Alex Tabarrok

Does Fair Trade help poor workers? Probably not says Don Boudreaux in this excellent, short video from the Everyday Economics series at Marginal Revolution University.

As is well known, however, Don is a rabid, free-market economist with ideological blinders who has been captured by corporate interests. So let’s ignore what Don says and consider what William MacAskill, author of Doing Good Better (reviewed earlier this week) has to say. No one can fault MacAskill’s charitable bona-fides:

MacAskill’s own pledge is to donate everything he earns above about $35,000 per year, adjusted using standard economic measures for inflation and cost of living, to the organizations that he believes will do the most good. Since his bar is roughly at the UK median income—such that half the population earns more each year, and half the population earns less—he’s certainly not condemning himself to a life of hardship; rather, he is pre-committing to staying roughly in the middle of the national income distribution even as his earnings go up over time.

That said, his pledge means giving away 60 percent of his expected lifetime earnings.

When I ask him the inevitable questions about whether this isn’t rather a lot to sacrifice for one person, MacAskill shrugs modestly and smiles broadly. “Imagine you’re walking down the street and see a building on fire,” he says. “You run in, kick the door down—smoke billowing—you run in and save a young child. That would be a pretty amazing day in your life: That’s a day that would stay with you forever. Who wouldn’t want to have that experience? But the most effective charities can save a life for $4,000, so many of us are lucky enough that we can save a life every year through our donations. When you’re able to achieve so much at such low cost to yourself…why wouldn’t you do that? The only reason not to is that you’re stuck in the status quo, where giving away so much of your income seems a little bit odd.”

So what are MacAskill’s views on Fair Trade? Why they are the same as Don’s!

…when you buy fair-trade, you usually aren’t giving money to the poorest people in the world. Fairtrade standards are difficult to meet, which means that those in the poorest countries typically can’t afford to get Fairtrade certification. For example, the majority of fair-trade coffee production comes from comparatively rich countries like Mexico and Costa Rica, which are ten times richer than the very poorest countries like Ethiopia.

….In buying Fairtrade products, you’re at best giving very small amounts of money to people in comparatively well-off countries. You’d do considerably more good by buying cheaper goods and donating the money you save to one of the most cost-effective charities…

Doing Good Better

by on July 27, 2015 at 7:25 am in Economics, Philosophy | Permalink

William MacAskill is that rare beast, a hard-headed, soft-hearted proponent of saving the world. His excellent new book, Doing Good Better, is a primer on the effective altruism movement.

Doing Good Better opens, just as you would expect, with an uplifting story of a wonderful person with a brilliant idea to save the world. The PlayPump uses a merry-go-round to pump water. Fun transformed into labor and life saving clean water! The energetic driver of the idea quits his job and invests his life in the project. Africa! Children on merry-go-rounds! Innovation! What could be better? It’s the perfect charitable meme and the idea attracts millions of dollars of funding from celebrities like Steve Case, Jay-Z, Laura Bush and Bill Clinton.

Then MacAskill subverts the narrative and drops the bomb:

…despite the hype and the awards and the millions of dollars spent, no one had really considered the practicalities of the PlayPump. Most playground merry-go-rounds spin freely once they’ve gained sufficient momentum–that’s what makes them fun. But in order to pump water, PlayPumps need constant force, and children playing on them would quickly get exhausted.

The women whose labor was supposed to be saved end up pushing the merry-go-round themselves, which they find demeaning and more exhausting than using a hand-pump. Moreover, the device is complicated and requires extensive maintenance that cannot be done in the village. The PlayPump is a disaster.

MacAskill, however, isn’t interested in castigating donors for their first-world hubris. MacAskill, a frugal Scottish philosopher, doesn’t like waste. Money, time and genuine goodwill are wasted in poorly-conceived charitable efforts and when lives are at stake that kind of waste is offensive. MacAskill, however, is convinced that a hard-headed approach–randomized trials, open-data, careful investigation of effectiveness–can do better. As MacAskill puts it:

When it comes to helping others, being unreflective often means being ineffective.

