Alex Tabarrok

The Case for Open Borders

by on September 15, 2014 at 7:20 am in Uncategorized | Permalink

Dylan Matthews summarizes the The Case for Open Borders drawing on an excellent interview with Bryan Caplan. Here is one bit from the interview:

Letting someone get a job is not a kind of charity. It’s not a welfare program. It’s just the government leaving people alone to go and make something out of their lives. When most people are on earth are dealt such a bad hand, to try to stop them from bettering their condition seems a very cruel thing to do to someone.

My elevator pitch has no economics in it, because the economics is actually too subtle to really explain in an elevator pitch. If I had a little bit more time, I would say, “What do you think the effects for men have been of more women in the workforce?”

Are there some men who are worse off? Sure. But would we really be a richer society if we kept half the population stuck at home? Isn’t it better to take people who have useful skills and let them do something with it, than to just keep them locked up someplace where their skills go to waste?

Isn’t that not just better for them, but better for people in general, if we allow people to use their skills to contribute to the world instead of keeping them shut up someplace where they just twiddle their thumbs or do subsistence agriculture or whatever?

On the economics, David Roodman has a characteristically careful and comprehensive review written for Givewell of the evidence on the effect of immigration on native wages. He writes, “the available evidence paints a fairly consistent and plausible picture”:

  • There is almost no evidence of anything close to one-to-one crowding out by new immigrant arrivals to the job market in industrial countries. Most studies find that 10% growth in the immigrant “stock” changes natives’ earnings by between –2% and +2% (@Longhi, Nijkamp, and Poot 2005@, Fig 1; @Peri 2014@, Pg 1). Although serious questions can be raised about the reliability of most studies, the scarcity of evidence for great pessimism stands as a fact (emphasis added, AT)….
  • One factor dampening the economic side effects of immigration is that immigrants are consumers as well as producers. They increase domestic demand for goods and services, perhaps even more quickly than they increase domestic production (@Hercowitz and Yashiv 2002@), since they must consume as soon as they arrive. They expand the economic pie even as they compete for a slice. This is not to suggest that the market mechanism is perfect—adjustment to new arrivals is not instantaneous and may be incomplete—but the mechanism does operate.
  • A second dampener is that in industrial economies, the capital supply tends to expand along with the workforce. More workers leads to more offices and more factories. Were receiving economies not flexible in this way, they would not be rich. This mechanism too may not be complete or immediate, but it is substantial in the long run: since the industrial revolution, population has doubled many times in the US and other now-wealthy nations, and the capital stock has kept pace, so that today there is more capital per worker than 200 years ago.
  • A third dampener is that while workers who are similar compete, ones who are different complement. An expansion in the diligent manual labor available to the home renovation business can spur that industry to grow, which will increase its demand for other kinds of workers, from skilled general contractors who can manage complex projects for English-speaking clients to scientists who develop new materials for home building. Symmetrically, an influx of high-skill workers can increase demand for low-skill ones. More computer programmers means more tech businesses, which means more need for janitors and security guards. Again, the effect is certain, though its speed and size are not.
  • …one way to cushion the impact of low-skill migration on low-skill workers already present is to increase skilled immigration in tandem.

Plaudits are due to Givewell. While others are focused on giving cows, Givewell is going after the really big gains.

The Fed on 9/11

by on September 14, 2014 at 11:11 am in Economics, History | Permalink

Daily Kos has an excellent, long-read from Arliss Bunny on the FED’s actions around 9/11 to keep the financial system afloat:

[Roger] Ferguson, considered a deliberative and thoughtful man by his staff, settled into his office and turned on his television to keep track of the markets. When the second plane hit the World Trade Center no one had to tell Ferguson, he knew the country was under attack and he already knew that the attack was aimed at the financial backbone of the world, lower Manhattan. Ferguson declared an emergency and all over the Fed stunned staff found assurance in going through emergency procedures for which they had prepared. The Joint Y2K Committee Ferguson had so recently headed proved to be a windfall of emergency planning and the entire Fed system referred back to those decisions and the associated training throughout the 9-11 crisis. By the time employees could all hear the muffled thump coming from the direction of the Pentagon and smoke could be seen out the windows the staff had secured themselves and the premises and they had started to organize their war room. The President, George W. Bush, was still reading a children’s book.

