Month: November 2003

Ways in which movies assume away, or do not assume away, scarcity

Here is a list of twenty ways in which movies alter our usual presumptions about scarcity.

Here is one of my favorites:

6. The ventilation system of any building is the perfect hiding place. Nobody will ever think of looking for you in there and you can travel to any other part of the building undetected.

The entire list is amusing, courtesy of the ever-inventive

Or how about this one:

8. Should you wish to pass yourself off as a German officer, it will not be necessary to learn to speak German. Simply speaking English with a German accent will do.


What does the mutual fund scandal cost?

The mutual fund scandals have received significant publicity in recent times, but how much are they really costing us? The current (November 24th) issue of Fortune offers a useful article on the topic (subscription required):

According to Stanford University business professor Eric Zitzewitz, market timing costs long-term shareholders $5 billion a year, and late trading costs $400 million per year. These losses may add up to 1% or less in lost returns in a given year, he says. That equates to about $10 for each $1,000 invested in a fund.

Of course, in economic terms, the real social cost is given by how much this limits or distorts investment, rather than by the size of the transfer away from investors. The magnitude of this distortion is harder to judge, but investors have been moving out of the funds, and many of them cite the scandals as a factor.

As a very rough exercise, compare this change in returns to the Bush tax cut on dividends. The previous top rate on dividends had ranged up to almost 40 percent, now it is 15 percent. So, tricky questions of incidence aside, you get to keep 25 percent or so extra of your gross dividend return. If the dividend rate on the stock is, say, 4 percent, you gain about one percent on your investment asset value, each year, from the tax cut. Which may be just about how much you are losing back to the mutual funds.

Some work on Eric Zitzewitz’s home page suggests that market timing can costs investors as much as two percent a year (this seems high to me, plus it is odd that Fortune then cites him as saying one percent). Yet another source, taken from his home page, cites a loss of 0.6 basis points on domestic funds, and a startling 5 basis points on international funds.

Plus you must pay expense ratios, which average at least 1.5% a year. Upfront sales commissions, a one-time fee, average more than 4.5% and sometimes run as high as eight percent of asset value or more.

Now mutual funds do not comprise the entirety of investment, by any means, but under this estimate the costs of mutual fund fees and chicanery, on a given investment, could be much more than the benefit reaped from the Bush tax cut.

There are two ways to look at this. First, all these fees may reflect marginal costs within a rational equilbrium. In that case the tax cut will provide a modicum of relief and encouragement.

Second, these fees reflect investor insensitivity to their true returns. This would suggest that the dividend tax cut, in the broader scheme of things, hasn’t done much to stimulate additional investment. I’ll guess-timate that this latter option is more relevant than the former.

The new chief economist at the World Bank

It is Francois Bourguignon. His work on inequality is highly regarded, but how is his policy sense? He recently noted the following:

It’s true that the Bank has focused on poverty and did not insist so much and as explicitly on inequality. I believe we must give more space to the problem of inequality and income distribution in general.

When it comes to growth he gives a “yes but” answer:

Of course, growth is critical to poverty reduction, but we need to analyze more closely who actually benefits from growth, and from the policies, programs and projects undertaken to reduce poverty. Will one or another group, or class, benefit more than others? Are our strategies reducing or increasing inequality? Are they pro-poor, benefiting everybody in the same proportion or benefiting relatively more those who are already better off?

Here is an interview with Bourguignon, including a brief biography, courtesy of

My take: Go for growth, and worry about short-term inequalities only insofar as they pose political constraints. Getting growth is hard enough, and concern about inequality often gets twisted to favor special interests and block reforms. We should never care if a policy is “benefiting everybody in the same proportion”, and of course it never will do so, no matter how good an idea.

Man vs machine, game II

Gary Kasparov (the human!) commits a gross blunder, hanging a pawn, in an even position. The computer pounced and won. will be one source of information, try also

The bottom line: Two games left in the match, and I hope you knew to bet on the machine. At this point you have to conclude that Gary, while the best human chess player in the world, is not the best guy to put up against a computer. Too much emotional baggage, it would appear.

What is love?

When you first fall in love, you are not experiencing an emotion, but a motivation or drive, new brain scanning studies have shown.

The early stages of a romantic relationship spark activity in dopamine-rich brain regions associated with motivation and reward. The more intense the relationship is, the greater the activity.

Here is the best part, or I suppose I should say the worst part:

Early on in a relationship, the images showed that the brain seems to be very focused on planning and pursuit of pleasurable reward, says Fisher, mediated by regions called the right caudate nucleus and right ventral tegmentum. The same regions become active when a person enjoys the pleasure of eating chocolate, she adds…There are also patterns that resemble aspects of obsessive compulsive disorder.

