Should economists shy away from teaching hard topics for fear of offending someone’s moral sensibilities? Should we restrict ourselves to the market for ice cream? The tagline of our textbook, Modern Principles, is See the Invisible Hand: Understand Your World. We take understand your world seriously and we teach topics that other textbooks do not such as the economics of network goods like Facebook or the economics of tying and bundling which students see regularly when they purchase cell phones and minutes and Cable TV.

The world, however, is not always a pleasant place and so we also discuss modern slavery and how the concept of the elasticity of supply can help us to evaluate programs like slave redemption. It’s important to teach this material with seriousness, it’s not an idle exercise in “freakonomics,” and it’s possible to misstep but we think students need to see economics as a vital discipline that can be used to make the world a better place, even if only one small step at a time.

Here is Tyler on elasticity and the economics of slave redemption. This is from the elasticity section of our course at MRUniversity, released today along with taxes and subsidies. You can also find a lengthier treatment with more details in Modern Principles.

My visit to Auschwitz

by on January 28, 2015 at 7:09 am in History, Travel | Permalink

I went once, might that have been 2004?  It was after a Unesco conference in Warsaw and from a hotel room in Krakow.  I have the recollection that Auschwitz had a terrible stench, though I doubt if it actually did.  Each journey that we take has a single place and experience at its emotional center, and no trek with a stop in Auschwitz can have any emotional center other than Auschwitz itself.  The rest of that trip is more or less forgotten.

The place was full of Germans walking the halls, confused and wailing.  The Jews were more somber.

The new far-left government in Greece dropped a bombshell on its first day in office by abjuring an EU statement on Russia.

There is more here, via Anders Aslund.  I guess they don’t have any other European issues they need to spend their political capital on…

“Dear Tyler,

I read with obvious interest your post (and the paper itself) about the endogeneity of institutions. Leaving aside my issues with the IV literature, I decided to take the bait regarding Jeff Sachs’ challenge to, “Go back to 1960 and choose any measure of institutional quality you want. Then see how well it predicts cross-national growth since then.”

Ok, I will.

The Economic Freedom of the World (EFW) index was first published in the mid 1990s, and the first year of data is 1970. So I’ll have to start in 1970 instead of 1960.

Here is a regression with growth from 1970-2010 on the lhs, and EFW and GDP per capita in 1970 on the rhs.

Growth1970-2010 = -1.62 + 0.75*EFW1970 – 0.13* GDPPC1970 R^2=0.18
(2.90) (3.17)

This regression adds the change in EFW from 1970-1980 to the rhs.

Growth1970-2010 = -1.69 + 0.84*EFW1970 + 1.00*chEFW70-80 – 0.15*GDPPC1970 R^2=0.32
(3.54) (3.39) (3.86)

A one-unit higher EFW score in 1970 correlates to 0.84 percentage points in higher annual growth over the next 40 years. A one unit EFW score improvement during the first decade, 1970 to 1980, correlates to a 1.00 percentage point higher annual growth rate over the 40 years.

I don’t know if that satisfies Jeff Sachs’ challenge, but it works for me.

Looking forward, I’ve constructed a back-of-the-envelope indicator that combines each country’s EFW rating in 2000 and with its change from 2000-2010. The top 20 (combined highest level & most positive change) versus the bottom 20 (combine lowest level & most negative change) countries are:

Top 20 – Bottom 20
Hong Kong – Haiti
Romania – Cameroon
Rwanda – Senegal
Singapore – Guinea-Bissau
Bulgaria – Mali
Cyprus – Bolivia
Unit. Arab Em. – Algeria
Chile – Guyana
Mauritius – Gabon
Lithuania – Ecuador
Slovak Rep – Burundi
Albania – Cote d’Ivoire
Jordan – Chad
Switzerland – Togo
Bahamas – Congo, Rep. Of
Malta – Central Afr. Rep.
Taiwan – Argentina
Korea, South – Myanmar
Finland – Zimbabwe
Estonia – Venezuela

I’m willing to bet anyone $100 (up to 10 people) that the Top 20 group will outgrow the Bottom 20 group by at least 1 full percentage point per year (on average) over the the next 20 year period (2015-2035).

Bob”

Yanis Varoufakis

by on January 27, 2015 at 6:46 pm in Current Affairs, Economics, Uncategorized | Permalink

He is an economist, taught last year at UT Austin, and is now the new finance minister of Greece.  You can find him here on scholar.google.com.  And here is his 2011 proposal for overcoming the euro crisis, another version of that here (pdf).  Here is his blog post on the Scottish Enlightenment.  Previously he was working as an economist for Valve, a video game company.  Here is Yanis on EconTalk with Russ Roberts.  The discussion of Greece and the eurozone starts at about 48:22.

