Month: March 2004

Robert Samuelson writes in today’s Washington Post (registration required) that China, though in many ways an abominable economic landscape is a lot like the US 100 years ago. He argues that while growth is a messy thing, there is hope for the future in China, and recent progress is encouraging. He notes (citing the World Bank as his source):

†¢ From 1978 to 2002, the average annual per-person income rose from $190 to $960. It’s probably now above $1,000. (The U.S. figure: about $36,000.)

†¢ Life expectancy increased from 61.7 years in 1970 to 71 in 2002.

†¢ Adult illiteracy fell from 37 percent in 1978 to less than 17 percent in 1999.

†¢ Infant mortality dropped from 41 per 1,000 live births in 1978 to 30 in 1999 (the U.S. rate: about seven).

As the election heats up, we’re going to hear a lot about labor and environmental standards and how we need to level the playing field in trade. China remains a very poor country. It cannot afford the luxury of our standards of today any more than America could have afforded them 100 years ago when the average work week was 67 hours (down to 34 today) and the work place was a much more dangerous place.

One way to see this is to think about bicycle helmets. Where are more bicycle helmets worn–Chicago or Shanghai? Manhattan or Mexico City? More are worn in Chicago and New York. Don’t people in China and Mexico know that it’s dangerous to ride a bike in traffic without a helmet? I suspect they do. It’s just too expensive. Poor people are better off foregoing the helmet, keeping their kids in school a little longer and doing the best they can to avoid being hit by a car. Making the Chinese have factories as safe and clean as ours is like forcing them to wear bicycle helmets. It’s a bad deal for them even though there are benefits.

African-Americans make up a larger proportion of students than teachers. Many educators say that as a result African-Americans students suffer because they lack role models and white students suffer because they lack diversity. In a newly published paper (working paper version), Thomas Dee (Swarthmore College) supports some but not all of this story. Using data from Tennessee’s Project Star, a very important experiment in which K-3 students were randomly assigned to small and regular sized classes, Dee finds that black students improve when they have black teachers. So far so good. Dee also finds, however, that white students improve when they have white teachers. Uh, oh. There goes the diversity is good for everyone story.

Dee is quick to point out that we don’t understand why students perform better with a teacher of their own race. If it is a role-model effect then why would white students perform poorly with black teachers – surely there are enough white role models to choose from that one more or less isn’t going to have an effect on the self-esteem of white students. Another theory, with some support from other studies, is that teachers spend more time helping students of their own race. Note that if it is the latter then better teacher training, to overcome natural biases, could improve the effectiveness of both white and black teachers.

The cite for the paper is Dee, Thomas S. 2004. Teachers, Race, and Student Achievement in a Randomized Experiment. The Review of Economics and Statistics 86(1): 195-210.

On my way in to work today, I heard a snippet of a President Bush speech on C-Span radio. “Tax and spend is the enemy of job creation,” he said.

That’s probably true. Unfortunately for the President, if tax and spend is the enemy of job creation, so is “borrow and spend,” the President’s recent formula.

The size of the budget and what it’s spent on is more important than how it’s financed. There are really only two choices for financing–taxes today and taxes tomorrow. Borrowing just means taxes tomorrow. The President likes to describe tax cuts as letting people keep more of their own money. I like that idea. Unfortunately, I agree with my hosts Tyler and Alex that the current administration has raised our taxes by increasing spending. So ultimately we’re keeping more of our money today and expecting to give back even more tomorrow.

Ironically, Bush has raised spending in what I would guess is a labor intensive way. By expanding homeland security, a lot of workers have been drawn into public employment rather than the private sector.

Last month’s job growth was “small” and almost all of it was in the public sector. That’s most likely a result of government spending pulling people into public sector jobs rather than the private sector.

This Friday is a big day for Bush and Kerry. The job numbers for March will be released. If they are weak again, Bush will have to keep talking about home ownership being up.

Brad DeLong argues that he has been harmed by getting IE for free with Windows.

Remember the days when there was not one single dominant browser that came preinstalled on 95% of PCs sold? Back then there was ferocious competition in the browser market, as first a number of competitors and then Netscape and Microsoft worked furiously to upgrade their browsers and add new features to them….Progress in making better browsers was rapid, because browser-makers wanted to make a better product and any new idea about what a browser should be was rapidly deployed to a large enough user base to make it worthwhile for web designers to try to use the new feature.

But why was competition in the browser market so furious? Hmmm… couldn’t have been because each firm knew that the winner would be a monopoly, could it? The alternative to Microsoft winning the browser war was not competition between many firms but a different dominant monopolist. Focusing on the economics, i.e. without getting into arguments about which firm was the better innovator etc., is there any reason to prefer one monopolist over another?

The double monopoly problem, first explained by Augustin Cournot in 1838, suggests that Microsoft might be the better monopolist. The double monopoly argument says that if two products are going to be monopolized its better if they are monopolized by one firm than by two (or more). The reason is that the single monopolist will take into account complementarities between the two products. The better the brower, for example, the more operating systems Microsoft will sell and vice versa. Separate the two products and you lose this added incentive to lower price and/or improve quality. (If you know the tragedy of the commons argument, the double monopoly problem is the same thing with the customers serving as the common resource).

An unappreciated aspect of this argument is that the reason that Microsoft might make the better monopolist is the same reason it will likely win in any battle with a stand-alone competitor. Microsoft has more to lose from losing and more to win from winning than does the stand-alone and will therefore put more resources into winning. This explains why the European directive requiring Microsoft to sell two versions of its operating system, one with and one without the media player, is pointless. Microsoft will simply sell the two versions at the same price – then which one would you choose?

Aside: I also think that Brad doesn’t appreciate enough the power of potential competition. Low marginal costs and ease of distribution in the software market mean that one of the now relatively small competitors to IE could grow very rapidly. Microsoft knows this and cannot rest on its laurels/behind (your choice). Consider how rapidly the browser substitutes known as RSS readers are growing.