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.