Here is the story from New Scientist, here is related research on the links between love and OCD. The research also suggests gender differences; male love has more to do with lust than does female love.

Deficit Disorder to get Attention?

Bruce Bartlett predicts that Howard Dean will run as a fiscal conservative on the Robert Rubin model. He quotes from Rubin’s new book

“The view over the next few years that fiscal discipline was being restored contributed to lower interest rates and increased confidence, and that led to more spending and investment, which in turn led to job creation, lower unemployment rates and increased productivity.”

and writes:

There I think you have the Democrats’ 2004 economic playbook. We are going to hear it over and over again. Howard Dean is already preparing to run as a fiscal conservative. With Rubin at his side, once he gets the Democratic nomination, he is going to get support from some of those ordinarily expected to support the Republican candidate.

The fact that Dean, the presumptive Democratic nominee, plans to forego matching funds means he will have to go to Wall Street and the business community for campaign contributions, which will reinforce the need for him to make fiscal responsibility a key issue. With his left-wing base secured by Iraq and Bush hatred, they will say nothing critical of Dean’s move to the right on fiscal policy.

The Colombian paradox

There is no logical paradox here, just a series of facts that I, upon reflection, find shocking.

Read this opening sentence from yesterday’s New York Times:

This strategically situated Andean country, with Latin America’s fifth-largest economy, had for years posted solid economic growth while controlling its foreign debt.

But not all is well in this economic paradise:

…heavy government spending in recent years, some of it for a military buildup encouraged by American officials, has led to serious economic problems that are worrying Wall Street and Colombia’s president, Álvaro Uribe. The economic difficulties, particularly a burdensome public debt, threaten one of Latin America’s few economic bright spots.

I don’t mean this as Times-bashing (a popular sport in the blogosphere), the description offered in this article in consistent with other sources I have read. Oddly, Colombia has flourished economically in spite of some minor difficulties in its recent past and present, namely the following:

1. “A 40-year insurgent campaign to overthrow the Colombian Government escalated during the 1990s.” From a CIA Factbook.

2. “…large swaths of the countryside are under guerrilla influence”, same source and link.

3. Colombia is the kidnapping capital of the world. I wrote the following in late October:

About 90 percent of all kidnappings take place in the ten riskiest countries…with Colombia a clear leader, reporting 10 kidnappings a day, more than half of the total. The police in Colombia admit that 1500 kidnapped hostages are held currently, the true number is likely much higher. Kidnapping is estimated to be a $200 million tax-free business in Colombia.

4. The Lonely Planet Guide, an adventurous source, hardly a bible for the Club Med set, describes the country as “off limits to all but the most foolhardy travelers.”

Get the picture? Yes, I am puzzled at how resilient the Colombian economy has been. And the reported statistics presumably do not include the illegal drug trade, and thus they underestimate how well the country has been doing.

Why don’t we have congestion pricing for roads?

Congestion pricing would limit traffic jams and increase efficiency, by virtually all standard economic accounts. So why is it such a political non-starter? After all, drivers would be the main beneficiaries.

I think Will Baude nails a good part of the answer. People don’t want to give government another revenue source, and they don’t trust government to give them the money back in the form of either a tax rebate or better services. I feel the same way. Sad, isn’t it?

Here is how Will puts it:

This [congestion pricing] is, in essence, like saying to all commuters “hey, why don’t you guys all subsidize the budget problem? Oh, but as a consolation for your lost money, we’ll solve your congestion problem.” Now, congestion is problematic, but so is losing money, as a group. Commuters are probably right to oppose congestion taxes, so long as there’s any serious risk of the money being used to “fix the state’s budget problems.”

Of course, mistrust of government is not the only problem. People seem to think that traveling on the road is a God-given right, and that a toll is a greater infringement of that right than is a traffic jam. But I can’t imagine this mental attitude lasting forever, just try a trip around the Capital Beltway at 5 p.m. on a rainy day.

You can’t always trust the dictionary

The 11th edition of Merriam-Webster’s Collegiate Dictionary, published in June, defines a “McJob” as “a low-paying job that requires little skill and provides little opportunity for advancement.”

Merriam-Webster’s announced yesterday, much to the chagrin of McDonald’s, that they would not revise this definition.

Here is a more balanced perspective:

McDonald’s is paying considerably higher than the minimum wage in most regions, and many franchises are now offering health and dental benefits. The average manager in a company-owned McDonald’s starts in the mid 30s. As for dead-end jobs, with one-eighth of the American work force having worked for a McDonald’s at some point, the company has rightly been called America’s best job-training program. Young people are taught cleanliness, punctuality, and basic business skills. Over half of the company’s middle and senior management started as hourly workers.