At 9:25AM ET the Federal Aviation Administration ordered all planes grounded.

Even as all of Washington dithered between evacuating or sheltering-in-place fearing the rumored fourth plane, Ferguson was already worrying about the next disaster, the crash of the entire US financial system. Within forty-one minutes of the second plane hitting the World Trade Center Ferguson issued as simple clear statement, via Fedwire, to all member banks and institutions assuring them that the federal fund transfer system was “fully operational” and that Federal Reserve Banks would “stay open until an orderly closing could be achieved.” In other words, we are here and we are fully functional. And that was just the first 41 minutes. Alan Greenspan was still on a plane with no knowledge of events and the President was just getting to Air Force One.

Later she discusses how in the days following the crash the Fed came up with extraordinary ways of dealing with transportation issues. In Chicago, for example, armored truck carriers refused to deliver cash to downtown banks because of fears that the Sears Tower was a target so Fed employees, she implies (naturally they don’t want to talk about this very much) delivered millions of dollars in cash in their own cars.

Read the whole thing.

Co-opting Regulation for Profit

by on September 13, 2014 at 7:24 am in Uncategorized | Permalink

Regulations often increase monopoly power. Indeed, increasing monopoly power is often why regulations are enacted. In other cases, however, ostensibly neutral regulations are co-opted by entrepreneurs who spot an opportunity to leverage the regulation for profit. Derek Lowe points us to an interesting case of the latter involving drug pricing and the FDA.

Retrophin recently purchased the marketing rights to the drug Thiola and they are increasing the price from $1.50 per pill to over $30 per pill. Surprisingly, Thiola is off-patent. Ordinarily, we would expect such a large price increase to be met with entry and price pushed to marginal cost. To enter into the market, however, a generic producer must prove bio-equivalence which requires that the generic producer obtain a small quantity of the branded drug. Branded drug firms don’t like competition from generics and they try to impede the process but it’s typically not a big deal for a generic producer to obtain some of the branded drug for their bio-equivalence trials.

In 2007, however, the FDA was officially authorized to approve drugs conditional on the firm implementing a Risk Evaluation and Mitigation Strategy (REMS). The FDA approved thalidomide, for example, only if physicians signed a patient-physician agreement and enrolled each of their patient’s directly with the producer. Indeed, a unique prescription authorization number was required for each prescription which could be filled only at specially authorized pharmacies. The idea, of course, was to prevent anyone from taking thalidomide during pregnancy. The purpose of the regulation was probably not to create monopoly power but it didn’t take firms long to realize that REMS regulations could be co-opted. Simply put, a REMS agreement can make it illegal for generic firms to obtain a sample of the branded drug through ordinary channels. In the thalidomide agreement, for example, it’s even the case that all unused thalidomide must be returned to the producer! Retrophin is hoping to use a similar REMS strategy to keep generic competitors out of the market for Thiola.

Addendum: Derek’s post aroused the ire of the CEO of Retrophin and may have gotten him banned from reddit.

Thirteen percent of US citizens play the lottery every week. The average household spends around $540 annually on lotteries and poor households spend considerably more than the average. The high demand for lotteries, especially among the poor, has led many to suggest that we use them to promote some other good. Los Angeles, for example, has recently discussed giving voters lottery tickets–a great idea if we want to encourage more voting by uninformed people with a penchant for get-rich-quick schemes. What could go wrong?

