It's Called a "Government Granted Monopoly," Betty...

...and it's coming to a financial market near you. This from CNN on Ike:

Tempers are running hot in Cincinnati even as hundreds of energy workers try to get the power back on, WLWT reported.

Resident Betty Ruark told the station she was "really teed off" that houses either side of her had power, but she still needed a generator just to make coffee.

"They're right here a week after you pay your bill to read your cotton-picking meter for next month," she said. "They're threatening to cut you off if you don't pay it, but could they care less that they don't got the electric on. It don't make sense, you know?"

Yes, I do know Betty, and I can't wait to pass it along to the other sectors of our economy. Check out this commentary from Nell Minow:

American International Group (AIG) replaced CEO Martin Sullivan after the company posted losses for two consecutive quarters totaling $13 billion. Sullivan's contract entitled him to about $68 million. His replacement, a board member who served as CEO for three months before the company was taken over by the government, will get as much as $7 million.

The boards of directors approved pay that was completely disconnected to performance. This, after all, is the world of the ultimate oxymoron: the "guaranteed bonus." So we should not be surprised that executives took the money and ran.

I agree wholeheartedly Nell, but fortunately the market forces these businesses out of existence. Oh, wait....

Is there a basic principle of economics that is not being raped and pillaged by policy makers right now?

Interview with John Nash

John Nash, of Nash Equilibrium fame, is interviewed here. I bring it up because it may be of interest to our friends in the school of Austrian Economics. If you skip to 28:00 in the video, he talks about the influence of teachers in his life. He says he only took one course in economics, but it was taught by an Austrian economist who was very influential in his way of thinking.

It is brief, but you may find it interesting that one of the most mathematical economists to ever live drew on a Austrian background.

TPS Welcomes Guest Blogger!

TPS welcomes guest blogger Emily C. Schaeffer. Emily is a Ph.D. candidate at George Mason University. Her fields of interest include applied microeconomics, political economy and urban development. Currently she is working on natural disaster response by public and private bureaucracy.

See her first post here. Her website is here.

Is a Ban on Abortion Consistent with Libertarianism?

This is mostly a pointer to DOL's Tim Shaughnessy's post, where he makes the anti-abortion case for libertarianism (and more to his point, the case for religion). I think this is an interesting topic for libertarians to think about precisely because they do seem to come off overwhelmingly in favor of abortion, and it is the party's official platform. I don't have a firm stance on the issue simply because I can't decide, I seem to agree with whoever is arguing their point at the moment (assuming it is a good point).

I tend to think that the role of government is to offset coercion. Yes, the government makes would-be murderer's worse off when they are denied or discouraged from killing someone else, but that merely offsetts the coercion they were to place on the person who was going to be murdered. To me, it is not clear there is or is not coercion because of the ambiguity in determining the human status of the fetus.

My understanding of the Supreme Court's Roe v. Wade decision was that since pregnancy is a medical condition, and the government has no place knowing what your medical condition is, they cannot punish those who terminate their pregnancy. I get that, and that kind of wording seems on the surface a fairly libertarian take (welcome to disagree). However, the government's knowledge of the existence of a person does not seem to grant others the right to murder them.

Ultimately, I think that libertarian philosophy brings nothing new to the abortion debate and we should justs accept this. If the fetus is a person, then the government has a police role to play. If they are not a person then it's not the business of government to intervene. I think this is a improvement over an entire political party taking a stance on it, which mostly seems to serve as a bundling strategy for political views.

Disagree if you wish. Insightful comments that are respectful to everyone's views are welcome.

Apocalypse Now?

If a picture speaks a thousand words, this one encapsulates the fallacious Marxian theories of historical cycles. What may be worse are the parallels between what is written on the gentleman’s sign above and conventional understanding of the relationship between business failure, the market process, and the role of government.

A market process theory of capitalism necessarily requires that firms that make poor decisions (not to name names…eh.. Lehman Brothers et al) collapse and fail. Failure by some is fully consistent with a well working capitalist system. Losses serve the important role of disciplining agents in the market. Losses indicate that using resources in a particular manner is undesirable to the rest of society and unsustainable in accordance with others’ plans. Sometimes (particularly as a result of distortions in crucial price signals) losses mean that large pockets of mal-investment have occurred and will require liquidation.

The process is painful for employees and those whose assets are tied-up in the mal-investment. Nevertheless, the pain is temporary and limited barring any additional government intervention. Resources are freed up by liquidation to be used in profitable undertakings elsewhere, ultimately fueling economic growth throughout the economy. This is part and parcel to the capitalist system, not the ultimate indication of its demise.

Bailouts, not failures, weaken the overall market order. The bailouts of Fannie, Freddie, and AIG are not only unhelpful in current recessionary period, but ultimately harmful and damaging interventions that impede and cripple the market process. Unprofitable allocations of resources and investments persist. Growth for all is curtailed for the protections of the few. More regulation, greater controls, and more government oversight is the immediate recommendation. However, it is not surprising that giving banks money in times of crisis allows for fewer failures in the short run. Example, here. These interventions produce expectations of future bailouts that lead to more risky and unprofitable behavior in the future. Call me crazy, but if the sign read “AIG’s bailout points to a crippling attenuation of capitalism” I would be inclined to agree, even if it was with the crazy man shouting on the corner.

What is today's worry?

A little while back, I heard an off-the-cuff comment about how people always need something to complain about, and that the media taps into this and gives them their ammunition. Complaining about financial markets and the state of the economy is the current favorite; gas prices and global warming have been recent favorites as well. And you never know which one is going to jump back into the top spot!

But it's also fun to see what happens to the old #1 complaints after they have been supplanted. Gas prices have retreated a fair amount; oil looks to take a decent jump this morning but is still down about 30% from July's high.

Y2K was a big worry. That didn't really pan out. Same with bird flu. And killer bees.

What got me to thinking about the topic this morning was this piece concerning ice levels in the Arctic. Remember when people were predicting that you'd be able to sail over the North Pole by the summer? Yeah, that didn't quite happen. Not even close. Turns out that ice loss was less in 2008 than it was in 2007; estimates for 2008 were off by 1.74 million square miles.

