Month: February 2004

Should we raise taxes?

Martin Feldstein says no. Brad DeLong says yes, at least once the economy recovers further. Alex Tabarrok says maybe, if we can cut the right deal. I would say that taxes, real taxes, already have been raised, the Bush Administration just hasn’t admitted it yet. Milton Friedman has long insisted that the level of government spending is the best measure of what government is taking from the economy.

Addendum: Co-blogger Alex agrees, read his very nice statement of the argument.

Kidney swaps

Your spouse is dying of kidney disease. You want to give her one of your kidneys but tests show that it is incompatible with her immune system. Utter anguish and frustration. Is there anything that you can do? Today the answer is yes. Transplant centers are now helping to arrange kidney swaps. You give to the spouse of another donor who gives to your spouse. Pareto would be proud. Even a few three-way swaps have been conducted.

But why stop at three? What about an n-way swap? Let’s add in the possibility of an exchange that raises your spouse on the queue for a cadaveric kidney. And let us also recognize that even if your kidney is compatible with your spouse’s there may be a better match. Is there an allocation system that makes all donors and spouses better off (or at least no worse off) and that maximizes the number of beneficial swaps? In an important paper (Warning! Very technical. Requires NBER subscription.) Alvin Roth and co-authors describe just such a mechanism and show that it could save many lives. Who says efficiency is a pedestrian virtue?

See here for more on how to alleviate the shortage of transplant organs.

The Peter Principle

Remember the Peter Principle? It suggested that we would all be promoted to a level where we are incompetent.

Economist Ed Lazear asks whether we might expect such a result from profit-maximizing businesses. His article, “The Peter Principle: A Theory of Decline,” appears in the latest Journal of Political Economy.

Here is the abstract:

Some have observed that individuals perform worse after being promoted. The Peter principle, which states that people are promoted to their level of incompetence, suggests that something is fundamentally misaligned in the promotion process. This view is unnecessary and inconsistent with the data. Below, it is argued that ability appears lower after promotion purely as a statistical matter. Being promoted is evidence that a standard has been met. Regression to the mean implies that future ability will be lower, on average. Firms optimally account for the regression bias in making promotion decisions, but the effect is never eliminated. Rather than evidence of a mistake, the Peter principle is a necessary consequence of any promotion rule. Furthermore, firms that take it into account appropriately adopt an optimal strategy. Usually, firms inflate the promotion criterion to offset the Peter principle effect, and the more important the transitory component is relative to total variation in ability, the larger the amount that the standard is inflated. The same logic applies to other situations. For example, it explains why movie sequels are worse than the original film on which they are based and why second visits to restaurants are less rewarding than the first.

In other words, firms know that you sometimes get lucky, and they set the promotion bar high on purpose. After your promotion you experience a “regression toward the mean”, and your observed performance declines in quality, relative to your promotion-winning triumphs. But on average the promotions are still deserved. In other words, the Peter Principle will appear to be true in a well-functioning organization, even when promotions are handed out rationally.

My take: Lazear offers a characteristically nice demonstration of a clever idea. Behavioral factors may skew promotions in less efficient directions, but they will not overturn the central argument. People often overweight recent observations, but of course worker skill levels change through time. It is not obviously inappropriate to weight some observations more than others. Furthermore if people overvalue first impressions as well, the two behavioral effects may cancel to some degree.

Here is an earlier version of Lazear’s paper. Thanks to Eric Crampton for the pointer.

Economists versus spam

The short history of society’s fight against spam–usually defined as unwanted commercial e-mail–may be about to pass into a significant third phase. In the first phase, it was geeks who led the resistance, using techie weapons such as e-mail filters with fancy Bayesian mathematics. In the second phase, politicians joined in, eager to get their names on to new legislation–in America, for instance, 36 states and Congress have passed laws of some sort against spam. Now, in the third phase, the economists are taking over.

The market opening for the economists is obvious. Both the geeks and the politicians are widely seen to have failed miserably.