His blog is here, he claims he will continue blogging:

The time to put up or shut up has, I have been told, arrived. My plan is to defy such advice. To continue blogging here even though it is normally considered irresponsible for a Finance Minister to indulge in such crass forms of communication. Naturally, my blog posts will become more infrequent and shorter. But I do hope they compensate with juicier views, comments and insights.

Here is a good Telegraph profile of the man.  Here is his Wikipedia page, and here is one excerpt:

In 2005/6, Varoufakis travelled extensively with artist Danae Stratou along seven dividing lines around the world (in Palestine, Ethiopia-Eritrea, Kosovo, Belfast, Cyprus, Kashmir and the US-Mexico border). Stratou produced the installation CUT: 7 dividing lines, while Varoufakis wrote texts that then became a political-economic account of these divisions, entitled The Globalising Wall. In 2010 Stratou and Varoufakis founded the project Vital Space.

Stay tuned, this will be fun.

American Sniper is one of the best anti-war movies I have seen, ever.  But it shows the sniper-assassin, and his killing, to be sexy, and to be regarded as sexy by women, while the rest of war is dull and stupid.  (Even the two enemy snipers are quite attractive and fantastic figures, and there is a deliberate parallel between the family life of the Syrian sniper and the American protagonist.  The klutziness of the non-assassin soldiers limited how many African-Americans and Hispanics they were willing to cast in those roles, as it is easiest to make white guys look crass in this way without causing offense.)  By making the attractions of war palpable, this film disturbs and confuses people and also occasions some of the worst critical reviews I have read.  It also, by understanding and then dissecting the attractions of blood lust, becomes a quite convincing anti-war movie, if you doubt this spend a few months studying The Iliad.  (By the way, Clint Eastwood, the director and producer, describes the movie as anti-war.)  The murder scenes create an almost unbearable tension, the sandstorm is a metaphor for our collective fog, and they had the stones to opt for the emotional overkill of four rather than just three tours of duty.  Iraq is presented as a hopeless wasteland with nothing of value or relevance to the United States, and at the end of the story America proves its own worst enemy.  It is not clear who ever gets over having killed and fought in a war (can anything else be so gripping?…neither family life nor sex…), even when appearances suggest a kind of normality has returned.  The generational cycle is in any case replenished.  I say A or A+, both as a movie and as a Rorschach test.

Two Days, One Night has some of the worst economics I have seen in a movie, ever.  It would be brilliant as a kind of Randian (or for that matter Keynesian) meta-critique of the screwed up nature of Belgian labor markets and social norms, and most of all a critique of the inability of the Belgian intelligentsia to understand this, except it is not.  It is meant as a straight-up plea for sympathy for the victim and as such it fails miserably, even though as a movie it embodies reasonably good production values.  Everything in the workplace of this solar power company is zero-sum across the workers and we never see why.  The protagonist campaigns to get her job back, but never asks or even considers how she might improve her productivity or attitude, asking only on the basis of need.  (And she is turned down only on the basis of need.)  At one point her employer states the zero marginal product hypothesis quite precisely, something like “when you took time off, we saw that sixteen people could do the work of seventeen.”  She never asks if there might be some other way she could contribute — but she does need the money — nor does the notion of a better job match somewhere else rear its head.  The depictions of financial hardship confuse wealth and income, basic survival and discretionary spending.  The rave reviews this movie has received represent yet another Rorschach test and one which virtually every commentator seems to have failed.

Assorted links

by on January 27, 2015 at 12:05 pm in Uncategorized | Permalink

1. “Between 2007 and 2013, the millennial population of Arlington grew by 82 percent — more than anywhere else in the country.”  And are big cities too small?

2. Even at Fox News more employees donate money to the Democrats.

3. Toyota now to pay on the basis of performance rather than seniority.

4. Flows vs. stocks in Greece.  And the Syriza coalition partner isn’t nice, nor does the selection send a good signal.

5. Can online education bend the cost curve?  And UCLA students on global warming.

6. Why do some women prefer submissive men?

7. RortyBomb on unemployment benefits.  Scott Sumner comments too.

8. A short video on the life of Sir Arthur Lewis.

In Defense of the Company Town

by on January 27, 2015 at 7:25 am in Economics, History | Permalink

In my EconTalk with Russ Roberts on proprietary cities I only mentioned company towns in passing. Even the great Milton Friedman got company towns wrong, however, so it’s worthwhile spending a little time to dispel some myths.