When writing the check matters

One of the most important public policy insights of economics is that it does not matter who you make write the check, who actually bears the burden of a tax is determined by market forces of supply and demand. It is another one of those "common sense when you think about it" examples that are so pervasive in economics. Simply put, there is no difference to the final cost to consumers and producers when choosing between raising a firm's cost of selling by a $1 tax or raising a consumer's cost of buying by a $1 tax.

Joel Slemrod has an excellent NTJ piece that reminds us that this analysis depends on ignoring administrative and monitoring costs. Here's the abstract:

The article cites a study that examined the aspect of implementing a tax system with relevance to tax remittance in the U.S. It stresses the importance of firms in modern tax remittance systems and considers remittance in the context of the choice between a value-added tax and a retail sales tax. It suggests that the remittance responsibility such as whether the buyer or seller of a commodity must remit any sales tax triggered by the sale is irrelevant to the consequences of a tax. It contends that the irrelevant propositions do not apply in the presence of avoidance and evasion because an effective tax structure may vary depending on the remittance system. Furthermore, it argues that who remits tax may be an important aspect of implementing a tax system.

Bottom line, it may be more efficient to tax 1 employer rather than 1,000 employees. Of course, the government will just do both.

Addendum: Bob Lawson at DOL has a much better post than mine on the same subject.

Are there any nickels left on the ground?

So is this an entrepreneurial opportunity...

...or are all of the nickels fake?

Survey Questions I Would Like to Ask

If I could put together my own survey of the public, here are some questions I would ask:

1. Suppose a new medical treatment is developed that nearly eliminates your body's ability to feel pain. Would you take it?
2. What is your educational attainment? In hindsight, was the level and type of education you obtained worth its cost?
3. What is the month and day of your birth (e.g. January 1)?
4. If you were sky diving and the parachute did not open, what do you think your personal chances are that you will survive the fall?
5. Do you believe life was better in the past than it is today? If yes, what year was life at its best? If you could be presented with the option of being born in that time period, would you take it?

I ask #1 because many of my non-economist colleagues argue that since people want protection from market forces, government should grant it to them. My rebuttal is that pain in the market place is similar to physiological pain, it prevents us from doing stupid things that would otherwise feel good. Laying out in the sun feels good, but the ability to feel pain encourages us to avoid getting sun burned. #3 I would ask only if I knew the true answer ahead of time. Once upon a time I saw a paper that did exactly this, and a surprisingly large percentage (over 10% I think) gave the wrong answer.

On the Optimal Minimum Wage Policy

Abstract from Lee and Saez:

This paper provides a theoretical analysis of optimal minimum wage policy in a perfectly competitive labor market. We show that a binding minimum wage -- while leading to unemployment -- is nevertheless desirable if the government values redistribution toward low wage workers and if unemployment induced by the minimum wage hits the lowest surplus workers first. This result remains true in the presence of optimal nonlinear taxes and transfers. In that context, a minimum wage effectively rations the low skilled labor that is subsidized by the optimal tax/transfer system, and improves upon the second-best tax/transfer optimum. When labor supply responses are along the extensive margin, a minimum wage and low skill work subsidies are complementary policies; therefore, the co-existence of a minimum wage with a positive tax rate for low skill work is always (second-best) Pareto inefficient. We derive formulas for the optimal minimum wage (with and without optimal taxes) as a function of labor supply and demand elasticities and the redistributive tastes of the government. We also present some illustrative numerical simulations.

If government (I think they mean society) enjoys the act of redistribution, or at least place a larger weight on low skill workers than on their higher skill counterparts, and the workers who enjoyed their job the least lose their jobs before the others then I have no doubt that this surgical policy strike could increase social welfare.

I skimmed over the paper and it is well written and classic micro theory, even though it does not pass the reality test. I also didn't see if taxes on high skill labor effected demand for low skill labor, so if someone happens to read it more carefully then I'd appreciate a note in the comments.

Maghound

Sticking with the Netflix theme for today, here's a new service: Maghound, which purports to be the Netflix of magazine subscriptions. You pay a small fee and swap out subscriptions from month to month. Here's a piece on it from ReadWriteWeb. Evidently the choice in magazines at the moment is small but they had to start somewhere.

People are hesitant to pony up a year's worth of service for a magazine they aren't sure they'll read often enough or really enjoy. This service would be a good way to get people back into the magazine fray, but why wouldn't people use the service for a few months, find which magazines they like, then drop the service and subscribe only to what they like (and, presumably, pay less in doing so)? Netflix works so well because movies are one-and-done; you watch it and move on to something else. Magazines don't work that way. Substitution arguments could be framed to support anything, but there aren't a lot of straight substitutes for a full-length feature movie if that's what you want to do. If you're looking to pass the time reading something light...there are a lot of substitutes for that.

Tom, what's the business school take on this idea?

Netflix Prize

I'm not sure if we've covered this before, if we did it was a while ago, but the Netflix Prize has been a popular conversation piece recently. The concept is simple-- write an algorithm that predicts whether users will like or dislike movies, based on previous likes and dislike, at a clip 10% better than Netflix's own algorithm (Cinematch). The prize? $1,000,000. There are also Progress Prizes of $50,000 along the way to keep the carrot within reach.

My interpretation of the leaderboard says that teams are breaking the 9% clip, and what is interesting is the timeframe of these entries-- the #2 entry was submitted at 10:00pm last night. The best programs are nearing the Progress Prize, so I'd imagine a flurry of activity until they get there.

I don't have a sense for the progress of this...could it take another year? 18 months? 6 months? I do know that amongst the programming community, this is a prize worth seeking-- and the $1 million may not be worth the prestige from being the person who wrote the golden code.

Obviously, Netflix now has swarms of very talented coders working their fingers to the bone to develop better software. They would have spent well into the millions of dollars to get this program up and running, so it's a bargain to them. Netflix also strikes me as one of the few internet companies that doesn't have a cash flow problem in the least.

Also, without knowing one thing about the specifics of the code (Tom, what do you know about this?), my guess is that Cinematch is a (relatively) simple code that doesn't presume too much and does a pretty solid job-- thus, making something exceedingly complex that could outperform it wouldn't be terribly difficult, but to outperform it by 10% would be pretty challenging.

Survey of Economists is Released

Reviewed on CNN by Dilbert creator Scott Adams. Kudos to Adams for providing this public service. Not surprisingly, the econ profession leans to Obama in part because they see little difference on economic issues. I would prefer the sample have a larger share of academic, mostly because I am more distrustful of think-tank "economists" (see here and here). Compared to the rest of the nation, economists are less partisan but nonetheless I am still pretty disappointed in the partisan results of the survey.