A somewhat better idea is to use lotteries to promote saving. Prize linked savings (PLS) accounts offer savers pro-rata lottery tickets based on how much they save. The average return on a PLS account can be the same as on regular account but the interest rate is lowered to make up for the small probability of a big gain. It’s illegal for banks in the United States to offer lotteries but a few credit unions have experimented with PLS accounts and they are used in some 20 other countries around the world.

Does the option of saving in a PLS account increase total savings or does it merely reallocate savings? In a new paper, Atalay, Bakhtiar, Cheung and Slomin run an experiment in which participants allocate a budget to consumption, saving, lottery tickets, and a PLS account. They conclude:

…the introduction of a PLS account indeed increases total savings quite dramatically (on average by 12 percentage points), and that the demand for the PLS account comes from reductions in lottery expenditures and current consumption. We further show that these results are stronger among study participants with the lowest reported savings on the survey.

Thus, PLS accounts appear to be a kind of crafty nudge, a way to trick the get-rich-quick brain module to save more.

If we allow PLS accounts, the poor may save more and in a competitive bank market the return on PLS accounts will trump the lousy returns offered by state lotteries. Win, win. If we deregulate all kinds of lotteries, however, I have little doubt that entrepreneurs will come up with schemes that will easily trump PLS accounts–but without the social benefit of encouraging saving among the poor. As a libertarian, I can live with that but as a political economist I wonder how well we can draw the line between banning gambling and allowing gambling so long as it’s tied to a nice nudge.

Roving Bandits

by on September 9, 2014 at 7:22 am in Uncategorized | Permalink

Yesterday, Tyler linked to an important report from the Washington Post showing how “aggressive police take hundreds of millions of dollars from motorists not charged with crimes.” The report and video are shocking.

The aggressive tactics documented by the Post have mostly been deployed against motorists who are unlucky enough to be stopped for a moving violation. An apparently leaked document, however, shows that these programs are likely to expand far beyond motorists.

Many people continue to call for greater inflation to solve our current economic problems. A classic argument for why inflation can help is downward nominal wage rigidity. It is difficult to believe that nominal wage rigidity is important now, years after the end of the recession. The main reason nominal wages don’t fall is that wages are an anchor around which expectations and understandings are built and when wages are cut workers get angry and upset. But when a worker begins a new job with a new employer it’s anchors away! New job, new wage and no feelings of loss even if the wage is less than what some other person earned sometime in the past for doing something sort of similar.

Now here is an important fact: the median number of years that current wage and salary workers have been with their current employer is about four and a half. In other words, more than half of current workers have jobs that are new since the end of the recession. A majority of workers have new jobs, some workers have wages that are increasing (and thus a fortiori not downwardly rigid) and quite a few workers have flexible wages due to piece rates, commissions, bonuses and so forth. Not all of these categories perfectly overlap. Thus, the scope for nominal wage rigidity as an explanation for current problems appears to be small.

Moreover, here’s an interesting test. If nominal wage rigidity explains unemployment and if wages are more rigid at old jobs than at new jobs then we ought to see a positive correlation between unemployment rates and job tenure. Instead, we see the exact opposite, unemployment rates are lowest in the industries with the higher tenure. Of course, this is a raw correlation not a causal estimate. Nevertheless, some of the points are striking.

JobTenureandUERate

In the leisure and hospitality industry, for example, the median worker has been in their job only about 2.4 years–that means that well over the half of the jobs in this industry are new since the end of the recession–yet the unemployment rate in that industry is over 8%. With that kind of turnover in jobs its difficult to believe that wages have not adjusted. Or to put it differently, if one were to ask apriori which will have a greater influence on reducing nominal wage rigidity either a) turning over more than half the jobs in the industry or b) a few extra points in the inflation rate then I think most economists would, without hesitation, answer the former. Inflation is not magic.

