Month: November 2006

The most interesting sentence I read today (so far)

We observe that countries where belief in the "American dream" (i.e., effort pays) prevails also set harsher punishment for criminals.

In my warped view of the world, everyone believes in some form of meritocracy or another; the kind of meritocracy you believe in shapes most of the rest of your political views.  Here is the paper.  Here are non-gated versions.

Can foreign aid work?

Jeff Sachs gives a one-page argument for "yes." 

I lean toward a more disaggregated approach, in which the success of aid is not just a matter of political will.  The question is when and where aid will work.  From another direction, this is an insightful paper:

Incumbent political leaders risk being deposed by challengers within existing political rules and by revolutionary threats.  I examine how the survival incentives created by these dual threats shape the e¬§ects of aid on government policy.  I use Bueno de Mesquita et al’s (2003) selectorate politics theory to examine the relationship between winning coalition size — the number of supporters a leader requires to retain office — and policy choice.  In large winning coalition systems, the public goods focus of public policy means that foreign aid improves societal welfare and economic development.  In contrast, in small coalition systems the private rewards focus of policy induces a loyalty norm towards incumbents which enables leaders to skim off aid resources for themselves and their cronies.  Further since in small coalition systems aid generates few of the societal benefits that it would under large coalition institutions, aid increases the desire of citizens to rebel.  Leaders can respond to such revolutionary threats by either buying off potential rebels by increasing the supply of public goods or retarding their ability to organize by suppressing public goods.  Aid increases the relative attractiveness of the latter option because aid provides governments with "unearned" revenues that are relatively isolated from the economic decline induced by the suppression of public goods.  The model also implies that aid can retard democratization.

I read that and I thought "today I learned something."  Both pointers are from www.politicaltheory.info.

Addendum: Here is more Sachs, via Mankiw.

Should old people move to Panama?

Panama has started a bidding war for retirees:

To attract more investment, the central American nation has eased
immigration laws and set up a discount bonanza for expatriate
pensioners that includes 20 percent off professional services such as
those provided by lawyers, architects and physical therapists; no
property tax for 20 years; no income tax on income earned outside
Panama; and a 50 percent discount on real estate closing costs.

And
that’s only the beginning. The list of discounts goes on and on,
including price breaks on telephone service, surgery and domestic
airfares and a one-time waiver of duties on imported household goods up
to $10,000.

All it takes to qualify is pension income of $500 or more per month — at any age and from any source.

Here is the story

I can think of four relevant models here.  1. The Panamanian government is simply stupid.  2. In Panama most prices are well above marginal cost, making this a good deal for the nation as a whole.  3. The Panamanian government has a preference for sources of wealth which will not get involved in politics.  4. The Panamanian government believes that the greater number of residents will result in a more efficient spreading of fixed costs.  I put my money on #2 and #3, and do visit Panama if you have never been; it is far more interesting than the now overtouristed Costa Rica.

Kramnik vs. the computer

The match started today, six games, here is a good overview article.  Kramnik gets a million dollars if he wins, $500,000 otherwise.

Here are the rather complicated match rules; Kramnik has unparalleled access to the opening book and workings of the machine.  Here are numerous expert opinions, many favor Kramnik.  Sorry guys, but I predict one computer victory and the rest draws.  Here is commentary by Kramnik.  You can watch the games live here.

One commentator put it well: "The last match was drawn – against a weaker version of Fritz on lesser
hardware.  And there’s no reason to think that since that match, Kramnik
has learnt to calculate an extra 6 billion positions per second."

But so far, in game one, the outcome was a draw and Kramnik had a slight edge throughout…

Addendum: Kramnik missed a win.

Headaches

Tyler asks, following philosopher Alastair Norcross, whether it could ever satisfy a cost-benefit test for one person to die a terrible and tortured death in order to alleviate the headaches of billions of others by one second.  Tyler begs off with "a mushy mish-mash of philosophic pluralism, quasi-lexical values" and moral conceit.  I will have none of this.  The answer, is yes.