It seems to me that the survey tended to ask "which is better - Obama or McCain?," where I would have liked a qualifier "would Obama/McCain's plans improve X?" I think in general both of their proposed plans stand to make the world a worse place to live, but one may be less-worse than another. We have no way of telling if the rest of the profession is the same on this.

Similarly, the list of "what issues are important" does not state why it is important. Raising and indexing minimum wage to inflation is likely going to be harmful to the lowest skilled workers, but that only applies to a small portion of the workforce. Those kind of caveats don't seem to come out in the survey.

At the time I write this, the server to the polling results themselves seem to be down, but if I get a look through it later I will write more on it again.

Is the FDA Captured?

Kling at EconLog:

Paternalism of that sort ("stop me before I...") is not in the traditional economic definition of public goods. Maybe the behavioral economists will put it there. If so, then I say we should lash people to the mast lest they be lured by behavioral economics.

Lurking in the background, there is a bootleggers and baptists story that Klein briefly hints at. The large pharmaceutical companies have a huge advantage over small start-ups in having the capital and know-how to run the regulatory gauntlet. The FDA approval process is a wonder drug for stifling competition and keeping the number of new medicines low.

I flesh this quote of Kling's out, first because I love the behavioral economists as siren's analogy, and second because of the application of capture theory. There is no question in my mind that the world is a better place without the murderous FDA at large. However, I am not so confident in the ability of large pharm companies to keep out smaller competitors via the FDA. I used to buy the story, but Richard Epstein really damaged the bootleggar and baptist argument in this particular case.

The Prescription Drug User Fee Act (PDUFA) is enormously popular in the pharm industry, which means firms big and small are willing to pay to get through the regulatory process quicker, not find ways to slow it down (though I concede there may just be a prisoner's dilemma here).

More damning for this argument though, is the use of in-licensing for pharmaceutical patents. The small Mom & Pop experimental lab discover a promising new drug, patent it, but don't have the capital to cover the fixed costs of clinical trials through PDUFA or traditional means. They can auction off an in-license that gives another firm the right to share in the patented drug rights. Since this is highly lucrative and competitive auction, Mom & Pop are going to come away with most of the surplus.

Optimal? No, not even close. However, as long as in-licensing is available I have a lot of doubt about the magnitude of the ability of large firms to crowd out lots of small firm innovation.

Should We Care about a President's Parenting Skills?

Hit & Run has the online debate with comments. Palin's entry has made the race more interesting as a form of entertainment precisely because it shows us how ugly people pursuing power become. I do like the question as to whether or not we should interest ourselves in their parenting ability.

First, I would like to point out that I have never heard the public or media question a male candidate's ability to parent while in office, but that is aside from the point.

Now to the question....since these people are competing over the right to rule over me, tell me what to do, what to eat, what to drink, what to drive, where to drive it, who to hire, who to work for, who to go to school with, who to marry, who to pray to, and a myriad of other activities, then I have the right to know what kind of parent they are going to be.

People used to say "we can't choose who are parents are." We can now, and we should be fully informed of our choices.

Also Read: Don Boudreaux.

Questions I've been pondering...Ideology in the Social Sciences

Here is an article in CHE on talking politics in the classroom. I am lucky, as an economist, that I can essentially be non-partisan by taking swipes at politicians in general (I warned my students that watching either campaign can seriously damage their understanding of economics). The other social sciences seem to have a harder time walking this line, as the CHE article notes:

For the political scientist, as well as the historian and sociologist, politics involves discussing their subject.

From what I have seen though, it is more than that in the other social sciences. In four years in the department of economics at WVU, I could count on one hand the number of times politics came up among its members in a specific "what is your personal ideology" manner. However, if I went to a regional science seminar (very interdisciplinary) it came up a lot. When Unleashing Capitalism was released, despite a concentrated effort to demonstrate the non-partisan nature of the subject, criticism from the other social sciences were heavily rooted in ideological grounds with accusations of "pro-business" or "pro-republican." The criticisim received from economists (or more accuarately a economist, I am aware of criticism from only one) was rooted in empirical relevance e.g. West Virginia is not that poor.

I recently listened to a talk by a SPEA colleague discussing his research on the interconnectivity of the "social safety net." A sociologist, he laid out his empirical survey results and concluded that 1) there is no "safety net" per say but rather many individual actors that exist at multiple levels with multiple directives, 2) they were extremely complex with an enormous amount of sophisticated interdependence, and 3) the idea of "managing the social safety net" is absurd due to the complexity. Afterwards, I told him he was essentially describing the welfare system as a spontaneous order and gave him the synopsis of "I, Pencil." He said his paper has been attacked by other sociologists as a "veiled right-wing back door attempt to destroy the welfare system."

My question is why. Why do the other social sciences seem to be so much more prone to using an ideological attack? In both these examples, the attack was not on the presented evidence, but the motivation of the researcher. Is this an example of projection? Is ideological bias such a barrier to accurate results in the other social sciences? Is this self-selection, that since the understanding of politics is necessary, those with a ideological bias are disportionately drawn to them?

We have a StubHub winner!

I enjoy college football as much as the next person, so I, like the rest of the country, am looking forward to this weekend's USC/Ohio State matchup. This bit about the game, though, has an interesting fact:

"On Wednesday afternoon, StubHub declared this game the best-selling regular-season game since it went into business in 2000, with an average ticket price greater than $400 and ticket buyers in 45 states."

Now that's saying something. Yes, the stadium is big, but so is the Rose Bowl and they hold that every year, and every four years the National Championship is there. I presume "best-selling" means highest volume. Also-- I would think that an early season matchup like this wouldn't see the turnover in tickets. Consider if this game were later in the year; yes, it would be a big game, but if one of them lost prior to their going head-to-head, you could imagine many people choosing to flip their ticket since the game wouldn't mean as much.

Maybe StubHub is more popular in California? The article said tickets were sold to people for this game in 45 states. There are other large college stadiums that play host to big games as well...perhaps the StubHub market saturation isn't there yet.

Addendum: I just noticed the quote mentioned regular-season, so ignore the Rose Bowl part (though the Rose Bowl is used for regular season games as well).