Of course, there are systematic problems with charitable giving. Most importantly, the feedback mechanism is never going to work as well when people are buying something to be consumed by others (as Milton Friedman explains). That problem, however, doesn’t explain why people do invest large amounts of money and their own time on wasteful projects. A large part of the problem is cultural. MacAskill asks us to consider the following thought experiment:

Imagine, for example, that you’re walking down a commercial street in your hometown. An attractive and frightening enthusiastic young woman nearly assaults you in order to get you stop and speak with her. She clasps a tablet and wears a T-shirt displaying the words, Dazzling Cosmetics…she explains that she’s representing a beauty products company that is looking for investment. She tells you about how big the market for beauty products is, and how great the products they sell are, and how because the company spends more than 90 percent of its money on making the products and less than 10 percent on staff, distribution, and marketing, the company is extremely efficient and therefore able to generate an impressive return on investment. Would you invest?

MacAskill says “Of course, you wouldn’t…you would consult experts…which is why the imaginary situation, I described here never occurs” Actually it’s even worse than that because what he describes does occur. It’s what the boiler rooms do to sell stocks (ala the Wolf of Wall Street). Thus, charities raise money using precisely the techniques that in other contexts are widely regarded as deceitful, disreputable and preying on the weak. Once you have seen how peculiar our charitable institutions are, it’s difficult to unsee.

Fortunately, effective altruism doesn’t require Mother Theresa-like levels of altruism or Spock-like level of hard-headedness. What is needed is a cultural change so that people become proud of how they give and not just how much they give. Imagine, for example, that it becomes routine to ask “How does Givewell rate your charity?” Or, “GiveDirectly gives poor people cash–can you demonstrate that your charity is more effective than cash?” The goal is not the questioning. The goal is to give people the warm glow when they can answer.

Rent Control in Stockholm

by on July 24, 2015 at 7:31 am in Data Source, Economics | Permalink

Here’s an interesting letter from “Stockholm” to Seattle

Dear Seattle,

I am writing to you because I heard that you are looking at rent control.

Seattle, you need to ask your citizens this: How would citizens like it if they walked into a rental agency and the agent told them to register and come back in 10 years?

stockholm1

I’m not joking. The image above is a scan of a booklet sent to a rental applicant by Stockholm City Council’s rental housing service. See those numbers on the map? That’s the waiting time for an apartment in years. Yes, years. Look at the inner city – people are waiting for 10-20 years to get a rental apartment, and around 7-8 years in my suburbs. (Red keys = new apartments, green keys = existing apartments).

Stockholm City Council now has an official housing queue, where 1 day waiting = 1 point. To get an apartment you need both money for the rent and enough points to be the first in line. Recently an apartment in inner Stockholm became available. In just 5 days, 2000 people had applied for the apartment. The person who got the apartment had been waiting in the official housing queue since 1989!

Stockholm2

In addition to Soviet-level shortages, the letter writer discusses a number of other effects of rent controls in Stockholm including rental units converted to condominiums and a division of renters into original recipients who are guaranteed low rates and who thus never move and the newly arrived who have to sublet at higher rates or share crowded space. All of these, of course, are classic consequences of rent controls.

Addendum: More details on Sweden’s rent-setting system can be found here, statistics (in Swedish) on rental availability in Stockhom are here and a useful analysis of the Swedish housing crisis with more details on various policies (e.g. new construction is exempt for 15 years but there isn’t nearly enough) is here. Jenkins wrote a comprehensive review of the literature on rent controls in 2009 that echoed what Navarro said in 1985 “the economics profession has reached a rare consensus: Rent control creates many more problems than it solves.”

Hat tip to Bjorn and Niclas who confirmed to me the situation in Stockholm and to Peter for the original link.

Patents should be made more difficult to obtain, say by raising the obviousness standard or more speculatively by requiring patent terms to vary with investment. Aside from these types of changes, however, damages for infringement can also be made more reasonable. The issue is especially pronounced for design patents.

