Month: September 2004

Bounty hunters for the IRS

Here is an interesting tidbit from the FTC report on spam bounty that I discussed earlier this week. The IRS has had a bounty system for tax cheats since 1967. In the first thirty years of the program more than seventeen thousand infomants earned $35.1 million, in the process helping the IRS to recover $1.2 billion. That’s a pretty good return, even if some of the ex-wives would have snitched anyway.

You can’t take it with you

False. The owner can sell the forest. As a result, the owner of a forest has an incentive to continue to seed it even if seeds planted today won’t produce trees until after the owner is dead. The same idea applies to any long-lived productive asset.

I think this insight is very beautiful. It’s precisely the fact that the forest is owned that gives the owner an incentive to take into account how other people value the forest.

The basic logic doesn’t require perfect competition or fully efficient markets but if these assumptions do hold then the private owner will choose investment decisions exactly as would a “social planner.”

Bonus questions: What does the logic say about the argument that managers of publicly owned corporations will focus too much on quarterly earnings and not enough on investments that only pay off in the long-run?

What does the logic say about the incentives of a politician who controls an asset like a forest but doesn’t own it?

As usual, and in advance of the Crooked Timber complaints, the points are for thinking about the problem in a logical way, laying out the assumptions and weighing which may or may not hold in various circumstances, and not for arriving at “the answer.” Sorry for being pedantic, but I am a professor.

Why reading Homer’s Iliad is good for you

Reciting the Iliad could have epic effects on your health. German physiologists have recently shown that such poetry can get your heart beating in time with your breaths. This synchronization may improve gas exchange in the lungs as well as the body’s sensitivity and responsiveness to blood pressure changes.

The poem’s use of hexameter — six rhythmic units per line — is seen as especially important to this result.

Here is one brief account, see also the October issue of Scientific American, p.29.

Erratically Changing Labor Market Expectations

In From the Valley to the Summit: The Quiet Revolution That Transformed Women’s Work, Claudia Goldin informs that

…in the early to mid-1960s the labor force plans of young women, 14 to 21 years old, reflected the current labor market work of their mothers, their aunts, and possibly their older sisters. The expectations of young women regarding what they planned to do when they were 35 years-old were more in line with what older women were currently doing than with what the younger women would actually be doing in 15 to 20 years. Their expectations about their future employment were inconsistent with what they eventually did. But in the late 1960s and the early 1970s something began to change. Young women (14 to 21 years old) when asked by the NLS Young Women (1968) what they would be doing at age 35 began to offer answers that were more consistent with their actual futures. In 1968, independent of their age at the time, about 30 percent said they would be in the labor force at age 35. But in 1975 about 65 percent said they would be [see figure].

This change in labor market expectations was accompanied by an increase in educational investment and radical changes in educational concentrations as women shifted from majors that were job- or consumption-oriented to those that rewarded long-term investment in a career.

So what was the main driver behind those changes? According to Goldin, it was the birth control pill:

…the Pill lowered the costs to young, unmarried women of pursuing careers, particularly those involving substantial, upfront investments of time. The Pill fostered women’s careers in two ways. A young college woman in the mid-1960s who was considering whether or not to enter a program involving a considerable investment in her time had to factor into this decision its impact on her personal life (e.g., social life, marriage chances after the career investment period). Sex was highly risky in a world without a highly effective, female-controlled, and easy to use contraceptive such as the Pill. A pregnancy could derail a career. The Pill had a direct effect by reducing the risk, and thus the cost, of having sex. The Pill also had an indirect effect because it led to an increase in the age at first marriage and thereby produced a “social multiplier” effect. The Pill virtually eliminated one potent reason for early marriage and for many of the social trappings (e.g., going steady, engagements) that led to early marriage. With more men and women delaying marriage for many years after college graduation, the decision of any one woman to delay marriage to pursue a career meant that she would reenter a marriage market that would not be as depleted.

via The NBER Digest

Queue Jumping in Canada

The Canadian health care system is falling apart. Bill Binfet needs both knees replaced. He waited 4 months to get an appointment with a specialist who then put him 290th on a waiting list. It’s been a year and still no surgery despite the fact that his arthritis is now so bad he has bone grinding on bone.

In desperation, Binfet has placed an ad in the local paper offering to buy someone else’s place on the waiting list. The provincial health care minister tut-tuts and says “it would be unethical for a doctor to trade places on a surgical wait list for an exchange of money.”