Resource Curse Revisited and Revised

For those interested in the resource curse and economic freedom, check out "The Resource Curse Revisited and Revised: A Tale of Paradoxes and Red Herrings" by Christa N. Brunnschweiler and Erwin H. Bulte, in JEEM 55(3), but ungated version here. Abstract:

We critically evaluate the empirical basis for the so-called resource curse and find that, despite the topic's popularity in economics and political science research, this apparent paradox may be a red herring. The most commonly used measure of “resource abundance” can be more usefully interpreted as a proxy for “resource dependence”—endogenous to underlying structural factors. In multiple estimations that combine resource abundance and dependence, institutional, and constitutional variables, we find that (i) resource abundance, constitutions, and institutions determine resource dependence, (ii) resource dependence does not affect growth, and (iii) resource abundance positively affects growth and institutional quality.

My research does not include the resource curse, but I never bought the arguments pertaining to the resource curse (underdevelopment of other sectors, for one example) other than the public choice view of it, which to me this article confirms (though other interpretations welcome).

The resources themselves are innocent, it is that resources are often immobile (you cannot relocate your coal mine to another jurisdiction). Government power is derived from immobility, e.g. the bridge club cannot exploit you easily because you will just quit, but it is harder to quit a country. This is precisely the reason so many people argue the federal government should tax income instead of the states, because people can't escape it as easily.

Since resources are immobile, they are prime targets for government exploitation (and hence corruption and lack of economic freedom). However, the resource owners and their employees are wise to this and have a long term interest in ensuring that they infiltrate the powers of government and provide a competing incentive for the rules of the game to favor them (hence corruption and lack of economic freedom). The resulting power struggle between exploitation and favoritism leads to poorer institutions that deter growth.

Factoring out this power struggle and poor institutions, resource dependence and abundance should be innocent. I see no reason for resource dependence to matter and abundance should be positive for growth, once this institutional struggle is held constant.

I think that this paper should clarify the meaning of the "resource curse," but not eliminate it from our lexicon.

As American as...

Everyone knows baseball was invented here in America, right? Not so fast...

General question: How would you determine the first baseball game? If a sport called "Base Ball" were mentioned in a diary yet played like rugby, would this count? At what degree of similarity do you draw the line? Name only? Name and same objective yet vastly different rules? I, nor anyone else, has the answer...so this debate isn't likely to get settled any time soon.

The Economist: August 30th - September 5th

I'm a week behind with The Economist, but last week's had some fun topics that I ran across a few nights ago:

- A great bit on the tendency for the best strategic, less luck-driven "Eurogames" to come from Germany. The Economist describes them as "emphasis[ing] strategy over showiness, downplay luck and conflict, lean towards economic rather than martial themes, and strive to keep all the players at the table until the game's end." Puerto Rico and Settlers of Catan both hail from Germany, and two significant games awards as well.

- It's been mentioned before, though I don't think here at TPS, but restaurants must now post the caloric attributes of the foods they sell. Sweet crispy Christ, this outflanks smoking bans on every margin. It's your typical regulation-yields-competition-on-other-margins story, but don't let the crafty entrepreneurs stray your eyes from the big picture of loss here.

- I'd love to hear Dana's take on this one: Lawyers are going away from the billable hour. Understandably, the push is coming from clients-- incentives simply aren't there for the best service if each hour or fraction thereof is pay at value. That just encourages lawyers to bill more hours. (ABB! Always be billing!) Instead, companies are experimenting with flat fees and bonuses for tangible improvements on the legal end of things.

Capture Theory at Work

The capture theory of regulation is demonstrated wonderfully in the following report by CNN, the lesson of which is that regulatory agencies almost inevitably begin to work on the behalf of the industry they are intended to regulate:

U.S. government employees received improper gifts from energy industry representatives, and engaged with them in illegal drug use and inappropriate sexual relations, according to a report issued Wednesday.
...
Some of the government employees tried to hide their close association with the industry they were supposed to be regulating, the report says.

Regulation provides a new avenue for industries to compete, one that occurs through the political process. If you are new to capture theory, here are the reasons why, even if you agree with the idea of regulating, it is so hard to implement in practice:

1. Q: Where will you find the regulators, who will be required to have an in-depth understanding of the industry you are regulating? A: The existing firms in the industry.
2. Q: Where will the regulators go when their time with the agency is done? A: Given their in-depth understanding of the energy industry, their highest earning potential will be a firm they used to regulate. What kind of reputation will they want to have going into that job market?
3. The industry actors care a great deal about the impact of regulations. Outsiders have many other things to care about, with very little at stake concerning the impact of regulators. Over a fixed interval of time, who will fight the hardest in this political process? The ones with the most on the line.
   
4. Firm's have a long time horizon, at least as long as a young person's career and much longer than a politician. For a fixed level of interest in the outcomes, who will invest the most in ensuring the regulations play favorably with the industry interests? The ones with the longer time horizon.

Transgressions like the one cited in this study demonstrates how far things have to go before capturing if paused, and the halt will only be temporary. Regulation is a losing game, even if you agree with the objectives.

Here is a link to the EconTalk with Sam Peltzman.

Worthy Wine?

There's been some scandal over at the Wine Economics blog (hosted by the American Association for Wine Economists - of which I'm a proud member). Economist, wine drinker, and blogger Robin Goldstein applied for Wine Spectator's "Award of Excellence" for restaurant wine menus. The only problem is that Goldstein doesn't own a restaurant. He fabricated a food and wine menu and a restaurant web page, and Wine Spectator deemed it good enough to win the most basic of three awards. Goldstein, who is writing a book on wine, then exposed the fraud.

Not surprisingly, Wine Spectator is not pleased and responds. Goldstein responds to their response, and then Wine Spectator responds again.

There seems to be two points of controversy. First, the restaurant didn't exist, so therefore should not receive an award. Second, Goldstein suggests the phony wine list was below average and not worthy of an award (with some not-too-subtle hinting that the award is just a gimmick to sell advertising to restaurants).

