Alex Tabarrok

Incentives in Action

by on May 25, 2016 at 1:30 pm in Economics | Permalink

A nice example of incentives in action from Jason Furman speaking at the World Bank (based on a good GAO report):

tobacco

 

Prior to the [2009] law’s enactment, the tax rates on roll-your-own tobacco and pipe tobacco were the same. After the law’s enactment, the tax rate on roll-your-own tobacco was over $20 per pound higher than the tax on pipe tobacco. And, as you can see in the figure below, sales of roll-your-own tobacco plummeted after the law and sales of pipe tobacco increased by a factor of ten.

Hat tip: Justin Wolfers.

Unsafe Cars Can Save Lives

by on May 23, 2016 at 7:15 am in Economics | Permalink

Jalopnik: If seeing that a vehicle has a zero-star safety rating isn’t enough to frighten a person out of his or her mind, seeing said vehicle in a wreck probably is. Five cars designed for India—which has minimal safety requirements for vehicles—just received that number in crash testing…

The tests come from the London-based Global New Car Assessment Program…The group tested seven cars made for the Indian market and handed five of them—the Renault Kwid, Maruti Suzuki Celerio, Maruti Suzuki Eeco, Mahindra Scorpio, and Hyundai Eon, all with no airbags—a rating of zero out of five stars for adult safety…

David Ward, secretary general of Global NCAP told the Wall Street Journal:

Global NCAP strongly believes that no manufacturer anywhere in the world should be developing new models that are so clearly sub-standard,” he said. “Car makers must ensure that their new models pass the UN’s minimum crash test regulations, and support use of an airbag.

family_on_motorcycle_indiaLet’s take a closer look. These cars are very inexpensive. A Renault Kwid, for example, can be had for under $4000. In the Indian market these cars are competing against motorcycles. Only 6 percent of Indian households own a car but 47% own a motorcycle. Overall, there are more than five times as many motorcycles as cars in India.

Motorcycles are also much more dangerous than cars.

The [U.S] federal government estimates that per mile traveled in 2013, the number of deaths on motorcycles was over 26 times the number in cars.

Similar ratios are found in the UK and Australia. I can think of several reasons why the ratio might be lower in India–lower speeds, for example, but also several reasons why the ratio might be higher (see picture above).

The GNCAP worries that some Indian cars don’t have airbags but forgets that no Indian motorcycles have airbags. Even a zero-star car is much safer than a motorcycle. Air bags cost about $200-$400 (somewhat older estimates here a, b, c) and are not terribly effective. (Levitt and Porter, for example, calculated that air bags saved 550 lives in 1997 compared to 15,000 lives saved by seatbelts.) At $250, airbags would increase the cost of a $5,000 car by 5%. A higher price for automobiles would reduce the number of relatively safe automobiles and increase the number of relatively dangerous motorcycles and thus an air bag requirement could result in more traffic fatalities.

A broader point is that in India today $250 is about 5% of GDP per capita ($5,700 at PPP) and that’s a high price to pay for the limited protection provided by an air bag. Lots of people in the United States wouldn’t pay $2750–5% of US GDP per capita–for an air bag. Why should Indians be any different? (Mannering and Whinston estimated U.S. willingness to pay was about $500 in the 1990s). As incomes in India rise more people will demand cars and they will demand better and safer cars but forcing people to buy an option before they are willing to pay for it is unlikely to make people better off.

Safety is relative so cars judged unsafe by global standards could save lives in India. The bigger lesson is that it’s always dangerous to impose global standards without taking into account the differing circumstances of time and place.

Michael Tomasello reviews theories of learning–some suggest that liberalism may be unnatural:

…a consistent finding in comparative studies is that human children are much more concerned than are other great apes to copy the exact actions of others, including arbitrary gestures, conventions and rituals (Tennie et al. 2009). Indeed, this tendency is so strong…when children do not see a clear goal to an actor’s action, they imitate even more precisely than if they do see a goal…

Moreover, children quickly learn to enforce arbitrary conventions and rituals:

…young children are so concerned with conformity that they will even enforce it on others, even when they themselves are not affected and the action involved is merely an arbitrary convention. For example, if children learn that on this table we play the game this way and on that table we play it another way, if a puppet then plays the game the wrong way on the wrong table, they intervene and stop him (Rakoczy, Hamann, Warneken, & Tomasello, 2010; Rakoczy, Warneken, & Tomasello, 2008)….Interestingly, when actors violate conventional norms, 3-year-olds admonish them more often if they are in-group rather than out-group members, presumably because in-group members should know better and be more committed to how “we” do it (Schmidt, Rakoczy, & Tomasello, 2011).