College Admission Secrets

by on September 2, 2014 at 7:38 am in Economics, Education | Permalink

Most colleges are non-profits with unclear ownership status so their incentives do not lead to simple profit-maximization. Don’t be fooled, however, neither do colleges maximize student welfare or the public good. Instead colleges pursue some index of free cash flow, prestige, and administrative and faculty independence. The result is some peculiar outcomes. Most businesses, for example, don’t want to reject customers but colleges often encourage students to apply so that they can reject them. The Washington Monthly’s college issue has an excellent primer, Ten Ways Colleges Work You Over, that explains:

education moneyThe aim of the game for colleges is to boost the number of students who apply and can be rejected. By doing this, the schools see their acceptance rates fall, making them appear to be more selective—which helps them rise up the U.S. News & World Report rankings.

Take Northeastern University in Boston… [which] sends nearly 200,000 personalized letters to high school students each year. The institution then follows up these letters with emails, making it seem that the school is wooing these individuals.

… Nearly 50,000 students applied to Northeastern this year for 2,800 spots in the fall 2014 class…

Lowering its acceptance rates is at least one factor in why Northeastern has catapulted up the U.S. News rankings, rising more than 100 spots since 2002.

Profit-maximization (or maximization of free cash flow) is also not absent from the process. Many schools, for example, say they are need blind but that just means that admission officers don’t know the student’s income. Admissions officers, however, do know lots of information that is highly correlated with income including where applicants live, what high school they attended and the occupations of the applicants parents–not exactly what I would call blind.

Schools even use seemingly arbitrary bits of information to increase their revenues. The  Free Application for Federal Student Aid (FAFSA) form, for example, has students list the colleges that they are interested in applying to. Although the order is irrelevant, students often list in preferential order and the colleges see this information. As a result, colleges have an incentive to offer students who list their college first less financial aid simply because that is an indication that the student has a high demand for that college.

A very nice talk by Robert Litan on the contributions of economists and economic ideas to the internet economy:

Ikea’s Simulacrum

by on August 28, 2014 at 5:31 am in Film | Permalink

An amazing 75% of the images in an Ikea catalog are not photographs but CGI.

…the real turning point for us was when, in 2009, they called us and said, “You have to stop using CG. I’ve got 200 product images and they’re just terrible. You guys need to practise more.” So we looked at all the images they said weren’t good enough and the two or three they said were great, and the ones they didn’t like were photography and the good ones were all CG! Now, we only talk about a good or a bad image – not what technique created it.”

room

Big Sugar

by on August 27, 2014 at 7:09 am in Economics, Food and Drink, Political Science | Permalink

From Bloomberg:

Because of a plunge in U.S. sugar prices amid a hefty crop of sugar beets and cane, the Agriculture Department estimates that it may have to buy 400,000 tons of sugar from processors who might default on $862 million in government loans. Sugar producers have the option of repaying the loans either with cash or with their harvests if prices fall below a certain level.

…The sugar, by law, would be sold to ethanol refiners, who would pay 10 cents a pound less than the government paid — an inducement needed to get the ethanol industry to use the sugar. Aside from the ridiculousness of piling one ill-advised subsidy atop another, this would produce a loss of $80 million for the U.S. Treasury. Some industry analysts estimate the government may have to buy as much as 800,000 tons of sugar to restore balance to U.S. stockpiles, potentially doubling the loss.

Police Killings

by on August 27, 2014 at 7:08 am in Data Source, Economics, Law | Permalink

Richard Epstein writes:

Police officer deaths in the line of duty, year to date for 2014, were 67 of which 27 were by gunfire. For the full year of 2013, the numbers were 105 total deaths, with 30 by gunfire. It would be odd to say that police officer deaths (which are more common than deaths to citizens from police officers) should not count…

It would indeed be odd to say that police officer deaths should not count, which is perhaps why no one says this. Police officer deaths are counted but the literal truth is that we don’t count deaths to citizens. No one knows for sure exactly how many citizens are killed by police because the government doesn’t keep a count. Draw your own conclusions. What we do know, is that it is not true that police officer deaths are more common than deaths to citizens from police officers. Not even close.