I think Wine Spectator (WS) is getting a bad rap on the first count. WS has some incentive to guard the integrity of its award list. If all of the restaurants on it were fictitious, it wouldn't be worth much to their customers. Second, it seems like the only person who would benefit from getting an award is an actual restaurant owner, which leads me to suspect that few non-restaurant owners would take the time to trick WS. I could send in a TPS wine list, but the only benefit I would receive would be from tricking someone. Moreover, given the amount of human capital required to pull off the trick (knowledge of high quality food and wine menus and website creation), it seems like most potential tricksters would bear substantial opportunity costs. Given the seemingly low benefits of tricking WS if you don't own a restaurant, WS shouldn't invest too much in certifying the existence of restaurants. In fact, they claim this is the first fraud in 27 years.

As to the actual quality of the fictitious wine selection, I'll leave that to more sophisticated palates than my own.

A Sense of Humor at Intrade

Have a look at this contract.

Error in CNN Money on Oil Speculation

Here is a good practical example for your introductory econ class, have them pick out the error presented in this CNN article covering a study given to Congress:

According to the study, investors poured $60 billion into oil futures markets during the first six months of the year as oil prices soared from $95 to $145 a barrel. Since then, investors have withdrawn $39 billion from those same markets as prices have retreated.

Michael Masters of Masters Capital Management, which did the study, said the flow of money - not major changes in supply and demand - caused the volatile movement of oil prices. The report was released Wednesday by Senate and House sponsors of bills to put additional curbs on oil market speculation.

Sigh. One of the factors that shift the demand curve is expectations of future prices, a.k.a. speculation. Thus speculation is by definition a change in supply and demand. If they are looking for reasons other than speculation to explain price movements, it is ass-backwards to look at history for reasons why expectations of future prices changed. In fact, that is why they call it a "futures market."

Large Hadron Update

More news on the Large Hadron Collider, this could yield some pretty remarkable results though I think people should be thinking years not months. Though the scientists claim we should see some results before the end of the calendar year...

Note the rap song about the Large Hadron Collider at the top of the news link above. Yes, you read that right. A rap song about the world's largest particle accelerator.

Here are fun facts about the LHC. Of particular enjoyment: "Part of the LHC will be the world's largest fridge. It could hold 150 000 fridge full of sausages at a temperature colder than deep outer space."

The cost for this device is $5 billion and 14 years. There are two ways to look at this:

1) Given the choice of this funding returning to the private sector (and I'm assuming a goodly chunk of the money raised was public funds, there aren't a lot of specifics at the site itself), clearly I'm partial to keeping the money in the hands of whoever earned it. I'm also not convinced that $5 billion of knowledge-- however that calculation could come out-- will come from this device. We could understand the universe better, which is fine, but a hazy, subjective, and easily overstated end, not unlike the issue of traveling to Mars.

2) Given that this money has already been taken and must be spent on something, I feel that science isn't a bad place for the money to go. There are benefits (gross, not net) from research. At least it's not aid and getting in the way of functioning economies, nor a public provision of goods infiltrating an established market.

Deliverance In The New Economy

I don't have a point to make really, I just think this story is interesting, amusing, and should be shared:

My friend recently had a problem with her van, namely, that it wouldn't start. The source of the problem? The microchip that coordinated the functions of her van was shorted out. The cause of the short out was the signal from "the clicker" for her car alarm and locks had shorted out the chip, which according to the mechanic is not an uncommon problem (though it is the first time I have ever heard of it). The cost to reprogram the microchip? $2,000 through the dealer, the only person who would do it.

However, her husband's friend knew a guy. In particular, this guy knew how to reprogram these chips, which apparently was in violation of some law or regulation, so he worked through word of mouth. Her husband removed the microchip from the car, and the next day she took it to see this mysterious reprogrammer.

Like most of the residents of Bloomington, she was uncomfortable with the prospect of living the city limits and entering the rural area. "Bloomington is just different than the rest of the state" they all tell me, as if it exists slightly out of phase with the rest of the universe. The residents believe life is uncivilized, nasty, brutish, and short once you pass the Wal-Mart by Rt. 37.

Even for someone who grew up in Conneticuit, $1,700 is a sufficient compensating differential for my friend to venture o'er yonder. As she pulls up to the rural farmhouse of the address shees sees that the porch of this house is occupied by about 6 people, all of whom seem to just exist for the purpose of sitting on the porch. All of them are older in age, many seem to be missing teeth, and nobody is talking. She describes it as being very creepy, and that it looked like a scene from the movie Deliverance.

She announces why she's there, one of the men accepts the chip and the $300, tells her to return tommorrow. Instead she sends her husband, who returns with the chip and installs it into the car, and it works flawlessly.

Apparently, reprogramming microchips in vans has replaced bootlegging homemade moonshine.

End of the World Economics

There has been quite a bit of publicity regarding the Large Hadron Collider starting up operations tomorrow. I can't remember the last time that a physics experiment got this much attention before the fact. The strongest opponents of the project think this will spell the end of the world in a cataclysmic event; personally, I think this is a bit like arguing that Wal-Mart is bad for the economy, but I'm not quite equipped to take the challenge.

Nonetheless, this got us to talking about the end of the world. Let's say that you knew with 100% certainty that the world would end in one week. How would the economy change?

What stuck in my mind the most would be the credit markets would basically cease to exist; selling a good on credit is basically giving it away, as you wouldn't see the final payment (unless the horizon were tremendously short). Could you make the same argument for monetary purchases as well to a lesser extent? There would seem to be a race to acquire goods-- consumable goods at that-- not money, per se; he who dies with the most money still dies. Would barter reign supreme?

Would contracts be broken without repercussion? Would crime go up, via Becker's model, since the punishment for crime would drop significantly? Would private security enjoy a short term boom?

Google Monopoly Nonsense

On the Google-Yahoo Deal:

The Wall Street Journal reported Monday that a group of major advertisers complained to the department about the deal. The Association of National Advertisers, which represents major advertisers such as Procter & Gamble Co. and General Motors Corp., warned that the deal could lead to higher prices and limited opportunities for Web advertisers.

That is the WSJ, but CNN is picking up the story too. Google's real business is actually advertising, so Procter & Gamble and General Motors must not understand that they would be better off if their competitors' prices started to increase. What they should be worried about is that the Google-Yahoo deal would cause prices to fall, which would be much harder to compete with. Unless...

Hat Tip: Russ Roberts

Intrade Update on Presidential Election

TC at MR points out:

Here is John McCain, up to 48.5 on InTrade or is that just because of the recent Gallup poll?

