Month: May 2004

Do Chinese raw material demands harm the U.S.?

Oil just hit $40 a barrel. Many analysts, such as Paul Krugman have noted the Chinese role in pushing up commodity and natural resource prices:

Lately we’ve been hearing a lot about competition from Chinese manufacturing and Indian call centers. But a different kind of competition – the scramble for oil and other resources – poses a much bigger threat to our prosperity.

I am surprised to see Krugman so qualifying his former belief in the virtues of free trade. Keep in mind that the core theory of international theory is a barter theory. “The Chinese buying oil” and “the Chinese selling bicycles” are just two sides of the same coin. If you don’t think one can harm the U.S., you shouldn’t, in general, think the other will harm the U.S. either. (Of course if your vision of free trade is we get the bicycles but give up nothing in return, we are worse off relative to that state of affairs!)

Here is another way to think of the logic. If the Chinese are bidding up the price of oil, they have found good uses for that resource. If they have a comparative advantage in buying oil, that benefits the rest of the world. Comparative advantage in production also will mean comparative advantage in buying certain inputs. The U.S. still has access to its previous production possibilities frontier. It must now decide whether it would rather spend its money on oil, or on something else, perhaps the outputs of the Chinese.

This analysis, of course, requires qualification. For instance Chinese uses of oil are often more polluting than American uses. This is a valid cause for concern. Distribution and transition effects can delay or modify the benefits of free trade. Some relative price shifts can occasion greater external effects than others. Theoretical economists also will recognize cases of “increasing returns” and “strategic trade policy” as providing possible exceptions to the benefits of free trade. Krugman in the past, of course, has stressed that these exceptions are unlikely to prove policy relevant.

But put all of these complicated cases to the side. The “first cut” approach to the problem should suggest that Chinese oil purchases, viewed in their proper general equilibrium terms, do not make the rest of the world worse off.

Addendum: Here is critical commentary from the ever-intelligent Randall Parker.

How to limit prostitution in poor countries

Raise male wages. Most prostitutes must forego or postpone marriage, because most men do not want to marry a prostitute. The more appealing the marriage prospects, the lower the relative return to prostitution. Andrew David Chamberlain gives more analysis, and links to the relevant research.

Thanks to Michael of for the pointer. I”ll also note I enjoyed his recent survey of conservative and libertarian thought in the blogosphere, not the least because he had nice words for Alex and me.

America’s economic secret

I was privileged to take the Washington-Trenton train, round trip, over the last two days. As you may know, this route takes you past some of America’s most spectacular industrial decay. (I recommend bringing Philip Glass music on CD with headphones; it makes your trip feel like the Koyaanisqatsi movie, experienced live.)

Some Europeans might regard the decay as reflecting our economic weakness. But they have it backwards: our willingness to let industries decline is a significant source of our economic strength. A country with no declining industries is a country that doesn’t have many better new ideas.

Here is a New York Times article about how the French are having a hard time accepting deindustrialization.

“[The French are] fighting against windmills – the process of disindustrialization is inevitable,” said Daniel Gros, director of the Brussels-based Center for European Policy Studies. “Those countries who slow that process pay. The problem is not that there is disindustrialization in France, but that it isn’t happening fast enough.”

Not suprisingly, the French are looking toward subsidies to slow down these changes. Here is an excellent article on just how much of American productivity growth comes from allowing losing sectors to decline.

Outsourcing anyone?

How to measure success or failure in Iraq

Currently a U.S. dollar buys 555 Iraqi dinar. You can track the fluctuating price at this web site. Perhaps over time they will develop forward contracts contingent on major events. This might include the election, or perhaps the resignation of various high government officials?

By the way, if you think you understand what is going on in Iraq, you can trade in the market.

And try this site if you wish to compare prices. How is this for a marketing line?

After decades of underinvestment, Iraq’s agriculture sector is poised to make the country once again the bread basket of the Middle East

Or this?

In the President’s radio address, President Bush reconfirmed the Adminstrations stance for a “Strong Dinar Policy”. The new dinar will be used throughout Iraq, thereby unifying the economy and the country.

Another site suggests:

According to recent releases by the US Department of State, the economic recovery of Iraq is in process and occuring quickly.

I’m glad to hear that. As is commonly the case in new markets, it is easier to go long than short.

Milton Friedman’s Monetary History

Cato Journal devotes a special issue to this marvelous book, co-authored with Anna Schwartz. Contributors to this symposium include Friedman, Schwartz, Allan Meltzer, William Poole, and Bennett McCallum. Of course Friedman’s monetary explanation of the Great Depression, radical in its time, is now part of the mainstream. And I see this book as providing a better statement of Friedman’s true method than his classic “The Methodology of Positive Economics.” His judicious and non-formulaic mixture of theory, empiricism, and history remains a classic account of how economic science can contribute to human knowledge. Friedman was never a naive positvist. His real method is that of consilience, and reaching a sophisticated reflective equilibrium of historical and theoretical understanding. It is sad that this book, with its low-tech statistics, would probably no longer pass as a Ph.d. dissertation at the University of Chicago.