But as Colby Cosh points out that’s not what Binfet proposes:

…the established bioethics of medicare – whether you approve of them in general, or not – forbid us from allowing patients to queue-jump using inducements to physicians. There is a theoretical hazard, the story goes, that too much of that sort of thing would cause the best doctors to abandon public-funded practice altogether. Fair enough. But Binfet’s offer creates no such danger. He proposes a zero-sum, wholly voluntary exchange between patients for access to the rationed, public, monopoly service. Where’s the ethical problem?

I agree, adding only that what Binfet proposes is positive sum not zero-sum! Binfet will be better off, the recipient of the cash will be better off and no one will be worse off. Contrary to the assertions of economist’s, however, even Pareto optimal policies are sometimes opposed. Try it out on your students.

Thanks to Eric Crampton for the pointer.

Economics of relationships

Ok, bear with me for a few minutes while I tell you a little bit about my relationship with my lovely wife. I promise I’ll be brief and I’ll soon tie into some economics!

My wife calls me on the telephone more often than I call her. Sometimes she complains, “Why don’t you ever call me? Don’t you want to talk to me?” Of course I do, so why don’t I call her? Glen Whitman at Agoraphilia explains:

Say Ted would like to talk on the phone every two days, whereas Sheila would like to talk every day. You might think Sheila would call Ted about two-thirds of the time – but in fact, she will call him every time. If they talk on Monday, Ted plans to call on Wednesday; but then Sheila calls him Tuesday. His clock reset, Ted plans to call on Thursday. And then Sheila calls on Wednesday. Eventually, Sheila decides Ted doesn’t care about her, because he never calls.

Glen uses the same model to explain some other relationship disputes (you can guess which).

As long as I am promoting Agoraphilia you can also read Glen on optimal haircuts, and here is co-blogger Tom Bell on the relationship between ice-cream and cryonics and lest you think this not a serious blog here is Glen’s excellent post on health care savings accounts.

Taxes then and now

How can we get Andrew Chamberlain to post more often at The Idea Shop? Here is his latest:

Some famous tax beginnings–and where they’ve ended up:

Up in Smoke: The first federal tobacco tax was passed July 1, 1862, and raised $8,592,000 in 1864. By 2003, federal tobacco taxes raised $8.2 billion, a 948-fold increase. At $4 per pack, that’s enough to build 14 full-size replicas of the famous Leaning Tower of Pisa out of cigarette packs. Laid end to end, those cigarettes would stretch from the Earth to the Moon, nine times.

Fueling Taxes: The first state gas tax–one cent per gallon–was passed in Oregon on February 15, 1919, and raised $443,000 the following year. Today, Oregon’s gas tax is 24 cents per gallon, with 2002 collections of $396 million, an 893-fold increase. At today prices that’s enough to buy the gas needed to drive a Honda Accord at 60 miles per hour for twelve and half years–long enough to circle the earth about 265 times.

License to Tax: The first law requiring auto license plates passed in New York on April 25, 1901, and the $1 fee brought in $1,082 the following year. By 2001 motor vehicle registration fees raised $583 million, a stunning 539,000-fold increase. At $2 per mile, that’s enough for a one-mile New York City cab ride for every man, woman and child in the United States–tip not included.

Here is the permalink.

The Predictions of Prediction Markets

On TradeSports a contract of George Bush in the winner-take-all market is currently selling for around $7. But what does this actually mean? Most traders and researchers would argue that 0.7 is the current “market probability” that the event “George Bush wins the 2004 presidential election” occurs. But this answer drives Charles Manski, an economist who recently also published an article in the September issue of Econometrica, crazy.

He says that under not-so-far-fetched assumptions, the price of a contract reveals nothing about the dispersion of traders’ beliefs and partially identifies the central tendency of beliefs. A President.GWBush2004 contract trading at 70 reveals that 70 percent of traders believe the probability of the event “George Bush wins the 2004 presidential election” to be larger than 0.7. The mean subjective probability of this event lies somewhere in the open interval (0.49, 0.91) (price/mean belief region).

No doubt the last word on this issue hasn’t been spoken but if Manski thinks he can figure out a way that market estimates are biased (for example by narrowing the set of possible belief distributions), then he should be able to come up with a market trading strategy that consistently makes money. And if he succeeds at that, he will in the process correct the market estimate.

