Economics

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.

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…

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.

Mostly, yes, although with some caveats (the headline of the piece doesn’t exactly capture this).  That is the topic of my latest column for The Upshot.  Here is one excerpt:

Niclas Berggren…and Therese Nilsson…have produced a fascinating series of papers on these questions, sometimes writing singly, sometimes together or with the collaboration of a variety of co-authors. Their most notable study is perhaps a paper they wrote together, “Does Economic Freedom Foster Tolerance?

…One of their most striking findings is that societies characterized by greater economic freedom and greater wealth do indeed exhibit greater tolerance toward gay people, a tendency suggesting that gay rights, including gay marriage, will spread globally as national economies liberalize and develop.

Some metrics of economic freedom count more than others:

This greater tolerance is strongly associated only with certain features of what has often been defined as economic freedom. For example, a smaller government, measured as a share of gross domestic product, is often included in so-called economic freedom indexes as an objective measure of freedom. But the data show that smaller government has a slight negative correlation with tolerance of gay people by heterosexuals. One implication is that many conservatives may be overly preoccupied with the size of government as a measure of how free societies actually are.

On the other hand, the data shows that when a society has impressive scores on property rights security and low inflation — two other components of economic freedom indexes — these characteristics are strongly and positively correlated with tolerance of gays. It’s possible that low inflation, and the behavior of a central bank, are stand-ins for the general trustworthiness of a nation’s government and broader institutions, and such trustworthiness helps foster tolerance.

The results for race are not nearly as strong, namely both freedom and prosperity are less clearly associated with higher levels of racial tolerance, although the correlation is still a positive one.

And there is this:

We are often told that education is an important remedy, yet it does not register as a meaningful factor in the cross-country data in this paper. Higher levels of education simply have not correlated significantly with higher levels of tolerance across countries.

Do read the whole thing.

The Peltzman Effect on the Golden Gate

by on January 24, 2015 at 11:49 am in Economics | Permalink

A safety barrier on the median was just installed on the Golden Gate Bridge; unintended consequences follow.

…in the days since the more secure movable median barrier was installed, the average speed of drivers on the approach from the north has jumped even though the speed limit was lowered from 55 to 45 miles per hour.

“We’re really seeing unreasonable speeds on the bridge, much faster than before,” said Priya David Clemens, a representative for the Golden Gate Bridge District. For whatever reason, including the possibility that drivers feel safer knowing a car won’t come barreling at them from the opposite direction, “we’ve noticed speeds going up,” Clemens said. “That’s why we asked the CHP to help us.”

More on the Peltzman effect.

Hat tip: Carl Danner.

Here is some media coverage of a recent Facebook study of its economic impact in terms of revenue and jobs.  Facebook claims it added $227 billion to the global economy, but they approached the question the wrong way.

The correct method is to treat jobs as a cost of Facebook, not a benefit, admittedly that is not how politics works nor is it how corporate PR works.  We should measure the benefits directly by consumer time use studies, much as Austan Goolsbee and Peter J. Klenow did in their paper on the internet (pdf).

My question today is this: what is the most accurate one line back-of-the-envelope estimate you can come up with for the gross benefits of Facebook, not bothering to subtract for the costs of running the site?  Here is one (hypothetical and illustrative) example, for America only:

100 million regular users, one hour a day, time valued at $10 an hour, and multiply for $365 billion a year.

You will notice this method implicitly captures the value and disvalue of the ads on Facebook.  The better and more useful the ads are, the more time people will spend on the site.

I don’t devote time to Facebook (I can thank MR for that), so surely you can do better than I in building a plausible one-line estimate.  Please leave your answer in the comments.

Jinfeng Luo and Yi Wen from the St. Louis Fed have a new working paper (pdf), “Institutions Do Not Rule: Reassessing the Driving Forces of Economic Development”:

We use cross-country data and instrumental variables widely used in the literature to show that (i) institutions (such as property rights and the rule of law) do not explain industrialization and (ii) agrarian countries and industrial countries have entirely different determinants for income levels.

In particular, geography, rather than institutions, explains the income differences among agrarian countries, while institutions appear to matter only for income variations in industrial economies.  Moreover, we find it is the stage of economic development (or the absence/presence of industrialization) that explains a country’s quality of institutions rather than vice versa.

The finding that institutions do not explain industrialization but are instead explained by industrialization lends support to the well-received view among prominent economic historians — that institutional changes in 17th and 18th century England did not cause the Industrial Revolution.

I am reminded of a puzzle which I think was first posed by Jeff Sachs.  Go back to 1960 and choose any measure of institutional quality you want.  Then see how well it predicts cross-national growth since then.  And that is doing the exercise knowing how the answer comes out!

The Supply Curve

by on January 23, 2015 at 7:25 am in Economics, Education | Permalink

Here is our video introducing the supply curve from our principles of micro-economics course at MRUniversity. Supply, Demand and Equilibrium are available now. Next week, elasticity!

Read the recent testimony of Robert E. Hall (pdf):

Most of the decline in participation occurred among teenagers and young adults. The fi nding that these e ffects tend to be larger in more prosperous families points strongly away from much of a role for rising influence of benefi t programs, because these programs, especially food stamps, are only available to families with incomes well below the median.
So what is going on here?  Could it be “culture”?  Hall cites, suggestively, time use surveys showing that sleep and personal consumption of video are up strongly.

This is just published in the Journal of Development Economics, from Chris Bidner and Mukesh Eswaran, and the title is “A Gender-Based Theory of the Origin of the Caste System of India”:

We propose a theory of the origins of India’s caste system by explicitly recognizing the productivity of women in complementing their husbands’ occupation-specific skill. The theory explains the core features of the caste system: its hereditary and hierarchical nature, and its insistence on endogamy (marriage only within castes). Endogamy is embraced by a group to minimize an externality that arises when group members marry outsiders. We demonstrate why the caste system embodies gender asymmetries in punishments for violations of endogamy and tolerates hypergamy (marrying up) more than hypogamy (marrying down). Our model also speaks to other aspects of caste, such as commensality restrictions and arranged/child marriages. We suggest that India’s caste system is so unique because the Brahmins sought to preserve and orally transmit the Hindu scriptures for over a millennium with no script. We show that economic considerations were of utmost importance in the emergence of the caste system.

There are ungated versions of the paper here.  Here are earlier MR posts on the Indian caste system.  I think I am not enough of a rational choice theorist to believe in any explanation of this sort, still it is sometimes better to try and fail than never to try at all…

The pointer to this paper is from Michael Clemens.