Month: May 2004

The Laffer Curve, Italian style

The good news is that the Sicilian Mafia has slashed the rates it charges “clients.” The bad news is that it has vastly expanded its client base.

“Pagare tutti, pagare meno,” roughly translated as “everybody pays, everybody pays less,” is the new slogan Sicilian magistrates and mayors are using to describe what the Mafia is doing these days.

Here is the full story, courtesy of Craig Newmark.

Markets in self-constraint

A dental appliance designed to help dieters take smaller bites and eat more slowly hits the market Wednesday.

It’s the latest addition to the $40 billion weight-loss industry, which caters to millions of Americans who are trying to lose weight. Some experts say the device may be helpful in changing behaviors. Others say this shows how truly desperate Americans have become.

The small retainer-like device, called the DDS System, fits into the top of a person’s mouth, filling much of the upper cavity. The price: $400 to $500. It’s available only through dentists who have been trained in fitting the appliance.

“You can pop it in when you go out to lunch and pop it out when you’re finished,” says William Longley, founder of Scientific Intake in Atlanta, which is making and marketing the product. The effect on speech is minor [sic], and it doesn’t interfere with swallowing, he says. Longley cites a study in Japan that showed those who ate more slowly weighed less. But some aren’t convinced.

And how does it work?

The appliance was the brainchild of a woman who had torus palatinus, a bulge of bone that grows from the center of the palate. She said it helped her stay thin all her life because she had to take smaller bites and eat more slowly. She got a patent on the appliance and licensed it to Longley almost three years ago.

…Researchers found that those wearing the dental appliance on the second day ate about 25% less food (in weight) over the course of a day than those who weren’t wearing one…

It usually takes patients a couple of meals to get used to wearing it.

“It doesn’t work if you have it in your pocket,” Longley says. And patients can override the benefits of the system by drinking milkshakes or other high-calorie drinks, he says.

Just think, people used to make fun of this sort of idea.

What is driving Argentina’s economic recovery?

The modest soybean:

Two years after hitting rock bottom, Argentina’s economy is on the rebound. Although the 10-month-old government led by President Nestor Kirchner has taken credit, economists are praising the soybean – a small, round legume packed with protein that is at the margin of Argentina’s beef-heavy cuisine but at the heart of its economy.
Soybean prices have soared to their highest levels since 1988, bringing in billions of dollars in foreign currency and powering the economy’s 8.7 percent growth last year.
Taxes on soybean exports, meanwhile, have been a godsend for the cash-strapped government, providing a huge chunk of its budget surplus.
In recent years, soybeans have swept across Argentina’s vast plains, replacing other crops and cattle to become the nation’s top export.
The nation’s once formidable industry is still in ruins, and widespread unemployment in sprawling, urban slums remains, but the small towns that dot the sparsely populated pampas are bustling.
An emerging group of soybean-growing businessmen equipped with cell phones and sport utility vehicles is driving the boom. They have amassed huge tracts of land, building expansive agro-industrial operations that have begun displacing the region’s gauchos and small-scale farmers.

And who is buying all these soybeans?

Most of the soybeans are exported to China and other Asian countries, where they are crushed into a meal used as feed for livestock.

Here is the full story.

I have long wondered: why don’t individual investors diversify more? OK, it is bad for a country to be so heavily dependent on one crop. But surely individual investors — most of all soybean growers — should internalize these risks and hold a more diversified portfolio. Many of them don’t.

What is the upshot? Is the resulting high volatility simply the only way to get high growth? Perhaps you need non-diversified positions to generate the proper entrepreneurial incentives. On top of that, perhaps you need volatile upswings to cover your fixed costs as you move to the next stage of progress, a’ la Andrei Shleifer. Smoother growth patterns would lead to a lower average rate of growth. Or does raw hubris cause individual investors to diversify too little, thereby leading to a social inefficiency? Or how about the old days, when Kenneth Arrow argued that individual investors don’t take enough risk? I am inclined to agree with Shleifer, but these are some of the genuinely open questions in development economics.

Who’s a troll now?

Not that long ago David Bernstein wrote:

Huge increases in spending on education and other domestic programs that are not even within the federal government’s constitutional purview; a new prescription drug entitlement for the elderly; Wilsonian rhetoric and actions in foreign policy; Kennedyesque manned space mission boondoggles; clumsy protectionism; in its appointments to high-level positions, the most affirmative-action conscious administration in American history; a proposal to legalize the status of illegal aliens; and now, a huge proposed increase in funding for the National Endowment for the Arts. Remind me again of why liberals are so hostile to George Bush? Give him a phony Haavaad accent instead of phony Texas twang, a wonky college life, a less religious persona, and an attorney general other than John Ashcroft, and George Bush, in theory, would be a dream president for many liberals…

and Brad DeLong responded particularly intemperately saying Bernstein was a “either a out-and-out troll saying things he doesn’t believe or is remarkably uninformed.”