The enforcement of conformity is so important for young children that 5-year-olds have more positive feelings toward a norm enforcer (even though he is acting aggressively) than they do toward someone who simply lets a norm violation go (even though he is behaving in a neutral manner; Vaish, Herrmann, Markmann, & Tomasello, 2016).

In the environment of evolutionary adaptedness (EEA) an individual could not survive outside the group of their birth and so conformity was a matter of life and death. Conform or be cast out. Conformity to arbitrary convention was not in fact arbitrary but signalled affiliation. Conformity banded groups together.

Today, however, conformity is often counter-productive. Trying to enforce the arbitrary conventions of one’s in-group impedes social cooperation on the scale that makes modernity possible. Conformity also slows the development of new ideas and new ways of doing things–the essence of growth and progress. Even though conformity is now counter-productive the desire to conform and to enforce conformity is buried deep–the atavism of social justice.

Individualism and liberalism are foundational ideas for modernity but these adult ideas battle the desire to conform in our childish hearts.

Hat tip: Rolf Degen on twitter.

Thinking about the Solow model and the limits of capital accumulation as a force for growth leads naturally to thinking about ideas and the institutions that create incentives to produce and use new ideas. Here is Patents, Prizes and Subsidies, the latest video from our Principles of Macroeconomics course at MRU–based, of course, on our textbook, Modern Principles.

My favorite part of this video is Tyler doing a cameo as an armchair economist.

In The Rise and Decline of Nations Mancur Olson argued that collusive arrangements accumulate slowly, reducing efficiency and economic growth. It’s difficult to defeat collusions, however, because the organized-winners fight harder than the unorganized-losers. But there is a way. Ironically, collusions get weaker in groups.

The base-closing principle tells us that the way to defeat collusions is to bundle them and force their existence on a single up or down vote. That’s one reason why general agreements on tariffs and trade, GATT agreements, are important. Trade agreements increase efficiency not simply because of comparative advantage, increasing returns to scale, and increased diversity but because general agreements are necessary to defeat the rent seekers.

Unfortunately, as Gary Hufbauer and Euijin Jung point out, we haven’t had a successful GATT since 1986 and the time between GATT rounds has been getting longer and longer. Moreover, just as Olson would have expected, collusions–what Hufbauer and Jung call “micro-protections”–have grown.

In the wake of the Great Recession of 2008–09, micro-protectionism has run rampant, often skirting the letter of WTO rules. This phenomenon is driven by political promises to create more jobs and to protect domestic firms and industries, notably evident in Buy America statutes and copy-cat local content legislation across the globe. As an illustration, table 2 reports that the imposition of 117 local content requirement measures identified since 2008 is estimated to affect $928 billion of global trade in goods and services in 2010, perhaps reducing global exports by $93 billion.

Local content requirements are just one form of trade restrictive measures introduced since the Great Recession…Macroeconomists are wrong to dismiss the quantitative importance of these poison pills, perhaps individually small but collectively deadly. The fact that highly visible tariff barriers have not been erected on a large scale does nothing to diminish the cumulative impact of thousands of opaque measures designed to keep out imports.

Micro-protections are especially important where trade most needs to increase, in services. There is vast scope for the expansion of world trade but we need a general agreement on trade, especially one focused on breaking down local markets for services.

The rent-seekers never sleep so simple measures of trade protectionism understate the prevalence of micro-protections but simple measures of the gains from trade understate the benefits of defeating strangling collusions.

Uber and Lyft may have left Austin but don’t make the mistake of thinking that’s because the voters or the Austin City Council promote overly burdensome regulations. Not at all. Recently, for example, the council lifted some of its regulations so that young entrepreneurs could get a start in business by selling lemonade. Nick Sibilla at the Institute for Justice has the rest of the story.

