Month: March 2004

Economists commonly cite driving on the right (left) hand side of the road as an example of a beneficial social convention. The equilibrium is arbitrary, provided that everyone agrees to drive on the proper side.

I was surprised to learn how recently some of these road conventions have solidified. Consider the following:

1. Seventeen percent of the world’s area drives on the left. This amounts to about thirty-two percent of the population, it includes India, Indonesia, Pakistan, Japan and Bangladesh.

2. Originally Quebec and Ontario drove on the right and the rest of Canada on the left. The prairie provinces, when settled, drove on the right but British Columbia did not. Canada started a move toward universal right-side driving in the 1920s. Newfoundland and Labrador were the laggards, not switching until 1947, shortly before they joined the confederation.

3. A 1903 Baedeker Guide wrote the following:”The rule of the road varies in different parts of Italy. In Rome and its vicinity the rule is the same as in England i.e. keep to the left in meeting, to the right in overtaking vehicles. In most other districts, however, this rule is reversed.”

4. Most of Austria drove on the left until the Anschluss of 1938. Hitler also made Czechslovakia and Hungary drive on the right.

5. The Falkland Islands drove on the right during the brief Argentinian occupation of 1982.

6. Myanmar (Burma) switched to right-side driving as part of a move to consciously repudiate its British colonial heritage. Panama changed in 1943, largely because the Pan American Highway opened up.

7. Recent switches to the right include China, Taiwan, and the Koreas (1946), Belize (1961), Ethiopia (1964), Iceland (1968), Nigeria (1972), Ghana (1974), and South Yemen (1977).

8. Island nations are less likely to switch to right-side driving, or more likely to switch later.

From Right Hand, Left Hand: The Origins of Asymmetry in Brains, Bodies, Atoms, and Cultures, by Chris McManus.

My take: Switching is easier and more common than you might have thought. In the meantime, I’m still waiting for England, New Zealand, and Australia to adopt consistent rules as to who has the right-of-way when entering a roundabout.

In the U.S. being on time is the rule. In other places, such as Latin America punctuality is rare. Why? Social psychologists have ascribed the differences to deep cultural facts, religion, and “national personalities.” One theory, for example, has it that the changing of the seasons in more northern latitudes induces a greater respect for time – plant a little late or early and frost will wipe out your crop.

In Punctuality: A Cultural Trait as Equilibrium game theorists Kaushik Basu and Jorgen Weibull make a simple but important point. If I think you are going to be late then it’s costly for me to be on time so I will choose to be late. But if I choose to be late then it makes sense for you to choose to be late also. Indeed, if I think that you think that I might be late then I will be late! In other words, lateness is a Nash equilibrium of a game. Punctuality is also an equilibrium. If you are going to be on time it make sense for me to be on time also (especially if you can punish me for not being on time.) Which equilibrium is played can be as arbitrary as the forces that determine which side of the road we drive on. Basu and Weibull write:

A social scientist who neglects the strategic aspect may be tempted to believe that if two societies exhibit sharply different behaviors, then they must have innate differences, such as different preferences or different religious outlooks on life or different genes. What we have just seen is that none of this is necessary. Some of the ‘cultural’ differences that we observe across societies could simply be manifestations of different equilibria in otherwise identical societies.

If the theory is correct then it should be possible, with a one-time push, to change an entire people from tardy to punctual virtually overnight in much the same way that Sweden switched to driving on the right-hand side of the road (precisely at 5am, by the way, on Sunday morning, September 3, 1967).

The theory is currently being tested in Ecuador, a country where, according to some estimates, habitual lateness costs 4.3 percent of GDP! Thus a national campaign is aiming to change the equilibrium.

Hundreds of institutions ranging from local councils to airlines have signed up to a promise to keep to time. Stragglers are barred from entering meetings. Hotel-style door signs have appeared in offices and schools. On one side, they say “Come in: You’re on time” and on the other “Do not enter: the meeting began on time.” A local newspaper is publishing a daily list of public officials who turn up late to events.

In related news, physicists are now measuring time in attoseconds, one quintillionth (10E-18) of a second.

The nation’s low-cost carriers are profitable even as the venerable “legacy” airlines barely tread water. How can they make money while offering fares that are 40 to 70 percent lower? The reasons are many — cost of labor is a big one — but here are 10 major differences between the cheeky upstarts and the big boys.

The list runs as follows:

1. Low cost carriers generally serve cities of 1.3 million or greater.

2. Southwest has 84.6 employees per aircraft, United has 116.

3. JetBlue sells 2 percent of its tickets through travel agents, US Airways sells 61 percent through agents.

4. The low-cost carriers have more point-to-point flights. 40 percent of American passengers have connecting flights, it is only 10 percent for Southwest. Connecting passengers cost more money to serve.

5. Low-cost carriers generally avoid costly foreign flights.

6. A Delta captain earns $215,000 a year, an AirTran captain earns $135,000.

7. The low-cost airlines have cheaper pension plans.

8. Southwest, JetBlue, and AirTran have no downtown ticket offices. US Airways has 13.

9. US Airways pays its telephone reservation agents $21 an hour. JetBlue pays them $8.25 an hour and has them work from home, saving on office costs.