The clearest reason to think that we should trade a terrible and tortured death of one in order to alleviate the headaches of billions is that we do this everyday.   Coal miners, for example, risk their lives to heat our homes and to generate the electricity that drives this blog.  We know that some of them will die horrible deaths but few of us think that we are morally required to give up electricity.

Implications of a zero discount rate

From the comments, Jane Galt asks:

…doesn’t a zero discount rate imply that even something that imposes trivial costs on each future generation should be avoided at catastrophic cost to us?

I would pose the question more broadly.  If a policy imposes a great cost on one person, but involves many small benefits for others, should we always evaluate that policy by summing the respective costs and benefits and finding the net value? 

The same question can be posed in both intertemporal and atemporal contexts.  Philosopher Alastair Norcross made his name by considering Parfit-like conundrums.  Let one person die a terrible and tortured death, but alleviate the headaches of billions of others by one second.  (No, by its construction, this is not an exercise in risk reduction or Rawlsian reasoning.  It is just a brute comparison of certain costs and benefits.)  If the billions are large enough in number, is this worth it?  Or does the suffering of the lone individual hold special status?

If we are willing to swallow this trade-off, we can accept it in the intergenerational comparison as well.  I would myself balk at the notion, citing a mushy mish-mash of philosophic pluralism, quasi-lexical values, and the conceit of my moral intuitions.  My conclusion is that we should modify cost-benefit analysis for (among other things) distributional concerns, but that the cost-benefit analysis should itself be done straight up.  In any case, a non-zero discount rate, applied to consumption streams, would not do justice to the relevant moral intuitions about distribution.  We might wish to count the wealthy for less, but not everyone in the future will be so wealthy, especially when China, India, and Bangladesh matter for the issue at hand.

Addendum: Here is commentary from Jonathan Adler.

Tim Harford on long-distance relationships

In today’s FT:

Economist Tyler Cowen, a professor at George Mason University, has
pointed out that the Alchian-Allen theorem applies to any long-distance
relationship.

The theorem, briefly, implies that
Australians drink higher-quality Californian wine than Californians,
and vice-versa, because it is only worth the transportation costs for
the most expensive wine.  Similarly, there is no point in travelling to
see your boyfriend for a take-away Indian meal and an evening in front
of the telly.  To justify the trip’s fixed costs, you will require
champagne, sparkling conversation and energetic sex.  Insist on it.

Meanwhile,
optimal-experimentation theory suggests that at this tender stage of
life you are highly likely to meet someone even better.  Socialise a lot
while your boyfriend is not around.

Here is Trudie on that same topic.  By the way, here are two clips from Tim’s BBC Econ TV show, on YouTube.

Thanksgiving dinner

For a variety of logistical reasons, we are doing it today.  I will sizzle fry some bacon strips in peanut oil, then tossing in garlic and small cauliflower florets.  One cup of very fresh chicken stock, simmer until ready, and salt and white pepper to taste.  Sichuan style, very yummy, and that is just the start of the meal…

Nordhaus review of Stern on global warming

Here is Bill Nordhaus’s critique of the Stern report.  Nordhaus argues that Stern’s "new" results boil down to the choice of a lower discount rate.

I agree with Stern that the discount rate should be zero or near-zero for resources which will not be reinvested but rather represent alternative consumption streams across the generations.  If we are doing normative analysis, however, and considering alternatives to controlling global warming, a’ la Copenhagen Consensus, we are by definition considering other investments.  In that case the correct rate of discount is given by opportunity costs, which might be quite high, provided the alternative investments will in fact be undertaken.  (On this topic, there are a few really good comments here.)

Having pondered the report a bit more, my main question is what it would cost for China and India to cut back on carbon emissions, all relevant institutional changes included in the calculations.  In other words, that figure should count costs of persuasion, enforcement, and implementation, not just the cost of one technology rather than another in the abstract.  We do not have a good sense of these costs, and given how many basic tasks these economies fail at, I can imagine the cynic citing the figure of infinity.  (To consider one analogy, what is "the cost" of getting avian flu out of China?)  Furthermore China in particular has a high rate of savings, and both economies have high rates of return on capital.  Current compliance costs should thus be compounded, when considering their future importance, at rates considerably higher than zero.