, but only one computer. I set up my laptop for permanent residence on the second desk, thinking it might create opportunities for more scholarly output. Complicated regressions can take a few minutes at a time, and working on other programs while they run can slow the process. My thinking was I could start a regression, turn around to the other desk, and work on something else. However, the transition process from one computer to another, and the monitoring process (frequently turning around to see if it was finished) offset the productivity gains. If you think of scholarly output (q) as a production function of labor and computers F(L,C) then the following was true:

q = F(1,1) = F(1,2)

The only production function* that comes to mind is the Leontief function, which is

q = min{input 1, input 2}

Finally, a real-world situation in which this function applies. Input-Output modelers, feel free to leave your hate mail for that statement in the comments ;).

* For students, we do have utility functions that might apply the Leontief function. You can think consumers are probably indifferent between a box containing 1 left shoe, 1 right shoe, and another box containing 1 left shoe but 2 right shoes.

Markets In Everything: Exam Advertisements

From CNN:

In tests for teacher Tom Farber's high school class, students can demonstrate their mastery of calculus and find out where to get braces or even a haircut.

Squeezed by classroom budget cuts, the Rancho Bernardo High School teacher is selling ads on his exams to cover the costs of printing them.

"It raises money for the teachers and it's amusing for the kids, so it seems like a win-win," said Luke Shaw, 18, a student at the suburban San Diego, California, school.

What will this do to the supply of exams? Since it takes time to grade both homework and tests, my thinking is that teachers would have an incentive to substitute away from homework and towards tests. Similarly, how will the content of the test change, and what kind of advertisers will be attracted to this venue? The Superbowl ads draws advertisers for more social or group oriented goods. Will exam ads draw more stress relief oriented advertisers? Will they tend to be Sylvan-like tutoring services? How will advertisers differ between subjects, say English and Math?

Best Thing I Read Today

I don't usually blog sports, but I couldn't resist:

Marty Schottenheimer -- The word is he badly wants back in, and his first choice is Cleveland, where his long head-coaching career began in 1984. He might be the Browns' fallback plan if there's no Cowher in their future.

The Browns fired Schottenheimer in 1988 because he went 2-4 in the playoffs and lost 2 straight AFC championship games. At this point, I would love to lose 2 straight AFC championships. Most likely, the Browns will screw up and continue to chase overvalued assets like Bill Cowher, who I think proved in his last year with the Steelers that he's not hungry anymore.

Things undergrads shouldn't be reading

Who knew I'd get an economics lesson in a CNN article titled "Are you afflicted with 'TiVo guilt'?":

"You want to watch TV, and what do you have? You turn on your DVR and you have a homework assignment," says Brad Berens, chief content officer for iMedia Communications, who analyzes how media advances change people's behavior.

"Economists call this 'opportunity costs,' " explains Berens. "You're sitting there and you have to weigh, well, 'I have to watch this thing, because I promised myself when I told TiVo... I want the whole season of that! Go get it! And go get things like it!' And so you've committed to this decision and it's a burden -- suddenly your relaxation has turned into more work."

It gets better:

"With infinite media, you have infinite choices, and therefore you have infinite opportunity costs," he says. "Your satisfaction index of the thing you actually choose can never be equivalent to the infinite opportunity costs, so we're in this position of being behind the cognitive eight-ball all the time."

Wow. That might be the worst sentence written concerning economics that I've read in some time: "With infinite media, you have infinite choices, and therefore you have infinite opportunity costs."

Wow.

You can learn all about Mr. Berens here, though before you head there, give a guess as to the discipline of his graduate study. Not the first guess for me, but it was top three.

Self Regulation in Port Lincoln

Incentives matter:

One secret of Port Lincoln's success has been a remarkable system of self-regulation. Take the rock lobster industry, which exports shellfish the size of poodles to grateful consumers in China, Hong Kong and Taiwan. Since 1991, the lobster fishermen have voluntarily reduced the length of their season, the number of pots that they can lay and the minimum size of lobster ­ or crayfish, as they are called here ­ that they can catch.
...
Steaming out to sea to pull his pots on a cool, clear autumn morning, Mr Collinson reflects on a wise investment that he made as a 23-year-old deckhand in 1983. He bought a licence and 40 crayfish pots, which cost him $40,000 (about £16,000 at today's exchange rates). He now has the maximum 60 pots, and his licence is worth $2.2m (about £840,000).
...
The value of licences spiralled as cray fishermen not only found new markets in Asia, but also recognised that it was in their own interests to look after the stocks. For without a healthy fishery, their licences would be worthless. The fishermen have become conservationists; they work in close co-operation with government scientists and, if the scientists advise them they are overfishing, they take steps to catch less. Every aspect of their job is regulated, mainly at their own instigation; boat size, engine power, dimensions of pots.

Eye of the Beholder

I see this story in the NYT as another reason not to have state-sponsored health care. I suppose others may see it as a reason to have state sponsored health care, depending on their view of immigration:

Dr. Bernhard Moeller moved to Australia with his wife and three children nearly three years ago when he was hired to work as a specialist at a rural hospital in the southern state of Victoria.

The family decided to apply for permanent residency, but were appalled when their application was rejected this month because Dr. Moeller’s 13-year-old son, Lukas, has Down syndrome.

Australia has a longstanding policy of weighing medical conditions in its residency decisions. Any applicant deemed to have a condition that would incur significant costs to the state-run health care system must be rejected under Australia’s immigration laws.

Ahhh, the compassionate system we get to look forward to in the U.S.

Hat Tip: Philippe Legrain

My Mistake

I thought we were in a country with Freedom of Speech, but the CNN internet poll says otherwise:

Everything about this poll makes me sick to my stomach.

Russian Communist Party on Obama Victory

Does this group have an RSS Feeder? The same party that believes James Bond to be real had this to say about Obama's victory:

"The days of the bloodthirsty and thieving Bush administration are ending. The American people have rejected the rabid Russophobia and anti-Sovietism of McCain. We, the Communists, believe that McCain must respond to his own defeat like an honorable officer and shoot himself in the head. Or there will be no respect left for him.

Even though Obama was supported by many left-wing forces in the U.S., including - at our request - The Communist Party of America, Barack is clearly being controlled by the Pentagon and Wall Street. Comrade Zyuganov has correctly observed with dismay that Obama is surrounded by slithering certified Russophobes - Brzezinski and the maniacal Albright. Therefore, Russia cannot lower its guard - we must be prepared for the continuation of the Cold War. But there still is a chance that Barack Obama chooses a realistic policy and brings new people into his team.
...
We would like to alert the progressive forces of America: if Obama chooses the policies of reason and renounces Bush's policies of aggression and intervention, the CIA will try to assassinate the new president. To this end, the American Left must hide Obama in some sort of Uncle Tom's cabin.

Hat Tip: Dr. Pavel Yakovlev