105 officers were killed in the line of duty in 2013 but to be clear this includes heart attacks, falls, and automobile accidents. Deaths due to violent conflict include 30 deaths by gunfire, 5 vehicular assaults, 2 stabbings and a bomb. To be conservative, let’s say 50 deaths to police at the hands of citizens.

According to the FBI there are around 400 justifiable homicides by police every year, where justified is defined as the killing of a felon by a law enforcement officer in the line of duty. But note that if the killing of Michael Brown is found to be unjustified it won’t show up in these statistics.

The best information we have of citizens killed by the police, believe it or not, are private tabulations from newspaper accounts. On the basis of one such collection, DataLab at FiveThirtyEight estimates that police kill 1000 people a year.

Thus, killings by police seem to be on the order of 10 to 20 times higher than killings of police.

How does a stop for jaywalking turn into a homicide and how does that turn into an American town essentially coming under military control with snipers, tear gas, and a no-fly zone? We don’t yet know exactly what happened between the two individuals on the day in question but events like this don’t happen without a deeper context. Part of the context is the return of debtor’s prisons that I wrote about in 2012:

Debtor’s prisons are supposed to be illegal in the United States but today poor people who fail to pay even small criminal justice fees are routinely being imprisoned. The problem has gotten worse recently because strapped states have dramatically increased the number of criminal justice fees….Failure to pay criminal justice fees can result in revocation of an individual’s drivers license, arrest and imprisonment. Individuals with revoked licenses who drive (say to work to earn money to pay their fees) and are apprehended can be further fined and imprisoned. Unpaid criminal justice debt also results in damaged credit reports and reduced housing and employment prospects. Furthermore, failure to pay fees can mean a violation of probation and parole terms which makes an individual ineligible for Federal programs such as food stamps, Temporary Assistance to Needy Family funds and Social Security Income for the elderly and disabled.

Ferguson1new report from Arch City Defenders, a non-profit legal defense organization, shows that the Ferguson municipal courts are a stunning example of these problems:

Ferguson is a city located in northern St. Louis County with 21,203 residents living in 8,192 households. The majority (67%) of
residents are African-American…22% of residents live below the poverty level.

…Despite Ferguson’s relative poverty, fines and court fees comprise the second largest source of revenue for the city, a total of $2,635,400. In 2013, the Ferguson Municipal Court disposed of 24,532 warrants and 12,018 cases, or about 3 warrants and 1.5 cases per household.

You don’t get $321 in fines and fees and 3 warrants per household from an about-average crime rate. You get numbers like this from bullshit arrests for jaywalking and constant “low level harassment involving traffic stops, court appearances, high fines, and the threat of jail for failure to pay.”

If you have money, for example, you can easily get a speeding ticket converted to a non-moving violation. But if you don’t have money it’s often the start of a downward spiral that is hard to pull out of:

For a simple speeding ticket, an attorney is paid $50-$100,
the municipality is paid $150-$200 in fines and court costs, and the
defendant avoids points on his or her license as well as a possible
increase in insurance costs. For simple cases, neither the attorney nor
the defendant must appear in court.

However, if you do not have the ability to hire an attorney or pay
fines, you do not get the benefit of the amendment, you are assessed
points, your license risks suspension and you still owe the municipality
money you cannot afford….If you cannot pay the amount in full, you must appear in court on that night to explain why. If you miss court, a warrant will likely be
issued for your arrest.

People who are arrested on a warrant for failure to appear in court
to pay the fines frequently sit in jail for an extended period. None of the
municipalities has court on a daily basis and some courts meet only
once per month. If you are arrested on a warrant in one of these
jurisdictions and are unable to pay the bond, you may spend as much as
three weeks in jail waiting to see a judge.

Of course, if you are arrested and jailed you will probably lose your job and perhaps also your apartment–all because of a speeding ticket.