© ClassicStock / 1940s BOY RUNNING LEMONADE STAND ON ORANGE CRATES SELLING TO LITTLE BOY

On Lemonade Day—and only on Lemonade Day—registered participants do not have to spend $35 to obtain a “temporary food permit,” and are also exempt from spending a staggering $425 on “a license agreement and fees” to use public property.

Unfortunately, the city’s friendliness to budding entrepreneurs ends there. Lemonade stands run by kids must comply with Austin’s “temporary food service guidelines.” Some of the rules include:

  • “NO HOME PREPARED FOODS ALLOWED. ALL FOODS MUST BE OBTAINED FROM AN APPROVED SOURCE.”
  • “Provide potable water for cleaning and sanitizing utensils. Use three (3) containers for WASHING, RINSING & SANITIZING. Sanitizing solution must be kept between 50-100ppm chlorine. Test papers can be found at restaurant supply stores.”
  • “Hand washing – Use a gravity-type water dispenser for hand washing. Example: drink dispenser with a spout or spigot. Do not forget hand washing soap, paper towels and catch basin. Wash hands for at least 20 seconds. Use of liquid alcohol sanitizer or single-use gloves is required for all food handling.”
  • “Provide a ceiling or canopy above beverage preparation and service areas. Example: wood, canvas or other material that protects the interior of the establishment from the weather and other agents.”
  • “All food, equipment, single service items shall be stored at least 6 inches above the floor.”
  • “No eating, drinking, smoking is allowed in the food booth.”

Parents or legal guardians who want their kids to participate in Lemonade Day must also sign a waiver, and “agree to release, indemnify, defend and hold harmless the organizers of Lemonade Day and anyone associated with it or Lemonade Day from any and all claims for personal injuries or property damage resulting from my child/ren’s participation in Lemonade Day, even if such injury is caused by the negligence of them.”

I’m sure the kids were disappointed by all these costly regulations but I don’t think these budding entrepreneurs will let regulations stop them. After all, as every entrepreneur knows, “when life gives you lemons, make…”…oh never mind.

Twitter Reminder

by on May 16, 2016 at 12:07 pm in Web/Tech | Permalink

On twitter you can  and for alerts from this blog .

NBER: We study a unique quasi-experiment in Austria, where compulsory voting laws are changed across Austria’s nine states at different times. Analyzing state and national elections from 1949-2010, we show that compulsory voting laws with weakly enforced fines increase turnout by roughly 10 percentage points. However, we find no evidence that this change in turnout affected government spending patterns (in levels or composition) or electoral outcomes. Individual-level data on turnout and political preferences suggest these results occur because individuals swayed to vote due to compulsory voting are more likely to be non-partisan, have low interest in politics, and be uninformed.

In other words, all mandatory voting did was add noise to the system and as such probably made everyone worse off including the new voters.

The fifth video in the Solow series from our Principles of Macroeconomics course is really the capstone. It explains how ideas drive growth on the cutting edge. A key insight of the model, however–one which many people still don’t really get–is that ideas increase output and by doing so they also drive capital accumulation so both forces are always at play.

We have heard a great deal about increases in mortality among white, non-hispanic, middle-aged Americans (especially women) but to state the case is also to note that this is one group among many. In an excellent new paper, Currie and Schwandt discuss the good news overall–life expectancy is up and health inequality is down, in some cases dramatically. Here, for example, is life expectancy at birth by gender and year.

Life expectancy 1Even more impressive is that life expectancy has increased significantly across all poverty groups (as measured by county poverty levels). In the graph below, for example, the blue triangles indicate life expectancy in 1990 (men on the left, women on the right). Note that as the poverty level of the county increases along the horizontal axis life expectancy falls. The green dots are life expectancy in 2010. Once again, as poverty increases, life expectancy falls. What’s remarkable, however, is how much life expectancy increased between 1990 and 2010 in counties of all poverty levels.

The news is good and may get better. Between 1990 and 2010 mortality rates for children ages 0-4 fell especially dramatically and especially so in poor counties. Moreover, since mortality at older ages is often baked in LifeExpectancy 2by poor health at younger ages there is significant opportunity for these gains to persist over time.

The New York Times also reported yesterday on inequality in life expectancy across race. It’s down.

