Month: May 2005

Why did the baby boom occur?

We should thank Clarence Birdseye.  Improvements in household technology, starting in the 1920s and 1930s, made kids easier to raise:

The mystery of the baby boom has not been cracked in economics.  The fact that the baby boom was an atypical burst of fertility that punctuated a 200-year secular decline adds to the enigma.  Conventional wisdom ascribes the baby boom to the effects of the Great Depression and/or World War II.  This story has several shortcomings.  First, for the U.S. and many OECD countries, it is hard to detect a strong structural break in fertility due to the Great Depression.  Second, fertility in the U.S. and many OECD countries started to rise before World War II.  Third, at the peak of the U.S. baby boom the most fertile cohort of women was just too young for the Great Depression or World War II to have had a direct effect on them.

The story told here attributes the secular decline in fertility to the tenfold rise in real wages that occurred over this time period.  This increased the cost, in terms of foregone consumption, of raising children.  The baby boom is accounted for by the invention of labor-saving household capital or other labor-saving household products and management techniques, which occurred during the middle of the last century…the increase in the efficiency of the household sector needed to explain the baby boom is not that large.

So let’s say you think demographic aging is a problem today.  What is the policy implication?  Subsidize complex robots?  Let people genetic engineer their kids?

The above passage is from "The Baby Boom and Baby Bust," by Jeremy Greenwood, Ananth Seshadri, and Guillaume Vanderbroucke, American Economic Review, March 2005.  Here is a free and earlier version of the paper.

The Canary is Dead

United Airlines, which is operating in bankruptcy protection, received
court permission yesterday to terminate its four employee pension
plans…The federal agency that guarantees pensions, the Pension Benefit  Guaranty Corporation,  will assume responsibility for the plans, which cover about 134,000 workers.

retirees could see sharply lower pension payments as a result; others
will see little change in benefits, depending on a variety of factors.
Some retirees at US Airways, which has terminated its plans, have seen
benefits drop by as much as 50 percent….United plans to switch its current employees from traditional
retirement programs, which are called defined-benefit plans, to
defined-contribution plans like 401(k) programs

Now, let’s review.  A large organization counts on its younger workers and continuing high revenues to fund the pensions and medical care of its retired workers but finds that rising health care costs, longer life-expectancy, and its own inability to control spending force it to cut pension benefits and switch to personal accounts.

Kinda makes you go hmmm…doesn’t it?

Barry Nalebuff’s tea

"The label of Barry Nalebuff’s, Honest Tea, which is sold on my campus, had the economics department up in arms last year.  I don’t have one in front of me, but in addition to the quote you shared, the label contains a graph plotting taste (total quality or utility in a sense, I guess) on the y-axis and sugar (presumably the only important input to the manufacturers) on the x-axis.  The graph is parabolic, revealing an increasing marginal product of sugar up to a point, and then a diminishing marginal product all the way down to the x-axis.  The manufacturer puts the competition way down past peak, as one might expect.  However, the manufacturer plots Honest Tea just BEFORE the peak of the curve.  That is, it seems they do not use sufficient sugar to maximize taste by their own standards."

Islam and prosperity, part II

The hypothesis that the coefficients on variables of religious affiliation are jointly equal to zero can frequently be rejected at levels of statistical significance (i.e., religion matters),  but no robust relationship between adherence to major world religions and national economic performance is uncovered, using both cross-national and subnational data.  The results with respect to Islam do not support the notion that it is inimical to growth.  On the contrary, virtually every statistically significant coefficient on Muslim population shares reported in this paper — in both cross-country and within-country statistical analyses — is positive.  If anything, Islam promotes growth.

Yes and they do control for oil wealth.  Here is the paper.  Here is my previous post on the topic.  Thanks to Asif Dowla for the pointer.

Real (Estate) Rent Seeking

The Justice Department may file suit against the National Association of Realtors (NAR) to prevent them from excluding discount brokers from access to the regional MLS systems.  I’m hardly a fan of antitrust but the market for realtors is a racket.  Six percent to sell a house?  Outrageous!

Putting aside the outrage the market for realtors is terribly wasteful.  Consider, house prices are much higher in California than in Idaho but commissions are stable at around six percent.  Thus, even though the realtor’s job, brokering a deal, is the same in California as in Idaho, a realtor in California will make much more per-house.  As a result, there are far too many realtors in California and many of them will spend an entire year selling only a handful of houses.  Indeed, many realtor’s spend most of their time prospecting for clients rather than actually selling houses – this is a huge waste of resources. 

The same relationship holds over time as over space.  That is, when house prices go up we don’t see a fall in commission rates.  Instead, we see more entry.  Since the same number of houses are being bought and sold, the extra realtors don’t make the buyer or seller better off and sadly the realtors aren’t better off either – instead the excess return is siphoned off in wasteful prospecting for clients.

Unfortunately, no one really understands why commissions are stable.  The answer is not monopoly.  It’s very easy to enter the market for realtors.  So why don’t commissions fall?  One can certainly point to some restrictive practices by the NAR but I don’t think that is the whole or even the major part of the story.

A clue to the puzzle is that we also see stable commission rates in law (contingency fees) and in services (tipping).  Why is the appropriate tip 15% at an expensive restaurant and at a cheap restaurant?  Does the tuxedoed waiter really have a harder job than the diner waitress?  Maybe (indeed, I have argued along these lines elsewhere) but the commonality across these very different markets tells me something else is going on.