In the recent Apple v. Samsung case, the infringement of a handful of “look and feel” design patents resulted in Apple being awarded Samsung’s total profits on the infringing devices. A friend of the court brief from industry heavyweights, Dell, eBay, Facebook, Google, Hewlett-Packard, Limelight Networks, Newegg, and SAS Institute explains:

In this closely watched case, the panel upheld a jury’s award of the entirety of Samsung’s profits on smartphones that were found to have infringed three Apple design patents relating to a portion of the iPhone’s outer shell and one graphical-user-interface screen. Although the design patents covered only minor features of those complex electronic devices, the panel rejected Samsung’s argument that damages must be limited to the profits made from those infringing features. See slip op. 25-28. It instead concluded that the relevant statute, 35 U.S.C. § 289, “explicitly authorizes the award of total profit from the article of manufacture bearing the patented design.” Id. at 26-27. Viewing the smartphone as a single “article of manufacture,” the panel held that the statute required it to award the total profit where the “innards of Samsung’s smartphones were not sold separately from their shells as distinct articles of manufacture to ordinary purchasers.” Id. at 27-28.

A typical device might involve many design elements and what the total profit rule means is that a finding of infringement on any of these elements can get you all of the profits. The total profits rule is an invitation to rent seek. For a complex product, trawling the patent databases will almost always find some handful of patents that some court might rule were infringed. Defendants are put in the unenviable position of having to be right one hundred percent of the time while trawls need only be right once.

Do we really want to turn serifs into billion-dollar weapons of commercial war?

Hat tip: Mark Thorson.

Addendum: Keep in mind the general point: Patents are supposed to protect innovators but when weak claims of imitation are easily made and well-rewarded then patent law can harm innovators and reduce innovation, as the Tabarrok Curve illustrates.

The Happy Meal Fallacy

by on July 20, 2015 at 7:25 am in Economics, Food and Drink, Law | Permalink

Some restaurants offer burgers without fries and a drink. These restaurants cater to low-income people who enjoy fries and drinks but can’t always afford them. To rectify this sad situation a presidential candidate proposes The Happy Meal Act. Under the Act, burgers must be sold with fries and a drink. “Burgers by themselves are not a complete, nutritious meal,” the politician argues, concluding with the uplifting campaign slogan, “Everyone deserves a Happy Meal!”

happy-mealBut will the Happy Meal Act make people happy? If burgers must come with fries and a drink, restaurants will increase the price of a “burger.” Even though everyone likes fries and a drink they may not like the added benefits by as much as the increase in the price of the meal. Indeed, this must the case since consumers could have bought the meal before the Act but chose not to. Requiring firms to sell benefits that customers value less than their cost makes both firms and customers worse off.

The Happy Meal Fallacy is fairly obvious when it comes to happy meals but now let’s consider the debate over the gig economy and the hiring of employees versus contractors. Employees are entitled to benefits that contractors are not. Thus the standard conclusion is that classifying workers as contractors “is great for employers but potentially terrible for workers.” Wrong. Employees get their wages with fries and a drink while contractors get wages only. Would a law requiring firms to provide all workers with fries and a drink help workers?

If firms are required to provide benefits to contractors they will lower the contractor wage. But how do we know the extra benefits aren’t worth the reduction in wages? If the extra benefits were worth more to workers than they cost firms, firms would have eagerly provided these benefits as a way of increasing profits. Firms can profit whenever buyers are willing to pay more for a product than its cost. Benefits are a product that workers buy from firms.

Workers buy benefits from firms by offering to work at a lower wage. Firms are happy to sell benefits when workers will accept a wage reduction that covers the cost of the benefit. Thus, if workers value a benefit by more than its cost, there is a mutually profitable deal to be made. The firm will provide the benefit and wages will fall by more than the cost but by less than the value of the benefit. Both firms and workers will be better off. It’s implausible that firms and workers will overlook mutually profitable exchanges. Thus requiring firms to provide benefits with every job means requiring firms to sell benefits that workers value less than their cost and that makes both firms and workers worse off–just like requiring restaurants to sell burgers with fries and a drink makes firms and customers worse off.

If the cost of the benefits far exceed their value to workers, the firm will close. But even if the firm doesn’t close, firms and workers will both be worse off. The exact division of the burden will vary depending on particulars but the workers who value wages the highest and benefits the least will be the most burdened. Often these will be the lowest income workers.

The Happy Meal Fallacy can lead to very unhappy firms and workers.

Addendum: The theory of compensating differences in wages with benefits was pioneered by Adam Smith. See Matt Kahn for a short overview and Sherwin Rosen for a full treatment of the theory. Jonathan Gruber and Craig Olson offer empirical evidence. The MRU video, The Tradeoff Between Fun and Wages presents another application.

