Month: November 2004

Shoot at animals over the Internet and activate a real gun to kill them.  Here is the website, and thanks to GeekPress.com for the pointer.

My question: If you add them all up, what percentage of these "Markets in Everything" installments is actually appealing?

From Jane Galt, read the whole thing.

For me the most intriguing passage (but not the central point) is:

Something that conservatives, and especially libertarians, have been slow to grapple with is that the more productive our society gets, the greater the possibility that some peoples’ labour simply isn’t productive enough to support them at a minimum level. Can we really tell former welfare mothers to go bunk ten to a room the way my Irish ancestors did? We’re a pretty rich country. Are we comfortable telling people to live as if they’re nineteenth century peasants, if their cognitive gifts, or education, won’t stretch to more?

I wonder whether increasing wealth will ever eliminate the case (sound or not) for, say, welfare payments or the public funding of education.  Won’t the U.S. at some point, however near or distant, become rich enough so that government won’t have to…fill in the rest of the sentence yourself…?  Or does growing wealth jack up land prices so much that subsistence becomes increasingly harder to achieve?  I’m not talking about a relative status effect here, or changing expectations as to what is a decent life (though those factors play a role too).  To some extent higher real wages also boost the cost of producing human beings (i.e., raising children), analogous to William Baumol’s "cost disease."  You can raise a family of seven in Mexico on one thousand dollars a year, just try that in Fairfax County.  And might further economic growth only exacerbate this contrast?

Some mid-level developing countries address this problem by allowing shantytowns to spring up in or near their major cities.  The wealthy live in the "normal" city, the poor in the shantys.  There are other ways of setting up parallel colonies on low-wage land.  Randall Parker writes of old people moving to low-cost cruise ships (no, not ice floes), and of course many of the elderly migrate to Mexico or Costa Rica.  The default of course is to keep everybody in the higher-rent, higher-value network, and not coincidentally raise general taxes over time.  We will all continue to pay lip service to the integrationist ideal, but let’s say you think the case for welfare will never go away, no matter how wealthy we become.  This view implies that the pressure for "separate colonies" will only increase over time.

The field of education is littered with reforms designed to increase student performance – everything from the "new math," to more teachers to better pay.  Yet the most obvious reform of all has hardly been tried – pay the students to learn.  That’s the simple idea of an impressive young economist, Roland Fryer (earlier I posted on Fryer’s controversial work with Steven Levitt on the causes and consequences of distinctively black names).

Fryer was here on Monday and he told me of a large scale experiment he is running in 24 of the poorest performing New York schools.  Every three weeks students are tested and if they improve they are paid on the order of $20.  Control groups are also tested.  Early results are very encouraging.  No other reform has anywhere near the bang for the buck as paying the students.

As Fryer said to me, ‘for years white parents have been giving their kids money for As, now we are trying the same system for black kids.’   

U.S. stocks yield six to eight percent on average, while T-Bills yield just a bit over one percent.  Might we reap higher social returns by investing a social security trust fund in equities?  That of course is one motivation behind many plans for social security reform.  Even if our government is borrowing more, the higher equity returns might more than compensate.

Under one common view, stocks yield more because they are riskier.  Yet stocks outperform bonds for any thirty year period in U.S. history.  So perhaps a sufficiently long-lived institution can ignore the short-term risks.  The return differential could instead exist because a) equity markets are not perfectly liquid, and b) many of us are irrational fraidy-cats, or have excessively short time horizons.

To make the case as strong as possible, let us put risk aside.  But even then the measured returns differential does not measure the gain from investing social security funds in equities:

1. Once the plan is announced, the price of equities will rise, eliminating some or all of these returns.  Current equity holders will be the beneficiaries on a once-and-for-all basis.  Of course if equity markets are not perfectly liquid — one of the assumptions — the current equity holders won’t capture all of these gains.

2. Higher stock returns, driven by a change in liquidity, might just redistribute wealth rather than creating more wealth.  The real question concerns not measured nominal returns but rather the real output of goods and services.  Say that one group of people suddenly earned far more on their investments.  Without a corresponding rise in productivity, the economy as a whole does not have greater opportunities.  We have simply divvied up the pie in a new way.

3. So what is the real gain?  When stock prices rise, it becomes more profitable for a company to issue new stock shares.  This will increase investment and eventually output.  But the magnitude of this effect is not given by the measured differential in stock and bond returns.  The real questions concern a) the elasticity of investment with respect to equity values, and b) the value of the next marginal investment to be made; we should not confuse average returns with marginal returns.   

Note that companies do not usually prefer to finance investments from new equity issues.  Retained earnings and debt are more popular.  The value of a company typically falls on the stock market when new equity issues come forth.  This suggests that markets do not think so much of new investments financed by new equity issues.

The bottom line: There may be some equity premium to be captured, but it is much less than the measured return differential between stocks and bonds.  Most likely, the equity premium is not a strong argument for investing the trust fund in equity or social security privatization; Alex agrees.  The more relevant argument is simply that savings will increase.

Read all about it.  Here is my earlier post on neuticles.

The current academic publishing system is slow, tedious, and error prone.  David Zetland, a clever economics graduate student at UC Davis, has a better idea.  Zetland suggests that journal publishers should buy manuscripts in an auction.  You probably already have some objections, Where would the money come from?  Why would journal editors buy what they can get for free? etc.  But wait.  Here comes the clever part:

The money paid in the auction would flow not to the author of the paper but to authors cited by the paper and their publishers.  For example, if a journal buys a paper by A.Tabarrok for $1000 which cites an article by T.Cowen published by Oxford University Press and an article by M. Friedman published by the University of Chicago Press then Cowen, Friedman and their publishers would each receive $250 (the author/publisher split could vary.)

The cleverness of the idea now becomes apparent.  Publishers will be willing and able to pay for papers because they expect to earn revenues when in turn those papers are cited.  Publishers will pay $1000 for the paper by A. Tabarrok, for example, if they expect that paper to be cited many times.

Once it gets off the ground, the market for journal articles is self-sustaining and self-fulfilling.

A market established in this way has all kinds of beneficial properties.  Publishers will have an incentive not only to seek out the best papers and pay for them but also to improve those papers in order to make them more citable.  Publishers might offer online data collection and color graphs, for example.  Similarly, if this proposal takes off we might expect a big improvement in the speed and accuracy of the refereeing process.  Who knows, editors might even edit papers!