Here is the Gallup poll he is referring to, and I don't think that is directly the case. I was looking at Intrade this morning after the poll was released and it was still 60/40 Obama, and the media polls have been this close for awhile.

This morning Ohio and Virginia looked much more solidly Obama, but he is trading even there now with McCain. Without looking over every state, they seem to have experienced a good deal of volume and price movement today, which may or may not have to do with the Gallup poll on the broad national average. I think the question is, what has changed people's perceptions about Ohio and Virgina?

Note also that, based on the Intrade electoral map, that Ohio and Virginia are enough to swing the election to McCain.

Higher Ed vs. Supply & Demand

I've been working on a project focused on making higher education more cost effective via market forces. Reading the academic literature in higher education is often baffling. Apparently, being efficient means your costs are not rising faster than revenue or, unlike other government agencies, you do not spend $500 on a hammer (so to speak).

More still, is the bizarre notion that we subsidize education to produce a better educated workforce/voter populace. Yet, they subsidize the tuition only for their residents living in-state prior to college.

Would it not make more sense to pay subsidies (on the grounds of their own logic) to those students who live in-state after college graduation, regardless of their state of origin? Comments open.

The Real Price of Gas

Work Time. The reason for the post is to point to CNN's cool calculator here.

Three Things to Remember About the Takeover

Keep in mind:

1. Freddie Mac and Fannie Mae were never real private sector firms with the normal accompanying incentives, they are politically designed animals from Washington (Freddie in 1970's by Congress, Fannie in 1938 by FDR).
   
2. The problem is the transparency of asset value. The government does not have any better handle on this than does anyone else, and I cannot see how nationalization changes that.
3. Housing prices are the rare zero-sum game, and are not to be concerned about. Despite what our handsomest policy makers say, home ownership is not a right, and selling at a price higher than you originally paid is definitely not right.

As always comments are open.

Check in with Arnold Kling often at EconLog.

Funniest Article in Today's News

From CNN:

FRESNO, California (AP) -- Authorities say they've arrested a man who broke into the home of two California farmworkers, stole money, rubbed one with spices and whacked the other with a sausage before fleeing.

Fresno County sheriff's Lt. Ian Burrimond says 22-year-old Antonio Vasquez was found hiding in a field wearing only a T-shirt, boxers and socks after the Saturday morning attack.

He says deputies arrested Vasquez after finding a wallet containing his ID in the ransacked house.

The farmworkers told deputies the suspect woke them Saturday morning by rubbing spices on one of them and smacking the other with an 8-inch sausage.

Burrimond says money allegedly stolen was recovered.

TPS Blogger in the NYT

TPS blogger David Skarbek is cited in Pete Leeson's guest post on Pirates for his work on social contract theory in California Prisons.

Way to go David!

How to panhandle a degree

Now, usually the Time category is reserved for Justin and his surliness, but today we've got an interesting bit-- about a high school graduate emailing strangers for tuition money so he can attend NYU. Asking for a lot of small donations instead of a few big ones is generally not the way to raise a lot of money, but with costless solicitation and a tug on the heart strings...I think this is his best strategy.

I am a bit curious as to why the loan market didn't cover the full amount; are capital markets that hesitant to take on risky loans? Is funding a student through NYU a risky loan?

I'm reminded of the recent hubbub over internet sites offering panhandling tips; like panhandling, I think this student was very wise in asking for an exact amount to contribute.

USPS, SSA, DMV - Meet your New Friends Feddie and Fannie

Pseudo-private firms Feddie Mac and Fannie Mae have been seized to "rescue" the mortgage industry. This has a very scary feel to it, I am somewhat comforted by the fact that these institutions were never really private firms to begin with, so on the margin I don't know how much damage they can really do. My bigger concern is that future downturns in the business cycle will require policy makers to "nationalize" something.

Couldn't Help Myself

I was at the college picnic yesterday and I see a graduate student with a t-shirt that reads:
"Movies: Ruining Books Since 1930*"

I had to ask him, "have you studied marginal analysis?"

He was not familiar with the term, but he was the concept. He reminded me, accurately, that it is just a shirt for laughs.

*I can't remember the exact year.

Your tax dollars supported this party!

Swaziland turned 40 on Saturday, as did its monarch, so in true Jose Canseco form King Mswati III held the aptly named "40-40" party. No word on whether King Cobra was involved. Nonetheless, the party is a microcosm for the larger failings of the majority of the rulers in Africa.

The cost of the party was announced at $2.5 million, though believed to stretch beyond $10 million. GDP per capita was estimated in 2007 to be at $4,800. Nearly 26% of Swaziland's residents between 15 and 49 have HIV or AIDS. One in four people in Swaziland live to be 40.

Robert "Democracy" Mugabe attended the event as well; Swazilanders feel he's stood up to the West and, as such, received the largest cheer of the day.

We does the development community think of such a regime? The DAC has funneled over $500 million to Mswati since he his reign began, $120 million from the U.S. alone. Chris Coyne and I have a paper (pdf) looking at the phenonmenon of aid flowing to the worst of the worst, its title works well to describe the Swaziland scenario-- "With Friends Like These, Who Needs Enemies?"

King Mswati III comes in at #14 on the Parade's World's Worst Dictators list.

No NFL Bettor Bias at Tradesports?

Philip O'Connor and Feng Zhou offer me a sigh of relief by inferring that the already low odds that my Browns will win the Super Bowl are not inflated by long shot bias in the Journal of Prediction Markets. Here is the abstract:

We investigated 1,587 Tradesports point spread contracts for NFL games during the 2005/06 season. Differing point spreads create differing odds, meaning we could test for the traditional favorite long shot bias in NFL betting. We found that there was no favorite long shot bias. However, the market underestimated the chances of the favored team winning by about 10% across all odds categories, and this bias persisted throughout the season. We found relatively low transaction costs. For a price-taker, the Tradesports "Vegas-line" point spread had a 2.2% total takeout including exchange fees, about half of the 4.55% takeout of traditional legal bookmakers. Contracts with a price around 50, creating even money returns to bets on both teams, and higher volume contracts, had lower transaction costs. Participants were found to prefer the Las Vegas line point spread contract followed by the straight-up contract. Trading volume during the game (in-running) was about twice the trading volume leading up to the game. Teams with better season records and from cities with larger populations generated a higher volume of trades. Sunday night and Monday night games generated about four times more volume than regular Sunday games.