Take company stores. Why did mining companies often own the town store? The standard answer: to squeeze every nickel from the workers so they would “owe their soul to the company store.” But that lyrical argument makes no sense and the truth is actually closer to the opposite.

The mining towns were isolated geographically but they weren’t isolated from the national labor market. The number of workers in these towns moved up and down in response to the price of coal and the workers often traveled long-distances to work in the mines, sometimes from other states or other countries. The company towns were isolated not because the workers couldn’t get out but because few people wanted to live where coal was abundant. As a result, workers had to be enticed to travel to and to live in these towns. Oil rigs are similarly isolated today and once on board the workers have nowhere to go but the company restaurant, the company theater and the company gym but that hardly means that the workers are exploited.

Since the mine workers weren’t isolated from the national labor market they had to be paid wages consistent with wages elsewhere and indeed on an hourly basis wages in mining were higher than in manufacturing (not surprising since these jobs were riskier). Moreover, workers weren’t dumb and so–just like workers today–they would consider the price of housing and the price of goods in these towns so see how far their wages would take them. All of this suggests that workers would not be fooled by high wages and really high prices at the company store that nullified those wages. And indeed, prices at company stores were not especially high and were similar to prices at independent stores in similar locations.

It was possible to find examples of a good at a particular company store which had a markedly higher price than at a particular independent store but this was cherry picking, (I am reminded of the exam question about two rival supermarkets both of which advertise “the average consumer at our store would pay 20% more if they shopped at our competitor.” The question asks how it can be possible that both stores are telling the truth.) Comparing identical baskets, prices at company stores were not higher than at similar independent stores.

I said that the traditional story actually gets things backward. We can see how by asking why the companies owned the stores. First, independent stores had to bear a lot of risk because they would be selling in a local economy that was dependent on a single mine. That risk was better born by the mining firm itself because it knew more about coal and fluctuations in the price of coal, its own plans, the time the mine would be expected to be open and so forth. Thus, it was cheaper for the mines to own the stores than for independents to own the stores.

Second, if an independent store did open they would have a monopoly and would want to charge a monopoly price but–and this is key–the higher the price charged by the independent store the higher the wages the coal mine would have to pay to compensate the workers. Thus monopoly independents would be bad for the workers but they would also be bad for the owners of the mine. If the mine owned the store, however, they would have a greater incentive than the independent store to lower prices because that meant they could save on wages. Overall, both workers and mine owners would be better off with company stores (A classic example of the double marginalization problem).

Similar arguments apply to company owned housing. On the one hand, this did mean that during a lengthy strike the firm could evict the workers from their housing. On the other hand, would you want to buy a house in an isolated town dependent on a single industry? Would you want to own a major asset that was likely to fall in price at the same time that you were likely to lose your job? Probably not. Rental housing meant that workers had the freedom to leave town easily when better work opportunities were available elsewhere – i.e., it meant that the workers were less isolated from the national labor market than they would be if they owned their homes and were tied down to a single place and a single employer. Moreover, the fact that the housing was company owned meant lower prices than if the housing was owned by an independent monopoly developer, the most relevant alternative (again because of the double marginalization problem).

The bottom line is that far from being an example of the abuse of monopoly power, the company town was an effort to constrain monopoly power.

References: The best source for an accurate view of the company towns in the mining industry is Price Fishback’s Soft Coal, Hard Choices: The Economic Welfare of Bituminous Coal Miners, 1890-1930. The book is based on a series of papers (JSTOR).

The company towns built by the mines weren’t especially pretty but some of the other company towns, especially those which employed high-skilled workers, were professionally designed by the leading architects of the day and they came with parks, playgrounds, retail areas, public transportation, churches and a variety of services. In essence, these company towns were doing what Google does today, competing for workers with amenities. Margaret Crawford’s book, Building the Workingman’s Paradise, is an interesting history showing how company towns pioneered a number of architectural and planning innovations that later found there way into many post World War II home developments.

Table 1 shows that adding estimates from the literature suggests that economists have already explained 177% of the rise in average BMI.

That is from this new NBER paper, by Courtemanche, Pinkston, Ruhm, and Wehby, which seems to be one of the most careful studies to date.  They do it right and then offer some more commonsensical conclusions:

A growing literature examines the effects of economic variables on obesity, typically focusing on only one or a few factors at a time. We build a more comprehensive economic model of body weight, combining the 1990-2010 Behavioral Risk Factor Surveillance System with 27 state-level variables related to general economic conditions, labor supply, and the monetary or time costs of calorie intake, physical activity, and cigarette smoking. Controlling for demographic characteristics and state and year fixed effects, changes in these economic variables collectively explain 37% of the rise in BMI, 43% of the rise in obesity, and 59% of the rise in class II/III obesity. Quantile regressions also point to large effects among the heaviest individuals, with half the rise in the 90th percentile of BMI explained by economic factors. Variables related to calorie intake – particularly restaurant and supercenter/warehouse club densities – are the primary drivers of the results.