Great writing from The Economist but it is not clear that we have an answer that will be accepted. The obvious solution is to price email. Even at a penny per email most spam would become uneconomic. The Economist argues, however, that internet culture is against pricing and micropayments are more expensive than they are worth. They recommend instead several groups who are creating clubs of approved bulk emailers. The emailers who join are guaranteed passage of their email past spam filters – club members either pay to get on the list or are fined if recipients complain. Unfortunately, these ideas only work indirectly by making the job of spam filters easier. If the clubs take off, a positive tipping point may be reached but that is a big if and in the meantime the plan assures that for many people spam will get worse before it gets better.

This economist has another idea. The problem of spam is really a negative externality generated by the people who actually buy the products spammers offer. Thus, I suggest sending out fake spam and prominently posting the names of all those who respond….. What product to advertise in the fake spam? I suggest, “length enhancers.”

Insourcing: the current trend

Michael Walden writes:

While outsourcing has captured current attention, it is not a new phenomenon. If the term is defined as jobs operated by U.S. companies in foreign countries, the current total is 10 million positions, or 7 percent of domestic U.S. employment. Further, there’s been an upward trend in the number of outsourced jobs since the mid-1990s, when trade barriers were significantly reduced following the signing of the NAFTA and GATT agreements.

What is less well publicized and understood is that “insourcing” also occurs in our economy. Insourcing happens when foreign companies establish jobs in the United States.

The latest statistics show insourcing accounts for over 6.5 million jobs nationwide. Although this is less than the number of outsourced jobs, the gap has actually narrowed in the past quarter century. That is, there’s been a recent trend of foreign companies adding jobs in the U.S. faster than U.S companies have increased jobs in foreign countries….

The scorecard on job outsourcing versus job insourcing has actually moved in the favor of the U.S. in recent decades, and policy-makers must consider both when evaluating the worldwide movement of jobs.

Thanks to Daniel Drezner for the link, read his accompanying discussion of the Europeans are dealing with outsourcing.

If pigs had wings

The Disney board just turned down the current Comcast offer. Of course Comcast is free to come back with better terms. The first bid was considered no more than an opening salvo in a longer bidding battle. Disney already has hinted it would consider a better offer.

Now if a better Comcast offer for Disney made sense, what would this imply?

1. It would mean that cable operators are correct in wishing for an earlier release of films to television. DVD releases would end up speeded up as well. Moviegoing would become more of a social event, rather than the only means of seeing a given film. Date movies and large screen spectaculars probably would become more popular in the theater, as they would offer a more unique product. Moviegoing as a whole might well decline in popularity. Large-screen televisions would increase in appeal.

The big gainers would be the cable companies, who would capture a share of the revenue currently going to DVDs. The big losers would be Hollywood and, to a lesser extent, companies such as Wal-Mart and Best Buy, which sell large numbers of low-priced DVDs (they would make back some money on TV sales). In part the offer is an attempt to yank DVD revenue away from movie producers and put it in the hands of a company that pipes movies into your home. The age of video on demand would finally arrive, Comcast is known for its strong promotion of this concept.

2. A takeover would signal a final end to the privileged position of the major networks. Don’t forget that Disney owns ABC, so the biggest cable company would now own a major network. Network programming would end up driven by the demands of cable television. Cable and satellite TV already account for the bulk of American viewing; only 14 percent of the American viewing public does not have either cable or satellite TV. In addition local news would continue to decline in importance and TV will become racier, given the looser role of the FCC in supervising cable content.

3. A takeover would later be seen as a turning point for the convergence of all media with the Internet. Cable supplies most of the bandwidth, and the ascendancy of cable companies will enable your TV, Internet connection, and other electronic devices to talk to each other. With a cable company leading the charge, and controlling and owning the relevant content, it could more easily internalize these benefits and charge you for the integration.

But reread the first word of the title of this post, “If.” Here is Rudyard Kipling’s poem If.