Those tricky phone numbers strike again...

A few days ago, I linked to a story concerning the University of Central Florida, a teleconference, and a misprinted phone number that led to a adult phone service. Well, football fans weren't only ones misdirected; you got the same treatment if you wanted to order some duck stamps.

Granted, the value of remembering phone numbers is pretty low these days-- when I was in high school, I could remember hundreds of them, both by necessity and since my brain remembers number well, but now I just shove them all into my cell phone-- but can we attribute these incidents to that fact? I can't say I find myself writing phone numbers incorrectly any more frequently than I used to; if anything, since I'm not dealing with phone numbers as frequently, I take more care to know that it's right.

Also, note the government's position that the printing error would be too expensive to correct. Too expensive? Since when did the government restrain activity on the grounds of it being too expensive? Which government are we talking about here? Because I'd like to see our government curtail a lot of activity on the grounds that it's too expensive.

Do we need to make a category for these events now? One more and I'm going for it.

What Do Democrat's at The Convention Think?

James Pethokoukis has a series of polls on the economy from attendants of the Democratic convention. Here are the results of the three polls he has blogged about so far (n=24):

How much money a person had to make a year to be considered "rich?" Their choices were $250k or more, $500k or more, $750k or more, or $1 million or more.
38 percent said $250k
13 percent said $500k
25 percent said $750k
25 percent said $1 million

Is the economy in expansion, recession, or depression?
12 percent said "expansion"
25 percent said "recession"
63 percent said "depression"

"What should 'the rich' pay in income taxes?"
50 percent said "25 percent"
25 percent said "20 percent"
12 percent said "30 percent"
12 percent said "35 percent"

Note: I have taken survey's of students at the end of my economics course with some interesting results. Students seem to think $100K is rich, with a minimum of $30K. Also, note that JP's poll has a sample size of 24, and you need at least 30 to asymptotically approach the normal distribution.

The Terrible Dangers in Protecting Culture: French Edition

Philippe Legrain provides an English translation for this French article:

A 32-year old Moroccan woman, who is married to a Frenchman and has 3 children who were born in France, has had her normally automatic request for French citizenship denied for wearing a burqa, which France's constitutional council deems "incompatible with the fundamental values of the French community, and notably equality between men and women."

This could be viewed as the Orwellian possibilities for those who are proposing that we create a government ministry of "cultural rights."

Assessment Too High? Ask for A Lower One

I just posted my lead dissertation essay on the incentives of property assessors to SSRN. Property assessors are both bureaucrats and politicians, and among other things I found that elected assessors seem to give systematically lower assessments.

So if you are feeling overassessed, ask for a lower one. If they are elected, mention that you vote and have a memory.

Just so long as they can entertain...

According to over 100,000 sports readers, over 50% answer "Not At All" to "How much does it bother you if athletes use marijuana?"

Sachs' Social Value Mishap

We're going through Sachs' Common Wealth in our reading group, it certainly makes for a lively discussion since there isn't a lot to agree with. Nonetheless, the man is a Harvard trained economist, which made the following gaffe all the more surprising. I'm paraphrasing, but it goes as follows:

Let's consider we have a lake that is privately owned. There are fish in the lake that exist only within those waters. Further, if the fish reproduce at a sufficiently low rate compared to the interest rate, it becomes profit maximizing not to manage the population, but to "cash out," if you will, and use the proceeds in capital markets to earn a better return. He notes that the social value of having this fish species can not be calculated into the price of the fish-- people would want it only for meat-- and, viola, market failure.

(Side note: Are there any animals-- fish or otherwise-- that even begin to approach this scenario? And no, his point was not that any animal exhibiting characteristics like this would end up extinct.)

He overlooks the market adjustment here-- the price of the fish will rise as extinction nears, but that could be swept under the rug as well considering his interest rate assumption. Depending on the demand for the fish, this may or may not be accurate, but that's not what bothered me. What bothered me was that he assumed the social value of fish needs to be factored into the sale of individual fish. It's in the sale of the lake that this calculation comes into play. When the lake is purchased, the owner has an idea of how he'll use the lake-- conservation, for food, perhaps some combination of the two. But to assume the lake is privately owned and to be used strictly for profit-maximizing fish harvesting is to forego completely the possibility for social value to play a role in the acquisition of the lake.

There will be collective action problems in mobilizing the social value into a lump of money to buy the lake with-- free rider problems mainly, there's reason to believe that you'll be below what the theoretical aggregated social value of the fish existing. (That's not to say that market solutions don't exist to the free-rider problem that would help get closer to the aggregated social value-- a hazy concept in and of itself.) But to miss completely the transaction of the lake itself and to attribute market failure to the sale of the fish since it doesn't account for the social value...that was surprising.

Narrow View of Social Welfare

Samuleson writes about America's Economic Report Card:

Similarly, if the immigration of low-skilled workers continues unabated -- whether they're legal or illegal -- the ranks of the poor will swell, as will the uninsured or the costs of providing government insurance.

I'm not faulting Samuelson for reporting this way because he is discussing the interpretation of the report card, whose focus is on America. However, it gives the impression that social welfare is declining because low skilled immigrants move to the United States.

U.S. Poverty Statistics, no doubt, increase. A broader view though is that an immigrant crosses an imaginary line and experiences an almost automatic increase in their standard of living. They were poor before they made it into the United States, but broadening the view of social welfare to at least two countries (the immigrant's home country and the U.S.) demonstrates the actual effect, which is that a poor person is less poor than before.

Hat Tip: Mankiw

High school football update

Last week, I wrote a bit on high school football rankings and the evolution of inter-regional scheduling. I was poking around looking for De La Salle's schedule for the year-- no out of state games, I believe, the first season in a while that it's been that way-- and found a few books concerning the De La Salle story. This one deals with the first national #1 vs. #2 high school football game when De La Salle played Long Beach Poly in 2001. This book deals with the streak and the program, and this video does the same.

In local high school football news, Morgantown High School, long a successful program at the state level, is bemoaning their loss to Wheeling Park as the beginning of the end.