Mind over Muscle or Where is Fatigue?

The old theory, taught to me in high school, is that muscles become fatigued when they run out of fuel/oxygen or they become suffused with lactic acid, an unpleasant byproduct of work. But if this is so, why do athletes almost always manage to go their fastest in the last mile of a race when their muscles should be closest to exhaustion? An article in New Scientist, (“Running on Empty,” by Rick Lovett, 20 March, 04, p.42-45, a copy is here) based on the work of Timothy Noakes and others, raises some more puzzles and offers a new theory.

If fatigue is based in the muscles then without more fuel, oxygen or less lactic acid you should not be able to improve performance. Yet, amphetamines and drugs like Ecstasy do allow athletes and clubbers to work and play harder (sometimes to dangerous effect). Measurements of the input factors also show that (absent unusual factors) fatigued muscles don’t in fact run out of critical factors.

The common sense response to these puzzles is that runners speed up in the last mile because they know it is the last mile and are willing to push themselves to their limits. Similarly, drugs fool the brain into thinking that the muscles are less fatigued than they are. If one thinks seriously about this common sense notion, as has Thomas Noakes, it provides a quite different view of fatigue than the old theory. The brain in this view is a central regulator that monitors the muscles and sends out messages of fatigue, quite possibly long before the muscles are truly spent as a sort of insurance policy. The central regulator theory doesn’t say that fuel and oxygen are unimportant only that the relation between fuel and fatigue is mediated by the brain.

The central regulator may have rational expectations. Experienced runners apparently report that the first mile of a 10k race is easier than the first mile of a 5k race. Makes no sense on the old theory but if you think about the central regulator meting out a fatigue budget in advance then everything becomes clear.

How then to improve performance? Try convincing yourself that you are running a 10k instead of a 5k (hypnosis may work). Also, Noakes suggests interval training, interspersed bouts of high intensity workouts with recovery breaks. The idea here is to the teach the central regulator that going faster won’t do you any harm.

What’s the difference between anthropology and economics?

Grant McCracken offers an object lesson in how to think about the two disciplines. Along the way he tries to explain why so many people pursue “fruitless” humanities Ph.d. degrees, with no real hope of a job on the other end. Here is his follow-up post on the same topic. His whole blog, in fact, tries to get at the differences between economics and anthropology. I am a big McCracken fan, here is his home page, which includes his on-line trilogy about modern culture.

My take: Anthropology is most likely to outperform economics when wealth maximization is not a useful proxy for utility maximization. That’s quite a broad swathe of cases. We need then to see how other values become imbued with social meaning and why they hold such an important place in the utility function. The answers to these questions are almost certainly context-dependent. Yet most useful economic theories deliberately abstract from context. For this reason, every economist should do fieldwork at some point in his or her career. A stint in government, time behind the counter at Nordstroms, or a sojourn in a third world village can all qualify. That being said, without an inquiring and curious spirit, all of these endeavors are a waste of time. The problems with economics are, to large extent, simply the personal failings of various economists.

What TV ads do people wish to skip?

…Just over one-third of beer ads were skipped through by those taking part in the research, whereas 93% of fast food and credit card commercials were passed over by viewers fast forwarding through the breaks.

MindShare predicted that there would be an increase in the amount of live event television such as sport on TV channels in the future, because these are events that people would be more likely to watch at the actual time of transmission than record.

The company also suggested that broadcasters could start charging a premium for advertising in such events, and could even raise the price of their firstinbreak and last-in-break slots to reflect that more people tune out during the middle of an advertising break.

TV sponsorship was also under much less threat from skipping, said the research.

So how will the market evolve?

What seems clear is that the sectoral make-up of TV advertising is set to change dramatically, consolidating around a smaller number of key industries.

Other industries will increasingly use advertiser-funded content, product placement and sponsorship to get their messages across on TV, or switch to other media altogether.

Outdoor and retail media, being the other two mass media, are likely to benefit from the sectorspecific shift away from TV.

Here is the original article. Earlier Alex wrote on Queer Eye and the Future of Television. Thanks to Eloise, whose blog post put me on to this.

Economic arguments I have never understood

Have you ever heard the claim that U.S. medical care is in trouble because we subsidize third-party insurance through the tax system? Glenn Hubbard presented this view in the Wall Street Journal this Tuesday. Hubbard writes:

Reform the tax treatment of health-care expenses. The most far-reaching and misguided government policy, established more than 60 years ago, allowed employer-provided health care to be exempt from taxation. Under this policy, medical care purchased through an employer’s insurance plan is tax-free, while direct medical-care purchases by patients must be made with after-tax income. The tax preference for employer health insurance has been instrumental in creating today’s third-party payment system. In this perverse world, true insurance, in the form of coverage for catastrophic health events, is the exception; prepaid health care, in the form of coverage with low deductibles and copayments, is the rule. The tax preference for insurance is the primary reason five out of every six dollars of health-care spending are paid by third parties…

Low copayments and deductibles fuel excessive cost growth and breed wasteful medical practice…consumers have little incentive to limit their use of unnecessary medical-care services, little incentive to shop for the health plan that best suits their needs in a cost effective way, and little incentive to evaluate their care on the basis of value.