Spam Bounty

Last year, Larry Lessig and Representative Rep. Zoe Lofgren (D-San Jose) proposed a system of mandatory spam tags, i.e. something like mandatory use of [ADV] in the subject line and, as a method of enforcement, bounties for people who tracked down illegal spammers. Lessig liked the idea so much he offered to quit his job if the bill became law and didn’t substantially reduce spam. Now that’s a guy who believes in incentives!

Lessig won’t have to quit his job anytime soon, however. After studying the idea the FTC has recommended against bounties aimed at cybersleuths but they do allow that large bounties aimed at insiders could be useful.

Some of the FTCs objections are unclear. At one point they say that “potential informants who lack subpoena power, and who are not ‘insiders’ possessing personal knowledge of the spammer, are highly unlikely to possess or produce the kind of information deemed most useful to the Commission.” But elsewhere they say that cybersleuths “already provide useful information to the public for free, and may not be further motivated by the prospect of a monetary reward.” So which is it? Is the problem that the information provided by cybersleuths is not good enough or is it that the information is good but we already get it for free? Admittedly these sentences are not necessarily contradictory if one riffs on the distinction between the Commission and the public. It’s unclear to me, however, why the FTC resorts to speculation about the sort of information that cybersleuths can produce when some examples of what they have produced in the past would give us a better idea about what stronger incentives could accomplish.

The FTCs main objection is that they could not handle the resulting flow of mostly low-value information. The FTC already receives 300,000 forwarded spam-emails a day and doesn’t want a slew of further emails from bedroom bounty-hunters.

America’s Most Wanted, however, doesn’t offer rewards for the arrest of any criminal they offer rewards for ….America’s most wanted criminals. A spam bounty system could similarly limit the number of low-value tips by focusing rewards on the spammers responsible for the particular pieces of spam that went out to the most people – the FTCs database already has this information. Rewards could also be limited to sleuths offering specific information.

Large rewards for insiders are a good idea, Microsoft caught the author of the Sasser worm with help from bounties. I’d like to see some more research and experiment, however, before counting the cybersleuths out.

Addendum: More on real bounty hunters here.

Robert Barro vs. Robert Reich

Here is their brief and entertaining debate over the economy and short- and long-run trends.

Here’s one good bit from Barro:

The difference between now and the late ’80s and the ’90s is when there was a deficit, it provided a lot of fiscal restraint, holding down spending levels. It doesn’t yet seem to be working that way today, that’s the thing that troubles me.

Yes, Bush and the Republican Congress are at fault, but I wonder what deeper is going on. The simplest hypothesis is that politics is more competitive now and voter wishes are harder to ignore. That induces all parties to ratchet up spending, even though they know it is bad in the long run. The classic Brennan-Lomasky story is that people vote for welfare programs to feel good about themselves, whether or not they would choose those same programs as a decisive voter. We now seem to have a world where people pay lip service to free market ideals, and want to hear candidates (i.e., Bush) pander to those ideals in their rhetoric, presumably to feel good about themselves. Then everyone turns around and supports further growth in big government.

Thanks to The Sports Economist for the pointer.

Our Austrian Economist Guest Blogger

We are delighted that Michael Stastny, author of the excellent Mahalanobis blog, will be guest blogging with us this week. Michael is a true Austrian economist – he studies economics at the University of Vienna! Alas, he tells me that Menger, Böhm-Bawerk, and Mises are never mentioned in his classes and Hayek wouldn’t get a mention either, except for the fact that he “worked together with Pinochet so closely.” How sad. Truly, one has to come to Vienna, VA to study Austrian economics!

Tornado II

It was raining hard and I was stocking up at the video store with my kids. Coming out of the store I was shocked to see a soot-black, swirling cloud, full of malice not far away. I bundled the kids into the car and headed home! My house was fine but tornadoes touched down throughout the area ripping roofs off homes and in one amazing Washington Post picture (not online) impaling a wooden fence-post through a wall.



I am enjoying my first day in Paris, and tomorrow I start a five-day stint for the State Department. The Star Wars DVD set is advertised more heavily here than back in Virginia. (Remember the Australian who said something like “Any country that makes a movie like Star Wars deserves to rule the world”? I once cited this and many readers did not realize it was meant ironically, both by him and me.) The French have the new Che Guevara movie, but not yet the delightfully retro Sky Captain. The new Philip Roth novel appears to have been translated into French already. You will continue to hear from me and Alex, and to make up for the trade imbalance we are importing a European guest-blogger…stay tuned…!