James Buchanan was a fountainhead of ideas, as his twenty volume collected works demonstrate. But there is another side to Buchanan’s contributions that is less apparent. Buchanan was more than a scholar, more than an idea man. He was also an intellectual entrepreneur who led a worldwide movement. We like to believe that good ideas defeat bad ideas, that the cream rises to the top, that truth wins out in the end, but as John Stuart Mill (1859) stated, “Men are not more zealous for truth than they often are for error.” Indeed, error may attract more zealots, since error can bend itself to flatter, and the truth does not bend.

Buchanan understood right from the beginning that for good ideas to win requires a movement, and a movement is not built on ideas alone, but also on students, on conferences, on outreach, on media, and on money.

That is the opening to a I talk I gave at the 2013 memorial, “James M. Buchanan: A Celebration of Achievement,” just now published.

The Electric Vehicle Tipping Point?

by on July 14, 2015 at 7:25 am in Economics | Permalink

Geoff Ralston, a partner at Y Combinator, argues that electric cars will soon dominate the world. He gives several arguments regarding cost and convenience that I take no issue with but his most interesting argument strikes me as wrong:

Gas stations are not massively profitable businesses. When 10% of the vehicles on the road are electric many of them will go out of business.  This will immediately make driving a gasoline powered car more inconvenient.  When that happens even more gasoline car owners will be convinced to switch and so on.  Rapidly a tipping point will be reached, at which point finding a convenient gas station will be nearly impossible and owning a gasoline powered car will positively suck.  Then, there will be a rush to electric cars….

Why is this wrong? Consider that in 2009 there were 246 million motor vehicles registered in the United States. A 10% reduction would be 221 million vehicles but that is how many vehicles there were in 2000. Was driving an automobile so much more inconvenient in 2000 than it was in 2009? No. Even a 25% fall in gas vehicles would bring us back only to the number of vehicles circa 1998.

More fundamentally, the argument goes wrong by not thinking through the incentives. Suppose that gasoline stations did become so uncommon that finding one was inconvenient. What will happen? More gasoline stations will be built! Ralston has implicitly assumed that building gasoline stations will add so much to the price of gasoline as to render that option uneconomic. In fact, gasoline stations are relatively simple, small businesses that easily expand or contract in response to the pennies on a gallon that people are willing to pay for convenience.

Addendum: By the way, even though the number of vehicles in the United States has been increasing, the number of gasoline stations has actually been decreasing, largely because greater fuel efficiency means that we want fewer stations.

Hat tip: Vlad Tarko.

Catalonian Roark

by on July 9, 2015 at 12:50 pm in The Arts, Travel, Uncategorized | Permalink

Gaudi was so self-assured and committed to executing his designs without intervention from clients or bureaucrats that he ignored not only criticism but building codes. The municipal architect Rovira i Trias refused to approve the plans for the Palau Guell; Casa Calvert was higher than regulations allowed; work on Casa Batillo was halted as it had begun without authorization; the dimensions of Casa Mila exceeded permitted limits, and a column at street level blocked pedestrian traffic. Unfazed by these issues, the architect responded in each case by confronting the authorities. It must be said that government officials ultimately celebrated his excesses and made exceptions to accomodate Gaudi’s designs.

From Gaudi of Barcelona.

gaudi1

Federal Judge Alex Kozinski (9th circuit) has written a scathing indictment of the US justice system. Kozinski starts out discussing a number of myths such as that eyewitness testimony or forensic evidence is highly reliable. Business Insider gives a quick rundown of this part of the paper but they clearly didn’t read very far because the incendiary material comes later.

Kozinski, writing in part based on his personal experience as a judge, says that prosecutors are too often running roughshod over justice:

…there are disturbing indications that a non-trivial number of prosecutors—and sometimes entire prosecutorial offices— engage in misconduct that seriously undermines the fairness of criminal trials. The misconduct ranges from misleading the jury, to outright lying in court and tacitly acquiescing or actively participating in the presentation of false evidence by police.

Discussing the Ted Stevens case he writes

Did Justice Department lawyers rend their garments and place ashes on their head to mourn this violation of their most fundamental duty of candor and fairness? No way, no how. Instead, the government argued strenuously that its ill-gotten conviction should stand because boys will be boys and the evidence wasn’t material to the case anyway.