But I’m stumped. If the argument is that tax deductibility leads to too much health care, I can see the logic. But then the problem is in the pretzels and beer markets; health care should be doing fine, albeit in bloated form.

Alternatively, it might be argued that buying health insurance involves a negative externality on others. Maybe insurance companies are intrinsically bad monitors, and more insurance corrupts the system as a whole. Grant this premise, but where do we end up?

1. We would have a good argument for taxing insurance purchases. Yet the insurance point is rarely raised with this conclusion in mind. We might have (yikes!) an argument for greater government involvement in health care.

2. If insurance companies are such poor cost monitors, why doesn’t this raise premia accordingly? The poor monitoring of the company would be reflected in policy price and thus would be internalized by the people or institutions who buy the policies. The externality should vanish or at least significantly diminish.

3. Why should insurance subsidies lead to “low copayments and deductibles”? Insurance with high copayments and deductibles is favored by the tax system as well. That being the case, why do we blame the tax system for how insurance is (perhaps) poorly structured?

All these points collapse into a more simple query: how can a simple relative price, whether a distortion or not, corrupt the cost control practices of an entire industry?

And if government provision of health care is ineffective and costly, isn’t there a positive externality from the purchase of private health insurance?

Many of the people who cite this argument about health insurance are smarter and more accomplished than I am. I will grant their greater wisdom and authority. But at the end of the day, I still don’t get it.

Is it just my imagination?

Kevin Garnett recently won the MVP award in the NBA after a stellar and very consistent season. He was awarded the trophy in a ceremony before last night’s playoff game, and then had a subpar performance. I recall this same pattern holding in the past when other players receive the award before games. The example of David Robinson comes to mind; he received the trophy and was promptly outplayed by Hakeem Olajuwon. I suspect the lesson is that approbational incentives always matter at the margin, and an MVP trophy makes it harder to motivate oneself for the single basketball game to follow the trophy award. A lesson for life lies therein. If nothing else, try to isolate your awards, triumphs, and conquests from your subsequent performance.

Addendum: Here is another quantitative method of measuring the marginal product of basketball players, the best I have seen yet. Kevin Garnett comes out as number one.

Economics and Philosophy reading list

Here are Brad DeLong’s picks for such a class. I’ll add Derek Parfit to the list, and maybe Jean-Jacques Rousseau. Rousseau, in his Second Discourse, questioned the identification of wealth with welfare. Instead he saw market society as leading individuals into “approbational traps,” whereby they seek more approval but find themselves on a fruitless treadmill in this regard. Parfit asks whether utilitarianism (or consequentialism more generally) can ever dovetail with common sense intuitive morality. I also would have them read McCloskey on economic rhetoric, to better understand the nature of economic argumentation. Then you could add Thomas Schelling on multiple selves, to illustrate the complexities of individual choice; Parfit chips in on this topic as well. If I taught the class for twenty-five weeks, I would consider using Plato’s Republic, which pretty much contains every argument ever made since.

Hey, I taught that class two years ago…!

If you can’t slow down time, try this…

Control your pain through biofeedback:

People can learn to suppress pain when they are shown the activity of a pain-control region of their brain, a small new study suggests. The new biofeedback technique might also turn out to be useful for treating other conditions.

Biofeedback techniques based on electroencephalogram (EEG) recordings of brainwave patterns, in which electrodes are placed on the scalp, are used with some success to treat epilepsy and attention problems such as ADHD.

…Fumiko Maeda, Christopher deCharms and their colleagues at Stanford University in California have tried showing people real-time feedback from a functional magnetic resonance imaging (fMRI) scanner.

The eight volunteers saw the activity of a pain-control region called the rostral anterior cingulate cortex represented on a screen either as a flame that varied in size, or as a simple scrolling bar graph. This brain region is known to modulate both the intensity and the emotional impact of pain.

During the scans the volunteers had to endure painful heat on the palm of their hand. They were asked to try to increase or decrease the signal from the brain scanner and to periodically rate their pain sensations.

It took just three 13-minute sessions in the scanner for the eight volunteers to learn to vary the brain activity level, and thus to develop some control over their pain sensations, the researchers reported at the Cognitive Neuroscience Society meeting in San Francisco last week.

Interestingly, none of the participants could explain how they managed some control. But it seemed to work, albeit on a small number sample.

Why stop here? Why not carry around an advanced biofeedback monitor and console to control your emotions more generally?

The bottom line: I can’t imagine how welfare economics will look two hundred years from now.