Infant mortality is down by more than a fifth among blacks since the late 1990s, double the decline for whites. Births to teenage mothers, which tend to have higher infant mortality rates, have dropped by 64 percent among blacks since 1995, faster than for whites.

Blacks are still at a major health disadvantage compared with whites. But evidence of black gains has been building and has helped push up the ultimate measure — life expectancy. The gap between blacks and whites was seven years in 1990. By 2014, the most recent year on record, it had shrunk to 3.4 years, the smallest in history, with life expectancy at 75.6 years for blacks and 79 years for whites.

Part of the reason has been bad news for whites, namely the opioid crisis. The crisis, which has dominated headlines — some say unfairly, given racial disparities — has hit harder in white communities, bringing down white life expectancy and narrowing the gap.

But there also has been real progress for blacks. The rate of deaths by homicide for blacks decreased by 40 percent from 1995 to 2013, according to Andrew Fenelon, a researcher with the National Center for Health Statistics, compared with a 28 percent drop for whites. The death rate from cancer fell by 29 percent for blacks over that period, compared with 20 percent for whites.

The Currie and Schwandt paper is also very good on describing how these estimates are produced and some of the data issues with making these estimates. It’s a must read for those interested in these issues.

eL-lettersModern Principles of Economics was the first principles textbook to make the Solow model of economic growth easily accessible to undergraduates. By focusing on simple mathematics that the students already know, like the square root function, we made the Solow model easy to understand without losing the power of the model to explain the world.

Modern Principles is the only textbook with the Super Simple Solow model! And now we’ve brought the model to life with a series of fun videos in our Principles of Macroeconomics class at MRUniversity. You’ve never seen the Solow model taught like this!

Introduction to the Solow Model introduces the questions and the “characters” that drive the story. Physical capital and diminishing returns explains the idea of a production function and diminishing returns. We then introduce capital depreciation and focus in on the most important idea for understanding the Solow model, the steady state:

I’ll cover some more videos in the Solow series later this week.

WSJ: One day in January, Eric Wilson dashed off a message to the teaching assistants for an online course at the Georgia Institute of Technology.

“I really feel like I missed the mark in giving the correct amount of feedback,” he wrote, pleading to revise an assignment.

Thirteen minutes later, the TA responded. “Unfortunately, there is not a way to edit submitted feedback,” wrote Jill Watson, one of nine assistants for the 300-plus students.

Last week, Mr. Wilson found out he had been seeking guidance from a computer.

…Last year, a team of Georgia Tech researchers began creating Ms. Watson by poring through nearly 40,000 postings on a discussion forum known as “Piazza” and training her to answer related questions based on prior responses. By late March, she began posting responses live.

Don’t confuse Ms. Watson with the customer-service chatbots used online by airlines and other industries. Mr. Goel boasts that she answers only if she has a confidence rate of at least 97%.

“Most chatbots operate at the level of a novice,” Mr. Goel said. “Jill operates at the level of an expert.”

In our paper on online education Tyler and I wrote about AI Tutors:

Feedback from interactive systems will be more immediate and more informative (Skinner 1958). Adaptive tutoring systems are already nearly as effective as human tutors in many circumstances and much cheaper to scale (VanLehn 2011).

Guido Menzio an economist at the University of Pennsylvania–author of Block Recursive Equilibria for Stochastic Models of Search on the Job among other papers–was pulled from a plane because…algebra is suspicious. From FB:

Unbelievable…

Flight from Philly to Syracuse goes out on the tarmac, ready to take off. The passenger sitting next to me calls the stewardess, passes her a note. The stewardess comes back asks her if she is comfortable taking off, or she is too sick. We wait more. We go back to the gate. The passenger exits. We wait more. The pilot comes to me and asks me out of the plane. There I am met by some FBI looking man-in-black. They ask me about my neighbor. I tell them I noticed nothing strange. They tell me she thought I was a terrorist because I was writing strange things on a pad of paper. I laugh. I bring them back to the plane. I showed them my math.

It’s a bit funny. It’s a bit worrisome. The lady just looked at me, looked at my writing of mysterious formulae, and concluded I was up to no good. Because of that an entire flight was delayed by 1.5 hours.