Can’t all this happen without Comcast buying Disney? If these outcomes are value-maximizing won’t arms-length transacting get us to the same place? You can bet on this question with a phone call to your broker. But before making your bet, read about this attempt to use stem cell technologies to grow pig wings.

Should you buy Latin American art?

A recent study by Sebastian Edwards suggests that Latin American art, in the latter quarter of the twentieth century, brought supra-normal returns with low risk relative to the market portfolio. Under one measure, the mean annual return was a solid nine percent. Here is the abstract:

In this paper I use a large data set to analyze two aspects of the Latin American arts: (1) the nature of artistic creative process, and (2) Latin American art as an investment. I use data on auctions to understand the relation between artists’ age and the value of their work. The analysis on creativity suggests that Latin American artists have followed very different patterns from that followed by U.S. artists. There is strong evidence suggesting that American artists born after 1920 did their best work at an earlier age than their older colleagues; exactly the opposite is true for the case of Latin America. Indeed, the results reported in this paper suggest that Latin American artists born after 1920 did their best work at a significantly older age than their colleagues from earlier cohorts. The analysis of art as an investment is based on the estimation of hedonic price indexes, and indicates that Latin American art has had a relatively high rate of return indeed much higher than that of other type of paintings. The results also indicate that returns on Latin American art have a very low degree of correlation that is, a very low beta relative to an international portfolio comprised of equities. This means that adding Latin American art will lower the overall risk of an international portfolio.

How can this be?: Most national art markets are driven by collectors from that country or region. The high investment returns on Latin painters suggest that the wealth of the wealthy, in Latin America, grew faster than expected for several decades. At the same time, some Latin painters, such as Frida Kahlo, attracted sudden and unexpected interest from North American buyers. So two particular idiosyncratic factors drove these superior returns. Mexican art is a great avocation of mine, but I cannot recommend it as a means of reducing your future portfolio risk. Buy what you love, and consider it consumption expenditure.

Cell phone numbers for sale

“The New phone number rules that allow you to keep your phone number when you switch carriers has given rise to phone nascent number property rights. On E-bay you can bid on 867-5309 (made famous by Tommy Tutone’s Jenny I got your number). As I write this the bid is over $8000 dollars with seven days to go. What other numbers are famous or valuable? Will we see a land rush like the internet names?”

From Slashdot, thanks to Noah Yetter for the pointer. And when I checked, the bid for the number was up to $56,000. Here are some classified ads selling cell numbers. I’d like CTA-102 in my number, $50 to anyone who can deliver it.

My President

Under the Federalists, the US government imprisoned journalists, exiled political opponents, increased taxes, centralized power and pushed for war (see here). The American experiment in liberty was failing. Hope rested only with the great philosopher-politician, Thomas Jefferson. By the narrowest of margins, Jefferson was elected President and the Revolution of 1800 saved the American revolution.


Musgrave and Buchanan

David Warsh writes about the pioneering public-finance economist Richard Musgrave and a series of debates he had with fellow Wicksellian, yet rival, public-choice pioneer James Buchanan.

In 1998, Hans-Werner Sinn, the leading economist at the University of Munich, invited Musgrave and his arch-rival in the study of political economy, James Buchanan, father of the relentlessly skeptical study of “public choice,” to a carefully organized five-day debate.

The scholars took turns stating their positions. They responded to one another. They took questions from the floor. Then they restated their views more narrowly. The results were published in 1999 as Public Finance and Public Choice: Two Contrasting Visions of the State. Their debate was a textbook example of what psychologist Daniel Kahneman recently called “adversarial collaboration.” So useful are both lenses for different purposes that it is not easy to form an opinion about who “won.”

It is, however, very likely that the lectures are the most important delivered at the University of Munich since the great Max Weber gave his farewell addresses on politics and science there in 1918. Long after the results of the next election have become old news – the next 40 years’ elections – the exchange between Musgrave and Buchanan will still be fresh.

Questions of the day

You say the rich do not pay enough taxes. In 1979 the top 1 percent of earners paid 19.75 percent of income taxes. Today they pay 36.3 percent. How much is enough?