Is it signaling?  Would you distrust a realtor offering lower commissions?  Again, maybe, but it’s hard to believe that with so much money at stake there aren’t enough people willing to take a risk on a discount realtor for long enough for reputations to be established.  I think part of the problem in the realtor market is that other realtors can easily discriminate against discount brokers by pushing their clients one way or the other – that says the antitrust actions will probably not be very effective.  But this doesn’t explain stable commissions in law or waiting.

It’s a puzzle and one worth solving.  Comments are open.

Do you *really* believe in the Pareto Principle?

Take this quiz, courtesy of Alina Stefanescu (nor should you neglect her recent post, "What does the increase in Romanian exports really mean?). My results:

Your Moralising Quotient is: 0.10.

Your Interference Factor is: 0.00.

Your Universalising Factor is: 1.00.

In other words, I am pretty libertarian.  The questions about the dead cat and the dead chicken didn’t even make me break a sweat; after all, do I not think that people should have more sex?

Egalitarian grading

A system giving students extra marks if they have suffered personal trauma is being defended by an exams authority.

GCSE and A-level pupils in England are given 5% more if a parent dies close to exam day or 4% for a distant relative.

They get 2% more if a pet dies or 1% if they get a headache.

The source:? "The guidelines are set out by the Joint Council for Qualifications (JCQ), which represents England’s three main exam authorities.."  Here is the story, and thanks to Jacqueline Passey for the pointer.  She titled her post "Sorry, Fluffy, but I really need an A."

Zero Marginal Taxes

The graph of marginal tax rates that I posted earlier has some regions of zero marginal rates and a larger version has negative marginal rates at low income.  How is this possible?  It helps to know that the graph is based on a four member family with one young child and one older child attending college.  Assumptions must also be made about 401ks, IRA contributions, education plans etc.  Kevin Hassett, one of the authors, lays out all the assumptions here.  Basic story – the earned income tax credit gets you negative marginal rates; zero rates are possible at higher incomes if you save some money for retirement and take advantage of education tax credits.  Of course, families in different situations would face different graphs but that too demonstrates that the tax system is a hodge-podge.

Thanks to John F. Eckstein for pointing me to the more detailed explanation.

Why don’t people have more sex?

Loyal MR reader Michael Vassar writes:

…all forms of consequentialism have a great deal of difficulty interpreting sexual behavior.  To put things short, there is an inexplicable shortage of sex.  Given that studies show that women and men enjoy it more than most other activities (on average, not on the margin I’ll grant), and given its intrinsically low cost, it appears that even a crude approximation of a utility maximizing person would probably spend much more time having sex than most do. Do you know of any economic discussion of this?

We need not just reasons, but rather gains-from-trade-defying reasons.  I can think of a few:

1. The long-run lifestyle costs of being "more open to sex" involve a loss of integrity and control.  (OK, but I know many married couples, not all of whom hate each other, who don’t seem to have much sex.)

2. The average utility of sex is high but the marginal utilities are falling off a cliff.  You just don’t want any more.  But how many people are at this margin?

3. Freud was right and we are all repressed.  The will is not unitary and the utility-maximizing part is not always in control.

4. There has been a market failure, but the Internet is remedying it.  People are having more sex and this will only go up.

5. Sex stops being fun when you do it to close a gap between your marginal utilities.  It requires spontaneity or some other quality inconsistent with the classical model of the consumer and the equation of marginal rates of substitution.

6. Sex isn’t as much fun as the studies indicate.  Perhaps people lie about their quality of their sex or remember only the better experiences.

7. People want their sex to consist of peaks, rather than seeking to maximize lifetime utility.  Tom Schelling once told me this is why he did not listen to Bach more.

8. The market-clearing price for more sex is positive, and people feel shame about paying too explicitly; see also #5.

9. We are biologically programmed to "stick to our guns," rather than just kiss and make up; read more here.  Or perhaps your wife has read my earlier post on why it is hard to avoid torture.

10. People are having sex in other ways.  Maybe that is really good too.

11. Everyone else is having sex all the time — Michael Vassar simply doesn’t know about it.

12. You’re all addicted to reading blogs.

My wife’s question: "Should you be flattered or insulted that you are considered an expert on this?"

Interview with Thomas Schelling

Here is the link, courtesy of the Richmond Fed.  Tom talks about Bob Frank and relative status, what is right and wrong with mainstream economics, how he came up with the ideal of focal points, whether we can deter terrorists, and his role in the Copenhagen Consensus.  Although over eighty years old, Tom remains one of the smartest people I have met.

Thanks to Dan Klein for the pointer.

Revenge of the Sith review

This review (a few spoilers, but nothing I would not have guessed) is from Variety.  In my opinion they write the most reliable reviews available.  Most of all, they do not conflate or blur together predictions of quality and predictions of commercial success.  Variety, which is written for industry insiders, evaluates movies explicitly in both terms, and also for overseas box office.  A newspaper also will hire a movie critic to meet the tastes of its readers, but this is typically at a lower level.

I do believe it will be awesome.

Thanks to Todd Zywicki for the pointer.

Addendum: Here are more reviews, no spoilers.

Outsourcing People

A recent 60 Minutes segment took a look at medical tourism.  The spanking-new hospitals in Thailand and India look like truly wonderful places to be sick.  The technology is cutting-edge, the doctors American trained, and the nurses are cheap.

    Many of the doctors interviewed by 60 Minutes worked in the United States before they returned to their home country.  Ten years ago these same doctors would not have left the United States.  These doctors are returning to their home countries precisely because they now have the opportunity to work in spanking-new hospitals with the latest technology.  The outsourcing story is thus more complex than it at first appears.  Ten years ago the foreign radiologists we now use to read X-rays might not have been foreign at all – they would have been living and working in the United States.   The world is flattening.