Trump’s America is already here. It’s not yet in power though. Personally, I will fight back.

Algebra, of course, does have Arabic origins plus math is used to make bombs.

Addendum: here is the Washington Post on the story.

President Obama telling what I thought was a joke at the White House Correspondents Dinner:

They say Donald lacks the foreign policy experience to be president. But in fairness, he has spent years meeting with leaders from around the world: Miss Sweden, Miss Argentina, Miss Azerbaijan.

Apparently Donald was listening because yesterday in an interview with Bret Baier he made exactly the same point but this time as argument:

Bret Baier: About Russia, you were asked yesterday if you’ve ever spoken to Vladmir Putin. And you said, “I don’t want to say”:

Donald Trump: Yeah, I have no comment on that. No comment…I was in Russia….I know Russia well. I had a major event in Russia two or three years ago. Miss Universe contest which was a big, big, incredible event. Incredible success. I got to meet a lot of people….

Guru, a 2007 movie from India starring Abhishek Bachchan and Aishwarya Rai and directed by Mani Ratnam, is one of the most pro-free market movies ever made and perhaps the best.

Guru follows Gurukant “Guru” Desai from his small village in India to Turkey where in a series of evocative scenes he shows a natural affinity for the rhythms of markets. Determined to work for himself, Guru returns to India and tries to enter the cotton market but he needs a license and the license system is monopolized by a rich clique with close ties to the government. Guru has no entry into this clique, which Guruposterdiffers in class and caste from his village roots, but his cause is taken up by a liberal newspaper editor, Manik Dasgupta, a veteran of the independence movement, who shames the government into opening up the license system. Guru and Manik become close and Guru becomes godfather to Manik’s daughter who has epilepsy.

The movie’s portrayal of entrepreneurship and the problems that Guru must surmount–financial, familial, and political–is unusually smart and sympathetic.

As Guru rises to the top the movie becomes more complex. Guru bribes politicians and skirts rules and regulations. His previous benefactor, the newspaper editor, turns against him. Derek Elley at Variety says Guru “forgets his ethics on the way to the top.” That’s a common but incorrect reading. What is going on is more subtle. Ratnam is telling us that Guru’s virtues are incompatible with a corrupt system and a choice must be made. Consider that on his way to the top, Guru has promised to always honor, love and respect his elder patron and even as they are at odds, he never wavers in this promise. Nor does he waver in his love for Manik’s epileptic daughter, even as she marries the reporter who has led the charges against Guru. Rather than having been corrupted, Guru demonstrates an iron-willed commitment to virtue. Riches and success did not corrupt Guru’s personal virtue nor has his public virtue been corrupted. In contrast to the earlier corruption of the ruling clique we never see Guru preventing others from competing with him. He bribes only in order to build.

The movie is powerful not because it opposes virtue and corruption but because it opposes two ideas of virtue. Is it virtuous to follow the law when the law itself is corrupt? Other artists have explored this question when the lawbreaker opposes social injustice, ala Gandhi and Martin Luther King, but what about when the lawbreaker opposes economic injustice? The question the movie asks is a classic question from Ayn Rand, how can an honest (business)-man live in a corrupt world? The theme becomes clear in the climax, a trial in which Guru, ala Howard Roark, puts society on trial.

The director, Mani Ratnam, has great ambitions. In telling the story of India’s liberation, not from colonialism but from socialism, he aims to elevate a new type of hero for post-socialist India, a business guru. In the trial, Ratnam is also arguing that a house divided against itself, a house half slave and half free, cannot long remain standing. Either India must push forward with a new vision for itself based on business, free and open markets and liberal views (on gender, the disabled, religion and other issues) or it will indeed fall back into internal strife and corruption.

I love the theme of Guru but the movie wouldn’t work without a great performance from Abhishek Bachchan. The beautiful Aishwarya Rai, a Miss World champion, gives a very good performance (she married Bachchan as the movie premiered) as do a host of other actors.

I find it encouraging for India that the movie was a hit and has a 90% rating on RT. You can buy the movie at Amazon or watch it on Youtube.

Addendum: Guru is loosely based on the life of Dhirubhai Ambani who from humble beginnings built Reliance Industries into one of the largest and most profitable firms in the world.