…Instead of contrition, what we have seen is Justice Department officials of the highest rank suffering torn glenoid labrums from furiously patting themselves on the back for having “done the right thing.”

Under Imbler v. Pachtman prosecutors have absolute immunity from damages liability from misconduct committed in the course of their work. Kozinski is outraged:

Under Imbler, prosecutors cannot be held liable, no matter how badly they misbehave, for actions such as withholding exculpatory evidence, introducing fabricated evidence, knowingly presenting perjured testimony and bringing charges for which there is no credible evidence. All are immune from liability. A defense lawyer who did any such things (or their equivalents) would soon find himself disbarred and playing house with Bubba. The Imbler majority seemed reassured by the possibility that rogue prosecutors will be subject to other constraints.

…This argument was dubious in 1976 and is absurd today. Who exactly is going to prosecute prosecutors? Despite numerous cases where prosecutors have committed willful misconduct, costing innocent defendants decades of their lives, I am aware of only two who have been criminally prosecuted for it; they spent a total of six days behind bars.

…What kind of signal does this send to young prosecutors who are out to make a name for themselves? I think it signals that they can be as reckless and self-serving as they want, and if they get caught, nothing bad will happen to them. Imbler and Van de Kamp should be overruled. It makes no sense to give police, who often have to act in high pressure situations where their lives may be in danger, only qualified immunity while giving prosecutors absolute immunity. It is a disparity that can only be explained by the fact that prosecutors and judges are all part of the legal profession and it’s natural enough to empathize with people who are just like you. If the Supreme Court won’t overrule Imbler and Van de Kamp, Congress is free to do it by amending 42 U.S.C. § 1983.

Read the whole thing, there is a lot more.

An Abandoned Space Ship

by on July 4, 2015 at 7:32 am in History, Science | Permalink

Russian urban explorer and photographer Ralph Mirebs discovered an enormous, abandoned hangar in Kazakhstan.

Hangar1

Inside were the remains of the Soviet space shuttle program.

Hangar2

More amazing photos from the source here or from a secondary news piece here.

The Greek story is being framed as a battle between the Greeks and the Germans and thus between spending and austerity. But this frame can’t make sense of the fact that, win or lose, large numbers of Greeks will vote for austerity on Sunday.

To understand what’s really going on, listen to this remarkable interview between NPR’s Robin Young and Nikolalos Voglis, a restaurant owner in Athens. The interview begins with a discussion of the crisis. No one has cash or credit and Voglis’s restaurant is basically shuttered. Young then asks Voglis how he will vote on Sunday and he replies, “Definitely, Yes.” Young is surprised, she tries to clarify, you will vote, “even for more austerity?” “That’s right,” he replies.

Following the conventional frame, Young finds this difficult to understand and she pushes back against Voglis with all the conventional arguments. She quotes Paul Krugman saying that the problem isn’t really Greece’s doing, that the IMF and EU are being too tough on Greece, that Greece has done a lot of cutting already and so on. Voglis responds:

We are on the right track but unfortunately the job wasn’t completed. We are a country in the European Community which has the biggest public sector in Europe. And all of us in the private sector spend millions to support the situation. So the only way that Greece can become a true Western country…is to make these reforms.

…Look the main problem in this country is the public sector. There is no other problem. Entrepreneurs here are very, very competitive. We have to let this thing, this monster that we call the public sector, it has to go, it has to finish. This is the main issue.

Many Greeks are sick and tired of the bloated public sector and its corruption, inefficiency and waste. In this frame, the Greek story is not fundamentally about Greeks versus Germans it’s about the Greek people versus their government–the Germans have simply been the vehicle that has brought the Greeks to their kairotic moment.  The Greeks want normalcy, as the Poles did after communism. If the Yes vote wins on Sunday it will be the Greeks voting not just against the current administration but against the entire state apparatus.

More on Asteroid Defense

by on July 1, 2015 at 7:25 am in Economics, Science | Permalink

In a very good piece on the risk from asteroids the Washington Post quotes me going all crunchy-granola:

Tabarrok says his hope is that private efforts in space will one day soon focus on mining asteroids for valuable resources. If you have miners and private developers working with asteroids in space, that could inadvertently make it easier to defend the planet against an asteroid collision.

