Month: August 2003

James K. Galbraith (son of John K.) has a strange review of William Greider’s The Soul of Capitalism in today’s Washington Post. He doesn’t say much about Greider’s book but does offer the following:

More deeply, we may question the book’s premise. Has the United States really solved the scarcity problem? That may have been more true five decades ago when a tract called The Affluent Society first made the case. Then, the United States was the world’s dominant industrial power. Today, our material abundance rests on fragile strands: our military reach, the willingness of the world to export cheap goods to us and to lend us the means to pay for them.

In the past 50 years real GDP per-capita has almost tripled (and this doesn’t account for improvements in the quality of many goods and services) and yet it may have been more true 50 years ago that the scarcity problem was solved?!! This is taking family fealty too far. The explanations for our fragile abundance are not too convincing either. Put aside the fact that the US is less dependent on trade than most other industrial nations. More interesting is that Galbraith thinks that the hundreds of billions of dollars we are spending on military adventures in Iraq, Afghanistan and elsewhere are a net positive for the economy. Why? Later he suggests that the Iraq war is about a “tenacious drive for oil.” Where then is the oil dividend? Has Galbraith filled up at the pump recently? In truth, Empire rarely pays and whatever the political case for war it will never turn a profit.

Having siblings costs you money over the course of a lifetime, just ask Ohio State sociologist Lisa Keister.

How much? Holding a variety of relevant factors constant, individuals with one sibling have an average net worth of $62,000. If you have another sibling, it drops to $49,000, then to $40,000, then to $24,000. Seven or more siblings, you have on average net worth of $6,000. Keister suggests, consistent with the research of Gary Becker, that parents invest less in each child when they have more children.

Keister herself has three brothers. See this summary of the research.

I am surprised that the effect from one child to two, or from two to three, is so small. And how much stems from a change in parental investments? Some fraction of the parents with more kids did not expect the pregnancies but rather made planning mistakes. If you think that planning/execution capabilities are carried in the genes, you would expect the offspring to be worth less for genetic reasons. So the Becker effect may be weak rather than strong, at least for the first few children.

Keister’s research also argues that much of the black-white wealth gap is due to the lesser willingness of African-Americans to put their money into stocks and mutual funds. It has long been a puzzle to economists (see here for one account) why individuals do not invest more money in the stock market, given that American stocks have outperformed bonds by significant margins over all previous twenty to thirty time horizons. Keister’s research both deepens the puzzle and hints at the relevance of psychology and context for understanding investment decisions.

The Economist has a good write-up on the work of experimental economist John List. As you may know, an endowment effect arises when you value something more, simply because you own it. In the context of laboratory experiments, often people will value a coffee mug more, much more (say five times more), once someone gives them the mug as theirs. In contrast, economic theory suggests that your willingness to pay for the mug should only be slightly less than your willingness to give up the mug for money (willingness to be paid). Here is a piece by recent Nobel Laureate Daniel Kahneman on the same topic.

List had the ingenious idea to see which traders were most subject to this ownership bias. So he took people who traded sporting cards and gave them other sporting memorabilia. The key result is this: the more real world trading experience a person had, the weaker the ownership or endowment effect. Professional dealers hardly seemed to be biased at all. The lesson is simple: asset markets work well when traders have the necessary experience. List also showed that sellers learn how to trade properly, without much of a bias, more rapidly than buyers do, which may explain why neophyte buyers get taken advantage of in stock markets, and why upward-moving bubbles may start. (Researchers have found that other distinctions may matter as well, you may value the mug more if you won it in a tough competition, as opposed to receiving it as a gift.)

Al Roth has a good general site on experimental economics, as does Vernon Smith’s ICES group, who are colleagues of ours at George Mason.

Iain Murray reports on the new London five pound fee (about eight dollars, and enforced by a penalty), charged to each car entering central London. It turns out the fee has been set too high, and traffic has fallen by more than the projected fifteen percent. Nor does the fee appear to be maximizing revenue. Mayor Livingstone wants to continue the high fee, however, because he likes the environmental effects of much lower traffic, despite a serious hit to London retail sales.

By the way, over 100,000 people are refusing to pay their penalty notices.

Addendum: Transportblog.com, an excellent source, offers some follow-up and commentary.

Go to www.nationmaster.com, an excellent source of data across the nations, on many different topics. The pointer is from www.crookedtimber.org, which also pulls out a list of countries where you are most likely to die before reaching forty years of age. The first thirty-four are all in Africa, then comes Haiti, then Madagascar.

If you look at what different central bankers earn, Alan Greenspan is way down on the list with his $172,000 a year. Is the Finnish central banker really worth more money?

The deeper question is whether we need to pay American central bankers more. How many of you have heard of Matti Vanhala? Well, he is the Finnish central banker. Greenspan earns a greater fame (and power) return. The head of the Hong Kong central bank makes over a million dollars a year. High public sector salaries are useful for limiting corruption, but this is not an obvious danger in the case of the American Fed. The head of the New York Fed makes $315,000, almost twice what Greenspan does, but how many of you could produce the name of Bill McDonough at the drop of a hat?

What does it mean to have property rights and prices in the virtual world of computer games? Did you know that you can buy a “virtual sword” on ebay? Did you know that the male avatars sell for more than the female avatars, despite having the same capabilities? What are virtual economies all about? Read this article, fascinating but sometimes incoherent as well, for a take on these new developments.

…is spent on the last year of human life. Read this interesting paper by Charles Jones of Berkeley, who tries to explain why health care expenditures now account for 14 percent of gdp.