But when Ezra Klein says:

Republicans are getting elected by promising to protect the environment, strengthen entitlement programs, conduct humanitarian interventions, back Democratic security initiatives, and support public schools. They are getting elected by pretending to be Democrats, albeit Democrats who wear cowboy boots.

and liberal Matthew Yglesias writes:

the Republican Party has essentially abandoned the small-government agenda, a small army of disgruntled conservative think tankers notwithstanding

Brad has nothing but happy praise writing, “It’s twue! It’s twue!” and it’s a “a much better country for it.” (See also here).

Oil prices and time

Allow me to quote the ever-intelligent Arnold Kling:

In forecasting oil prices, I tend to defer to the efficient markets hypothesis. In some sense, oil in the ground has to compete with bonds and other interest-bearing assets. So, a reasonable approximation is that oil prices should be expected to go up at the interest rate. So, if the interest rate is 5 percent, then oil prices should go up at 5 percent, plus something for storage cost. If people thought oil prices were going to rise faster than that, they would keep the oil in the ground. If they thought that oil prices were going to rise more slowly than 5 percent (if that is the interest rate), then they would sell oil and buy bonds.

So my tendency is to assume that markets are efficient and predict that oil prices will rise at the interest rate.

This is called the Hotelling rule. But hey, didn’t Julian Simon tell me that most natural resource prices, in real terms, are falling over time? And surely the evidence is on his side. What gives?

Is oil exempt from Simon’s prediction? (How do VCRs fit into the picture?, the gentle reader might ask…)

Do markets systematically underestimate the rate of technical change, and thus the rate of price decline?

Or are falling prices an equilibrium because arbitrage-ready inventories are already essentially zero (no more selling is possible and the Saudis won’t pump more), and natural resource costs of production are falling rapidly as well? In other words, yes prices are falling but you can’t sell tomorrow’s oil today at a profit. Prices will be lower tomorrow but costs of production will be lower too. Good enough, but then the Hotelling rule doesn’t hold at the relevant margin.

I’ve never had good answers for these puzzles. Here is one useful survey of some models and the literature, scroll down a bit for the most relevant parts. Try this article as well. This literature suggests that most of the standards “outs,” such as changing costs of production, or new discoveries, don’t square the circle for anything other than the short-run. Holding oil still ought to yield (risk-adjusted) market rates of return, unless again investors are fooled into underestimating how much prices will fall.

My take: In my gut I don’t believe in the Hotelling rule. But I couldn’t tell you why not; I do understand that the arbitrage conditions of the model are fairly simple. If you wish to create some disagreement over lunch, raise this question with some economists you know. In the meantime, if you’re not confused, it means you don’t know what is going on.

Bigger than you think

The universe, that is. New estimates for its size, based on measured microwave radiation, are up to 78 billion light years. And that’s a minimum. The bad news? Given this size, it is less likely that light can “wrap around” an odd-shaped universe, allowing us to see what the earth looked like four billion years ago. And here’s more evidence that the universe is dominated by “dark energy,” causing it to expand, possibly forever.

Prof. Bainbridge answers 20 Questions

Prof. Bainbridge is the latest to undergo questioning at Crescat Sententia. When asked about law and economics the good professor had this insightful comment:

Traditional forms of legal scholarship were mostly backward-looking. One reasoned from old precedents to decide a present case, seemingly without much concern (at least explicitly) for the effect today’s decision would have on future behavior. Yet, law is necessarily forward looking. To be sure, a major function of our legal system is to resolve present disputes, but law’s principal function is to regulate future behavior [and]… law & economics gives judges a systematic mechanism for predicting how rules will affect behavior.

Health and Status

A number of studies have shown a startling connection between higher social status and better health, even after controlling for income, education and other factors. Some economists are skeptical, Angus Deaton, for example, suggests reverse causality may be a factor:

The major reason that people retire from the work force is that they’re sick. If you get sick in America, it does terrible things to your social status.

Two remarkable papers by Donald Redelmeier and Sheldon Singh cast some doubt on this explanation. In Survival in Academy Award-Winning Actors and Actresses Redelmeier and Singh compare the longevity of Oscar winners with nominees who did not win. The statistical hypothesis is that all that separates winners and nominees is the random fact of winning (random with respect to other factors influencing health). If winners and nominees are alike but for random factors then any differences in longevity can be causally ascribed to winning the Oscar. R and S find that winners live about 4 years longer than non-winners, a huge difference. The effect does not go away with additional controls.

Skeptics will posit other mechanisms but R and S have a lesser known but equally important paper on screenwriters who win the Academy Award. Surprisingly, they find that winning screenwriters die about 3 years earlier than non-winning nominees. At first, these two results appear to be quite contradictory suggesting some problem in the studies. But on second look there is a compelling logic to the findings. The difference between actors who win the Oscar and screenwriters is that even winning screenwriters get no respect. Who remembers a screenwriter’s name? I think it’s in the movie Bowfinger that Steve Martin says of the lovely ingenue something to the effect, “She’s so dumb she’s sleeping with the screenwriter to get to the top.” Winning screenwriters have longer and more successful careers (4 star movies) than non-winning writers so income and other material factors would suggest greater longevity but even a winning screenwriter is almost surely destined to have his lines mangled by a lousy but famous actor and perhaps this stress drives them to an early grave.