And of course, there is the option that people on Earth could somehow get the motivation to work together, and asteroid defense might ultimately be a reason for unifying the world, says Tabarrok.

“The idea that the whole planet is potentially under threat from an asteroid does make us think that the world is our home, and we’re all in this together – Spaceship Earth, to get a little crunchy granola. And that makes us think a little more about our fellow travelers, our fellow world residents, that we’re all in this together.”

I may have to turn in my hard-headed economist card.

Today is Asteroid Day, the anniversary of the largest asteroid impact in recent history, the June 30, 1908 Siberian Tunguska asteroid strike. The Tunguska asteroid was only about 40 meters in size but the impact was 1000 times more powerful than the Hiroshima nuclear bomb.

Large asteroid strikes are low-probability, high-death events–so high-death that by some estimates the probability of dying from an asteroid strike is on the same order as dying in an airplane crash. To mark asteroid day, events around the world, including here at the observatory at George Mason University, will discuss asteroids and how we can protect our civilization.

Tyler and I are signatories to the 100X Declaration which reads in part:

There are a million asteroids in our solar system that have the potential to strike Earth and destroy a city, yet we have discovered less than 10,000….

Therefore, we, the undersigned, call for…A rapid hundred-fold acceleration of the discovery and tracking of Near-Earth Asteroids to 100,000 per year within the next ten years.

I am also a contributor to an Indiegogo campaign to develop a planetary defense system–yes, seriously! I don’t expect the campaign to succeed because, as our principles of economics textbook explains, too many people will try to free ride. But perhaps the campaign will generate some needed attention. In the meantime, check out this video on public goods and asteroid defense from our MRU course (as always the videos are free for anyone to use in the classroom.)

By the way, can you identify the easter egg to growing up in the 1980s?

In our textbook, Tyler and I write:

Farmers use the subsidized water to transform desert into prime agricultural land. But turning a California desert into cropland makes about as much sense as building greenhouses in Alaska! America already has plenty of land on which cotton can be grown cheaply.  Spending billions of dollars to dam rivers and transport water hundreds of miles to grow a crop which can be grown more cheaply in Georgia is a waste of resources, a deadweight loss. The water used to grow California cotton, for example, has much higher value producing silicon chips in San Jose or as drinking water in Los Angeles than it does as irrigation water.

In Holy Crop, part of Pro-Publica’s excellent, in-depth series on the water crisis the authors concur:

Getting plants to grow in the Sonoran Desert is made possible by importing billions of gallons of water each year. Cotton is one of the thirstiest crops in existence, and each acre cultivated here demands six times as much water as lettuce, 60 percent more than wheat. That precious liquid is pulled from a nearby federal reservoir, siphoned from beleaguered underground aquifers and pumped in from the Colorado River hundreds of miles away.

…Over the last 20 years, Arizona’s farmers have collected more than $1.1 billion in cotton subsidies, nine times more than the amount paid out for the next highest subsidized crop. In California, where cotton also gets more support than most other crops, farmers received more than $3 billion in cotton aid.

…If Arizona’s cotton farmers switched to wheat but didn’t fallow a single field, it would save some 207,000 acre-feet of water — enough to supply as many as 1.4 million people for a year.

…The government is willing to consider spending huge amounts to get new water supplies, including building billion-dollar desalinization plants to purify ocean water. It would cost a tiny fraction of that to pay farmers in Arizona and California more to grow wheat rather than cotton, and for the cost of converting their fields. The billions of dollars of existing subsidies already allocated by Congress could be redirected to support those goals, or spent, as the Congressional Budget Office suggested, on equipment and infrastructure that helps farmers use less water.

“There is enough water in the West. There isn’t any pressing need for more water, period,” Babbitt said. “There are all kinds of agriculture efficiencies that have not been put into place.”

Luddite Violence

by on June 26, 2015 at 7:47 am in Current Affairs, Economics | Permalink

Don’t make the mistake of thinking the Paris riots against Uber are worker versus capitalist, the attacks are rentiers versus capitalists and worker versus worker.

UberParis

More pictures here.