Here is a much earlier ungated version of the paper, with differing numerical estimates, use with caution.  A few related studies you will find here.

“How can the Spanish or Italian prime minister tell voters that Greece has a lower interest burden than we have, but we still need to give them debt forgiveness?” said Mr Darvas.

That is from Ferdinando Giugliano at the FT, who is referring to the possibility that the Greek debt load might be sustainable.  Don’t focus on the debt to gdp ratio of 175 percent, consider that the interest rates are low and the term structure of the debt is long.  Here is your Greece fact of the day:

Mr Darvas calculates that total interest expenditure in 2014 [for Greece] was 2.6 per cent, only marginally above France’s 2.2 per cent.

Yet I do not find the Greek position to be sustainable.  As has been the case from the beginning, the real problem in the eurozone is in the politics, not the raw numbers of the economics.  It is worth noting that there are Maoist and Trotskyite factions in Syriza, so if we are going to moralize about the National Front in France, or other disreputable groups, let’s be a little more consistent here…

Assorted links

by on January 26, 2015 at 12:59 pm in Uncategorized | Permalink

1. Why has this battery lasted for 175 years?  (Didn’t they read Coase?)

2. Scott Sumner movie and book reviews.

3. Ogilvie and Carus, a long essay on institutions and economic growth.

4. Daniel Davies on Greek scenarios.  And Alan Krueger: “But did the fall in wages lead to a fall in export prices?

5. Interview with Peter Boettke.  And how D’Angelo managed Black Messiah.

Quite a bit.  There is a new NBER Working Paper on this topic by Hagedorn, Manovskii, and Mitman, showing (once again) that most supply curves slope upward, here is one key part from the abstract:

In levels, 1.8 million additional jobs were created in 2014 due to the benefit cut. Almost 1 million of these jobs were filled by workers from out of the labor force who would not have participated in the labor market had benefit extensions been reauthorized.

There is an ungated copy here (pdf).  Like the sequester, this is another area where the Keynesian analysts simply have not proven a good guide to understanding recent macroeconomic events.

When I visited Santa Monica in January it struck me how much it reminded me of…Arlington.  Arlington is now essentially a part of Northwest, at least Arlington above Route 50 or so.  Arlington and Santa Monica have never been more alike, or less distinctive.

Parts of east Falls Church will meld into Arlington, and south Arlington will become more like north Arlington.  Real estate prices east/north of a particular line are rising and west of that line are falling.  Fairfax is definitely west of that line.

The Tysons Corner remake will fail, Vienna is not the new Clarendon, and the Silver Line and the monstrously wide Rt.7 will form a new dividing line between parts of Virginia which resemble Santa Monica and parts which do not.

Incumbents aside, no one lives in Fairfax any more to commute into D.C.  Why would you?  The alternatives are getting better and Metro parking became too difficult some time ago.  Fairfax is not being transformed, although some parts are morphing into “the new Shirlington.”  Most of it will stay dumpy on the retail side.  Annandale will stay with Fairfax, whether it likes it or not.

For ten years now I have been predicting various Fairfax restaurants will close — casualties of too-high rents — and mostly I have been wrong.  The good Annandale restaurants are running strong too.  Annandale won’t look much better anytime soon, thank goodness for that.

“Northern Virginia” is becoming two different places, albeit slowly.

Based on my paper, Lessons from Gurgaon, India’s Private City (with Shruti Rajagopalan) I discuss private cities with Russ Roberts over at EconTalk this week.

I think the conversation went well but I haven’t heard it yet so let me also take the time to point you to my favorite recent EconTalk, Russ interviewing Greg Page, the former CEO of Cargill, the largest privately-held company in America. Their discussion covers the global food supply, false definitions of national food security, the role of prices, comparative advantage and more. It’s a great discussion.

Each monastery had its own estates, and all the people farming on these estates paid taxes in money and goods.  One of the main tasks of the stewards was to increase this income; for instance, by lending grain back to the peasants at high interest rates, or selling goods at market.  Before the destruction of the monasteries in the 1960s, they owned as much as half of Tibet’s farmland.

The description however is referring to the 15th century.  Another interesting part of the book concerns how, during Tibet’s “Golden Age,” the Tibetans tried to impose their language and culture on the neighboring regions of China, and with some success.

That is all from Sam Van Schaik, Tibet: A History.