IPOs bring out the bloodsuckers

In the late 1930s, Edward Kasner was asked to come up with the name for a large number; as legend has it, he asked his nine-year old nephew, who said “googol,” and Kasner’s 1940 book “Mathematics and the Imagination” popularized the term for the number 1 followed by a hundred zeroes.

Can you guess where this is going….Yup, Ted Frank at Overlawyered continues:

Kasner’s great-niece, Peri Fleisher, is going public herself, complaining that her family hasn’t been compensated for Google’s choice of a name, and “exploring” the possibility of legal action.

How to persuade the rich, or Cannes update

The first German film to compete in Cannes in 11 years, it [The Edukators] tells the story of three idealistic youths who break into rich people’s villas and move around their furniture, leaving behind notes with messages such as: “You have too much money.”

Their aim is not to steal from the rich to give to the poor, but to make their targets question their privileges. When they are surprised by one of the homeowners, they kidnap him and are forced to put their ideals into practice.

“I’m really happy to present this film in the country where the word revolution was invented,” Weingartner told a news conference in this French Riviera resort.

As is often the case, the remainder of the story surpasses any comment I could offer:

Critics at Cannes clapped and cheered during scenes in which the kidnappers and their victim intelligently debate how youthful idealism eventually fades.

Weingartner avoids a simplistic ending, but leaves open the possibility that each of them is changed by the experience.

Here is the full story. Here is more information on the movie. Don’t forget that the alternative title of the film is “The Fat Years are Over.”

Supply curves slope upwards

You might think that the labor supply of the dead is fairly inelastic. Well, it is not so simple as meets the eye:

These days, the icon of Renaissance art is Florence’s greatest single brand and the global Michelangelo market is booming. You might imagine that as the years go by, the chances of finding a long-lost Michelangelo would shrink. But no. As one expert has observed, as the price tag on the world’s greatest artists keeps soaring, so, miraculously, more hidden Michelangelo gems keep being discovered.

There is more:

According to Wallace, the rate at which Michelangelo finds are turning up – including documents, drawings, and even a candlestick – has gone from one every two years a century ago to two a year on average from 1996 onwards. In the past year, he observes, three finds have been attributed to Michelangelo, most recently a small wooden statue of Christ, which went on display at the Horne museum in Florence earlier this month.

Now here is the clincher:

Some of the most highly publicised finds have subsequently “been shot down in flames” as they fail to withstand the scrutiny of the world’s experts, says Timothy Clifford, Michelangelo expert and director of National Galleries of Scotland.

Here is the full story. Most Renaissance artists did a wide variety of anonymous small commissions, especially in their early years. So there probably are “unknown Michelangelos” out there; it is less clear that we will ever know what came from his hand.

Markets in everything: Google edition

At lunch recently, Tyler expressed concern about how well the Google auction would work given that no one knew what the stock would open at. Robin Hanson, famed for his role in the Pentagon “terror market,” chimed in that “we could have a market in that.” True, but not necessarily helpful – surely, the regress must end somewhere? Helpful or not, Robin has been proven correct as a descriptive matter. We now have something of a market, or at least a contest, in predicting the Google IPO price. See The Google IPO Swami.

Thanks to Eric Crampton for the pointer.

Patents for everything

While browsing at Barnes and Noble this last week, I picked up the interesting title Patently Absurd: The Most Ridiculous Devices Ever Invented, by Christopher Cooper.

What struck me was how appealing many of the inventions sounded.

OK, I’m not ready to put up venture capital for “Bird Diaper” or “Dust Cover for Dog“. And it was scary to read about “Firearm Mounted in a Shoe Heel,” patented in 1971.

But how about a combined fork and chopsticks? A “Night Light for a Toilet,” attached directly to the seat, would come in handy. I like the fork that warns when you are eating too fast. It is now well-known that slower eating is healthier and keeps your weight down. Some may prefer a wind sail for your bicycle.

The sociologist will be interested in “Interpersonal-Introduction Signaling System.” Using a small hand-held device, you broadcast a signal indicating that you are interested in meeting someone. You can be rejected without (major) embarrassment on either side.

No, contrary to the impression you might sometimes get from this blog, there are not markets in everything. If you wish to be woken by light corks falling on your face, well…they tried this idea in 1882 and it did not take off. But if there is no market, at least there is a patent. Read this short article on the recent proliferation in patents in the United States. Here are some other web sites with descriptions of absurd patents.

The book, appropriately, had been remaindered. And there is always hope for the future, as at least one of their examples has come true. Amphibious motorcycle anyone?

Addendum: Check this out, maybe there really are markets in everything.