10. JetBlue flies one kind of plane, Delta flies 16 different kinds of aircraft.

Here is the full story. Obviously many of these cost savings can cut into long-run profitability, but that is how the low-cost airlines have penetrated the market.

If air genius Gary Leff offers commentary, I’ll write an addendum.

Addendum: Here’s Gary, he says “It’s the labor costs, stupid”.

Very quick response to Tyler and then we shall just have to wait and see. No need to state the obvious, of course growing life-expectancy is a good thing. But it’s an even better thing if you have planned for it and our government has not.

Alex remains worried about our future, but let us look more closely at his concerns. His biggest fear is our future demographic structure:

…the Bush policies are not the major problem. The major problem is that we are about to be hit by a tidal wave of old people (contra Tyler demographics are the problem not the solution).

Hey, I hope to be part of that wave, the problem will be if I am not!

Let’s redo Alex’s doctor example. In my version, the doctor suddenly tells Alex that he will live to the ripe old age of two hundred, most of those years in reasonable health. This is reason to celebrate, even though Alex would have to restructure his retirement plans. Something like this, albeit in less extreme form, is going on in America: a large baby boom cohort can be expected to live to older ages. Bravo, I say. Count up those extra years, including the implicit value of leisure, at their full economic value, and our “intergenerational accounts” will look much better. Note also that the elderly have a higher quality of life than ever before, for reasons ranging from cheap eye surgery to bypass operations to new drugs.

Two other issues:

First, contrary to what Alex suggests, “g>r” would solve the problem. Growing debt, which is a transfer, doesn’t change the fact that the intertemporal budget constraint has melted away, provided we can shift real resources into the present (if you’re not an economics nerd, the point would take too long to explain in non-technical language, read the link if you must).

Second, I am not convinced that Alex has put his money where his mouth is. He is conspicuously silent about whether he has gone short in bonds. Plus I bet he would have taken a tenured professorship, bought a house, and bought an internationally diversified portfolio anyway, I certainly did all of these and I am an optimist.

The bottom line? A growing population, combined with a bulge of old people, requires planning wisdom and creates some costly expenditure pressures. But overall longer lives are cause for rejoicing, not our economic doom. Love and time are what we are ultimately seeking to economize, and longer lives contribute toward both ends.

Tyler is not as pessimistic as I am (see my earlier posts here and here) regarding our long-term budget problems. Unfortunately, he should be. Consider Tyler’s most gut-level response:

The United States remains a strong and prosperous country. Our infrastructure, national culture of innovation, human capital, and economic dynamism are unparalleled in world history.

Of course. Who would deny this? The problem is that the budget projections of Kotlikoff et al. already take these factors into account. Their projections assume that the economy will continue to grow, they assume that a nuclear weapon will not go off in Washington, they assume that we will not become bogged down at increasing expense in the Middle East for the next 50 years etc.

A doctor tells a man that he has just 6 months to live. The man replies but doctor I’m only 25, I’m in great shape and I’ve never been seriously sick before. Yes, the doctor says that’s why I gave you 6 months.

Tyler’s next comment reveals a misunderstanding. He says, “The Bush fiscal policies, whatever their irresponsibilities, costs, and drawbacks, haven’t changed those core facts.” But the Bush policies are not the major problem. The major problem is that we are about to be hit by a tidal wave of old people (contra Tyler demographics are the problem not the solution). The baby boom generation, born beginning in 1946, will begin to retire in 2008 and as they do so the demands on social security and Medicare are going to explode. By 2030 there will be 18.2 million people in the United States 85 years of age and older! In 2000, the 65 years and older crowd made up 12.4 percent of the population. By 2030 they will be 19.4 percent of the population.

Critically, combine baby boomers with rising life-expectancy and declining fertility and we have that by 2030 there will be only 2 workers per retiree (down from 16.5 workers per retiree in 1950).

Comparing today’s US budget deficit with that of Brazil or any other country misses the point. It’s the present value calculation over the future that is important. Put simply: Kotlikoff is applying Milton Friedman’s permanent income hypothesis to government accounting. (Kotlikoff is to Stone as Friedman is to Keynes).

Tyler’s most technical point, that g may be greater than r, also misses the mark. If g is greater than r then we can continually roll over our debt and eventually grow our way out of it. But this calculation is only relevant for a fixed debt – the problem is that our debt is rising very rapidly. If the debt were to stand still we could pay it but it ain’t standing still.

Tyler challenges me to put my money where my mouth is. In fact, I have. First, I got a job as a tenured professor! Second, I borrowed a lot of money at the lowest interest rate I expect to see in my lifetime and bought housing. The key problem in the future is going to be inflation and rising tax rates so you want to borrow at a fixed rate and put your wealth in hard to tax assets (Tyler, art may be an even better investment! You can always take it with you over the border.) I also own an internationally diversified portfolio (yes, even some in Brazil).

No, I’m not yet stocking up on cans of spam. We could get lucky. Kotlikoff could be wrong. The obvious facts of demography make me think that he is right enough, however, to warrant taking serious actions now rather than later. But like Kotlikoff, I don’t think our political system is ready.