From George Will’s excellent “The 1st 28 Questions for Kerry.” The entire article makes for compelling reading.

How about this one?

You say the federal government is not spending enough on education. President Bush has increased education spending 48 percent. How much is enough?

These questions are an object lesson in the virtues of divided government.

Addendum: For the tax data, here is a relevant link, thanks to Paul Barriere.

Progressive speeding fines?

One of Finland’s richest men has been fined a record 170,000 Euros ($217,000) for speeding through the center of the capital, police said.

Jussi Salonoja, 27, heir to his family’s sausage business, was caught driving 50 mph in a 25 mph zone last week.

Finnish traffic fines are pegged to the offender’s income. According to tax data, Salonoja’s 2002 earnings were close to 7 million Euros.

Imagine that kind of system here. It could be scaled way down, say $3,000 for a rich person, $300 for a middle-income person and $30 for a poor person for each violation involving speeding, running a red light, blocking an intersection, ignoring a crosswalk or parking illegally in a curb lane during rush hour. Think that might bring any more compliance and downtown gridlock relief?

As reported by Dr. Gridlock, who writes for The Washington Post on traffic problems.

Legality and constitutionality surely do not favor this idea in the U.S., but how about efficiency? I say no. Richer individuals on average have higher valuations of time. If a billionaire wants to park illegally, there is some chance he is in the process of cutting a big deal. Don’t levy a special fine on him. “Rich people speeding” is not a crisis in need of a particular solution, general reductions in the speeding rate will do, which suggests upping a general fine for speeding. Equal dollar fines are consistent with the rule of law, and progressive fines would give the cops a special incentive to go after Bill Gates. Gates in turn would have special incentive to hire a chauffeur. True, efficiency is unlikely to suggest strictly equal dollar fines, but if the choice is equal dollar fines or discretion I will prefer the former.

The strangeness that is our universe

Over the weekend I’ve been gobbling up Brian Greene’s The Fabric of the Cosmos. I still don’t understand strings, branes, and how the known universe might be a projected hologram, but this book gets me further than any of the other popular science treatments I know. The author favors string theory and the idea of extra, hidden dimensions. He also discusses how we are on the verge of testing some of these exotic ideas. Recommended, especially if you find these ideas intriguing but have a hard time grasping them in intuitive terms.

Coatless Girl

In his stump speech, John Edwards is fond of empathizing with the plight of a 10-year old girl “somewhere in America,” who goes to bed “praying that tomorrow will not be as cold as today, because she doesn’t have the coat to keep her warm.”

Yet, as John Tierney points out, “clothing has become so cheap and plentiful (partly because of textile imports, which Mr. Edwards has proposed to limit) that there is a glut of second-hand clothing, and consequently most clothing donated to charity is shipped abroad. The second-hand children’s coats that remain in America typically sell for about $5 in thrift shops.” (emphasis added)

A cinematic renaissance

Two years ago, every one of Phnom Penh’s 33 cinemas lay disused. In the 1960s, Cambodian-made films were famous across Asia, and movie-going was a national obsession. But cinema culture was one of the many victims of the genocidal Khmer Rouge of 1975-79 and the two decades of civil war and Vietnamese occupation that followed.

N.B.: Hollywood is not the only reason why cinema is struggling in many locales.

Today, however, Phnom Penh is in the midst of a cinematic boom. Theaters are opening or reopening across the country. The last eighteen months have brought nine new cinemas. A ticket costs about a dollar, the same as per capita daily income.

And what is the most popular genre, by far? Horror films.

The quotation is from “Phnom Penh’s New Rage,” The Financial Times, Saturday, February 14. Here is an account from The Cambodian Times.

Cambodia, of course, provided one of the more extreme examples of government support for the arts. Prince Sihanouk produced, directed, and wrote the musical scores for twenty-eight movies. He was often scriptwriter and star as well. So if the print says “Director’s Cut,” I’m sure they mean it.