As a final outrage, consider this story which ties together Ferguson, the courts, and the arrest of parents, often minority parents, for leaving their kids to play in parks (just as my parents did).

According to local judge Frank Vatterott, 37% of the courts responding to his survey unconstitutionally closed the courts to non-defendants. Defendants are then faced with
the choice of leaving their kids on the parking lot or going into court. As Antonio Morgan described after being denied entry to the court with his children, the decision to leave his kids with a friend resulted in a charge of child endangerment.

A Reason-Rupee poll asked

Do you think all kids who play sports should receive a trophy for their participation, or should only the winning players be awarded trophies?

Overall, an estimated 57% Americans said that only the winning players should be awarded trophies but there were big differences according to gender, race, politics, education and income. 62% of men, for example, said that only the winning players should be awarded trophies compared to 52% of women. These results are consistent with experiments in which women tend to shy away from competition (perhaps with long-run consequences in the workforce). Whites opt for trophies to the winners-only at 63% compared to African Americans at just 44% and Hispanics at 39%. A whopping 80% of libertarians say that trophies should go only to the winners compared to conservatives at 63% and liberals and progressives both at 53%. More educated respondents were more likely to opt for trophies for only the winners.  Trophies for the winners also increased strongly in income which could be because people with high income feel that they are winners or perhaps because people with high incomes are the types of people who enjoy competition.

Trophy1

Note that these are raw differences not betas from a statistical regression and since income, race, education etc. aren’t independent we don’t know which are the most controlling although the results point in directions consistent with other evidence. The data can be found here.

In a great paper, The Impact of Jury Race in Criminal Trials, Shamena Anwar, Patrick Bayer and Randi Hjalmarsson exploit random variation in the jury pool to estimate the effect of race on criminal trials. The authors have data from nearly 800 trials in two Florida counties. On any given day, a jury pool is randomly drawn from a master list based on driver’s licenses. On some days, the pool of about 30 people contains some black members and on other days, purely for random reasons, it does not. The voir dire process–>For every $1 spent on legal aid, the savings can range from $1.60 to $30.removals, excuses and challenges–whittles down the jury pool to 6 jury members with typically 1 alternate.

The authors have data on the race, gender, and age of each member of the jury pool as well as each member of the ultimate jury. The authors also know the race and gender of the defendant and the charges. What the authors discover is that all white juries are 16% more likely to convict black defendants than white defendants but the presence of just a single black person in the jury pool equalizes conviction rates by race. The effect is large and remarkably it occurs even when the black person is not picked for the jury. The latter may not seem possible but the authors develop an elegant model of voir dire that shows how using up a veto on a black member of the pool shifts the characteristics of remaining pool members from which the lawyers must pick; that is, a diverse jury pool can make for a more “ideologically” balanced jury even when the jury is not racially balanced.

The author’s results show not only that blacks and whites are treated differently depending on the composition of the jury pool but also that random variation in the jury pool adds to the variability of sentences holding race constant. Like is not treated as like. The results also suggest that we don’t need racial quotas to increase fairness. We can increase fairness and reduce variability in a racially neutrally way by expanding the size of juries. Six-person juries have become common because they are cheap(er) but a return to twelve person juries would reduce the variability of sentences and greatly equalize conviction rates across race.

A Job is an Exchange

by on August 17, 2014 at 4:57 pm in Economics | Permalink

I love Natasha Singer’s parenthetical in her excellent NYTimes article about job exchanges like Uber, Lyft and Task Rabbit.

“These are not jobs, jobs that have any future, jobs that have the possibility of upgrading; this is contingent, arbitrary work,” says Stanley Aronowitz, director of the Center for the Study of Culture, Technology and Work at the Graduate Center of the City University of New York. “It might as well be called wage slavery in which all the cards are held, mediated by technology, by the employer, whether it is the intermediary company or the customer.”

(Disclosure: For two weeks in the summer of 1988, I had a gig as the au pair for Professor Aronowitz’s daughter, then a toddler.)