Ocho Cinco Pesos

From SI, Ross Tucker writes on Cincinnati Bengal Chad Johnson:

I can easily envision Chad or another like him changing their name to better suit one of their off-field ventures. Chad GoDaddy.com and Chad Right Guard certainly come to mind. I wouldn't put it past him. In the interest of commerce, and at its core that is exactly what it is, Chad could change his name on a yearly basis. Players get a fraction of the revenue from every jersey that is sold which bears their name and number. If the Bengals and the NFL officially switch his jersey to Ocho Cinco, that will become a hot item.

Chad is either a marketing genius who finds a way to keep his name in the spotlight or a troubled soul with psychological issues. Either way, the NFL is walking a very thin tight rope on this one. A man has a right to change his name and have his new name be recognized. But what if it wasn't just "Ocho Cinco"? What if Chad or any other player decided to pocket some additional endorsement income from his own name?

I can easily envision Chad or another like him changing their name to better suit one of their off-field ventures. Chad GoDaddy.com and Chad Right Guard certainly come to mind. I wouldn't put it past him. In the interest of commerce, and at its core that is exactly what it is, Chad could change his name on a yearly basis. Players get a fraction of the revenue from every jersey that is sold which bears their name and number. If the Bengals and the NFL officially switch his jersey to Ocho Cinco, that will become a hot item.

Tucker gives me the impression he sees this as a bad thing. I don't really know what to say about this, other than that I'm ok with whatever the Coasian solution would be if this actually started to pan out. Could a terrible or hated player extort fees from advertisers to keep him from changing his name to theirs? Now that would be interesting to watch unfold.

File this under...might want to check the number twice

First-time TPS suggester Jeremy Segall sent along this story of the University of Central Florida's attempt to have a conference call concerning their football team. You certainly don't want to double check absolutely everything you do throughout your day...but if I'm in charge of distributing the number for a conference call, I'd probably a) want to make sure the number was correct, and b) make extra sure that any incorrect number didn't connect the caller to an adult-content service.

The Mankiw Model Weeps

Menu costs are shrinking at Kohl's in Bloomington, where shoe prices rise throughout the day:

Note: I am aware that this in no way harms the menu cost model, whose point is that menu costs can be small and still create price rigidities.

Comment Away You Magnificent Bastards!

We have 86'd word verification for comments. 1) We hope this encourages a supply shift to the right in comments; 2) We hope to estimate the comment elasticity of rhetoric.

Levitt Makes it Ok for Me to Reveal My Favorite Brand of Wine

Arbor Mist.

It also goes great with a bowl of Cheerios right before you go to bed. I know it is Carlinesque, but it is true.

Thanks Steve!

Hat Tip: Art Carden

More Children's Books for Economists

Tops and Bottoms, by Janet Stevens, is the story of a crafty rabbit outwitting a lazy dumb bear. The bear allows the rabbit to grow crops on the condition that he gets to keep the tops of what the rabbit produces. Naturally, the rabbit grows root crops and leaves the bear with nothing. The bear wise to the rabbit's ways changes the rules, insisting that this time the bear gets to keep the bottoms (roots). The rabbit then grows corn, leaving the bear again with nothing.

The economics your kids learn:
Incentives
Principle-Agent Problem
Entrepreneurship
The behavioral response to taxation
Deadweight loss

Bartering is back

As it turns out, bartering is alive and well here in America. And this is bartering in the truest sense of the practice-- accountancy and home repairs for lodging.

What prevents bartering from persisting-- indeed, what drives market participants away from it-- is the steep transactions costs associated with the process. How long is it going to take me to find a trading partner who needs my pound of wheat and has my desired horseshoe? We're better off trading for a unit of common value that everyone agrees upon and, presto, money.

Craigslist, though, vastly reduces the transactions costs. Here is the bartering section for Pittsburgh; here is New York. Instead of walking the entire bazaar, you click around your area and see what's there. Obviously, this is driven by network effects, so as more people join the more valuable the service becomes to everyone. Of course, the transactions costs rise along with the number of people as well-- it takes you longer to search through the listings. Given the stability of the monetary system, it's hard to imagine this becoming more than a minute fraction of total transactions, but it's still intriguing nonetheless.

There was an interesting line in the story, though: "Historically, when times get tough, you see a 50 percent-plus increase in bartering..." I'd love to see some data on this one. Without a change in transactions costs, I find this hard to believe. Though it could be a statistics trick, too-- small increases in small numbers can yield large percent changes.

A Double Stigma?

From CNN Career Builder.

High salaries have a nasty stigma attached them. One that reeks of years of school, advanced qualifications, extensive training and many years of experience, which some people just don't have.

Yet politicians routinely attach to people with high salaries the stigma that they are undeserving, liars, crooks, lazy, and borderline criminals. They want me to have contempt for them so that I will want to tax them heavily, and relabel the rest as the "working class."

File this under....grandma is forever

A Swiss company, Algordanza, now takes the ashes of the deceased and makes a diamond out of them. The story is here. The price seems pretty reasonable-- starting at 5,000 euros-- though there is no mention of the time it takes. (Anyone?)

Note also the following quote underlying the fact that, yes, markets exist in every facet of life (and death):

Algordanza does 40 percent of its business in Japan, its largest market, where cremation is more common because land is so scarce.

If all you need is carbon, you could presumably make a diamond out of yourself, right? Maybe that's the next big piece of hip-hop bling.

Alternative Voting Systems

In an interesting discussion at a family BBQ last night, a few of us were discussing alternative methods for tabulating votes, as opposed to the "just vote for who you want" system we have now. My wife's brother-in-law suggested this:

You can either cast a vote "for" somebody that adds to their votes, or "against" somebody that subtracts from it. Hypothetically, you could have the McCain and Obama supporters cancel each other out by voting against the opposing candidate, and wind up with a third party winner who had fewer "for" votes than the other two.

I like that one a lot, it would be very entertaining. My suggestion was conditional votes:

You can cast a "preferred" and "conditional" vote. This would require two rounds of counting. You cast a vote that lists your preferred candidate for the office, then a second choice conditional on your preferred candidate not being in the top two for most preferred votes. So suppose you vote preferred for Libertarian Bob Barr, with the conditional being Obama. If after counting the preferred votes, if Bob Barr is not in the top two of the preferred candidates and Obama is, then your vote would be given to Obama.

I like that idea because it would make the system more competitive and you could overcome the objection to voting for third parties ("a vote for Nader is a vote for Bush", etc. etc.). However, I'm not entirely convinced that increasing political competition is actually good.

Other Alternatives? Thoughts?