My take: Right now 12 million people work in the restaurant industry, many of them in the fast food sector. So many people work for McDonald’s because the company, adjusting for all relevant factors, offers them a higher wage than is available elsewhere.

The economic behavior of children

Yes, there is a whole web site about the economic behavior of children.

Here is one of the listed abstracts:

We study the development of bargaining behavior in children age 7 through 18, using ultimatum and dictator games. We find bargaining behavior changes substantially with age and that most of this change appears to be related to changes in preferences for fairness, rather than bargaining ability. Younger children make smaller dictator proposals than older children, and they also make and accept smaller ultimatum proposals. Even young children seem to be quite strategic in their behavior. Boys claim to be more aggressive bargainers than girls do, but they are not. We also find a relative height effect: within each experimental group, taller children make much smaller dictator offers. Since gender and height are correlated, height alone explains part of the gender effects. We argue that the existence of systematic differences in bargaining behavior across age supports the argument that culture is a determinant of economic behavior, and suggests that people acquire this culture during childhood. We argue that the height differences indicate that forces other than culture are also important.

In other words, we learn our sense of fairness, and unfairness, over time. And boys aren’t so tough after all, although they pretend to be. Here is the original paper. And thanks to Ben Muse for the pointer.

Another piece listed on the web site has the rather sinister title: “Economic Experiments You Can Perform at Home On Your Children”. Scary, no? They could have at least referred to experiments “with” your children.

And while we are on the topic, a hearty congratulations to Eugene Volokh, legal scholar and blogger extraordinaire, new father of a splendid baby boy, yes the link is a lovely photo.

This growth rate deserves publicity too

Confounding President Bush’s pledges to rein in government growth, federal discretionary spending expanded by 12.5 percent in the fiscal year that ended Sept. 30, capping a two-year bulge that saw the government grow by more than 27 percent, according to preliminary spending figures from congressional budget panels.

And no, it is not just the war against terrorism:

Much of the increase was driven by war in Afghanistan and Iraq, as well as homeland security spending after the attacks of Sept. 11, 2001. But spending has risen on domestic programs such as transportation and agriculture, as well. Total federal spending — including non-discretionary entitlement programs such as Social Security, Medicare and Medicaid — reached $2.16 trillion in 2003, a 7.3 percent boost, according to the Congressional Budget Office.

Here is the full and sad story. You would think that with a (quarterly) growth rate of 7.2 percent, the rate of growth of major spending categories would be lower than that figure, but alas not.

Henny Youngman once said:

“What good is happiness? It can’t buy money.”

Here is an insightful review of Gregg Easterbrook’s new The Progress Paradox: How Life Gets Better While People Feel Worse. Why is it that we are wealthier than ever before, but not much happier?

The reviewer, drawing on Easterbrook’s text, suggests a few answers. Bad news sells, and progress always brings new problems. People will always envy their neighbors and compare their lot in relative terms. The bottom line?:

“We are built to be effective animals, not happy ones,” evolutionary psychologist Robert Wright has written.

I’ll blog more about this book when my copy arrives.

A monocausal theory of the aggregate divorce rate?

The divorce rate is almost perfectly predictable from the proportion of men to women in the population. In 1920, when the annual divorce rate was eight per one thousand married women, there were 104 males for every female. By 1980 the tables had turned, and there were only ninety-five males for every one hundred females, and the divorce rate had risen to twenty-three per one thousand married women. The sex ratio has remained virtually unchanged for the past thirty years and is paralleled by a steadily high divorce rate. The correlation betwee the population sex ratio (or number of males per one hundred females) and the divorce rate at four-year intervals between 1896 and 1992 was -.91, indicating that changes in the number of men relative to women accounts for 83 percent of the changes in divorce rate.

From Nigel Barber’s The Science of Romance who, on this claim, cites his own Why Parents Matter.

Can this be true? If it is such a neat fact, why have I never heard it before?

A good bit of web searching yielded surprisingly little enlightenment. One Amazon reviewer writes:

On page 150, Barber refers to a 1983 book purporting that the increasing divorce rate was due to a shortage of marriagable men. That was true in 1983. Barber fails to note that by 1987 the marriageable male/female ratio reversed, and we’re now in a “women shortage” era.

Point well taken, we should consider the sex ratio of marriageable people, not the overall sex ratio. More significantly, the general rate of American divorce is rising over time. The sex ratio has been moving in favor of more women as well, at least until recently, perhaps because survival out of childhood depends less on parental discretionary investments, noting that many parents prefer boys to girls. So the correlation may be spurious, rather than representing causality.

The fact is intriguing, but so far it is not a good monocausal theory of the divorce rate.