Month: March 2007


A loyal MR reader asks:

Africa.  What are your long term predictions?  Which policies should rich countries adopt?  Which will they adopt?  What can I do?

My long-term prediction is that Africa will stay quite poor.  Rich countries should offer Africa complete free trade, but the benefits of this move are overrated.  Low productivity, and transport costs and corruption within Africa remain the central problems, not foreign tariffs. 

Libertarians are too quick to say that foreign aid is counterproductive.  Most African governments would be corrupt anyway, and there is usually some positive trickle-down from the aid.  The wastage is massive, and I can understand the desire to stop sending government-to-government aid, but there is a real moral dilemma. 

I also think most of Africa is in a Malthusian trap. That is perhaps the better critique of aid, but alas also of trade as well.  But even within this trap, wealthy foreigners can help make the transition from one steady state to another less painful.  And the trap need not hold in every local corridor.  Plus we are offering a lottery ticket (with what p?) out of the trap.  Malthus doesn’t mean we should turn our backs on suffering. 

The intellectual property issues, when it comes to copying drugs, involve an irreconciliable clash between rule and act utilitarianism. 

Africa is a much bigger moral dilemma than most people are willing to admit.  And that moral dilemma appeared pretty big in the first place.

I see some chance that parts of Africa, such as Ghana and Senegal, will escape the Malthusian trap within twenty to thirty years.  That’s the most positive prediction I am willing to make.

You can do some good if you are willing to directly administer medical treatments to Africans, in Africa.

Here is an interesting bit:

“Thinking about problems analytically can easily suppress sympathy for smaller-scale disasters without, our research suggests, producing much of an increase in caring for larger-scale disasters”, the researchers said. "Insight, in this situation, seems to breed callousness".

#14 in a series of 50.

What do unions do for economic performance?

I’ve spent the last few days perusing the economics of unions.  I’ve unearthed Barry T. Hirsch’s useful and serious piece, which looks at whether the Freeman-Medoff pro-union work from the 1980s has held up.  Here are a few select quotations from the article:

…while it is true that much of the negative relationship between unions and growth is not causal, slower growth is partly attributable to the lower profits and investment resulting from union rent seeking.

Empirical evidence on unions and productivity was rather sketchy in 1984; it remains less than clear-cut today.

…union firms reduce investment in physical and innovative capital, leading to slower growth in sales and employment and shrinkage of the union sector.

…empirical evidence for skill upgrading [through union participation] is weak.

The thesis that unions substantially increase productivity has not held up well.  Subsequent studies are as likely to find negative as positive union effects on productivity.

…employment declines have been concentrated in the unionized sectors of the economy.

…the empirical evidence finds that U.S. unions are associated with slower employment growth…

I am genuinely puzzled why the highly intelligent segment of the left-wing blogosphere is so attached to the legal encouragement of labor unions.

The demand for Trudie

Trudie told me:

Two problems are operating in tandem.  First, some people are never happy with anything.  Second, not all choices are convex (read: you can’t have .73 of a kid, or with ease marry 0.4(Tom) + 0.6 (Tony).  In this case the predominance of the first problem renders the second irrelevant.  "Do you want to hate just any man, or do you want to hate the man of your dreams?"  Given the costs of rent exhaustion, you might as well hate any man.

The normative upshot is not to marry, if only to maximize social welfare on the male side.  She hasn’t found any man "good enough" for her yet, which is a bad sign.  It would be more encouraging if she had written: "I once met Mr. Right — just the proper blend — but sadly he was married.  How can I find another just like him?"

The new problem is to precommit to not marrying.  That’s a tough one.  Investing in higher education no longer does the trick.  How about having an ugly kid?  Here is another strategy, but Tyler can ask his readers for better ideas.

Tyler is not so extreme and as you might expect he is just a wee bit more humane.  He recommends playing an imagined strategy of 0.4(low class guy) + 0.6(high class guy), but taking your time with the actual choice, so you can bask in the expectation of having it all…

Poor People

In 1999, a poor Colombian told me that his eighty-two years had finally dulled his fear of violence, which had tormented him because he had been robbed many times, once they’d cut his belly open — I requested his opinion of the rich — He clenched his fists and said: Oh, they don’t do nothing for the poor people!

The ones who had harmed him were poorer than he — and still he hated the rich.

That is from William Vollmann’s intermittently fascinating Poor People.  Here is an earlier post on Vollmann.

Access denied?

A few MR readers have informed me that as of yesterday they cannot pull up MR in their governmental offices; we have been classified by some of the technical services as not quite a family site.  I believe I have spotted and removed the offending text passage, it was quite innocuous, two simple words, used in the context of the art world.  Of course I cannot repeat them here without courting further trouble (but the first was the opposite of "cold," the second was those twinkling things up in the sky).  Do you all have any advice on how/when service will be restored to these desperate, clamoring individuals?

Who is healthy?

From MR comments:

Japanese Americans have the longest measured life expectancy on this
planet.  Mormons live 10 years longer on average than Europeans.  Black
men in the US live 8 less on average than Hispanic men…they [Americans] can get
“cheap” European care if they like, just create extremely bad American
HMO insurance, or don’t buy health care at all and go to Public
hospitals.  The reason the European systems are cheaper is not that they
magically have less costs, it is that they give the consumer much less
health care.  Of course the people in the US that go to public hospitals
in the US are not the same kind of people that consume government
health care in Europe.  This makes the health outcome different, even if
the quality of the health care is not.

Link here.  Another reader writes:

The single largest group (30% of all the [un]insured) are Hispanics. 
Hispanics have the same (actually slightly higher) life expectancy as
the average American.

Life expectancy statistics are tricky, but these claims hold up under the scrutiny of Google.  More importantly, the claims "sound right wing" but actually they provide the best argument for single-payer health insurance to be found: "The link between health and health care is murky, so let’s just save money on our health system."

That is another example of Stories You Won’t Often Hear

I’ve yet to see a fully convincing answer.  Of course this is not the kind of low-cost, government-run system we would end up with in the United States, but we can still debate whether Europe should switch to some other system, and for the time being perhaps the answer is no…

Should they simply wait for the day when health care matters more than it currently does?

Garvey Fellowships

The Independent Institute, where I am research director, is offering fellowships to students and young professors for essays on the theme "Is Foreign Aid the Solution to Global Poverty?"  Previous winners of the Garvey essay competition include Alan Stockman, Thomas Hazlett, David Kelley, Bryan Caplan and many others.

Young Professors: Win up to $10,000

Although the Olive W. Garvey Fellowship Competition is well known for its college student essay contest–which awards $2,500 for the 1st Prize essay–the competition also has a faculty division. Untenured college professors no older than 35 years of age can win $10,000 for their 1st Prize essay!

This year’s topic is foreign aid.

“Is foreign aid the solution to global poverty?”

A 2005 United Nations report called for a doubling of foreign aid to poor countries as the means to reduce poverty. Yet the 2006 Nobel Peace Prize was awarded to a for-profit microloan bank and its founder, an apparent vindication of the ideas of Peter T. Bauer, Henry Hazlitt, Deepak Lal, and others. As Bauer wrote, “Development aid, far from being necessary to rescue poor societies from a vicious circle of poverty, is far more likely to keep them in that state.…Emergence from poverty requires effort, firmly established property rights, and productive investment.

The deadline for essay submissions is May 1, 2007.

More details on the Olive W. Garvey Fellowship Competition

The incidence of unions

To some extent higher union wages translate into higher prices for consumer goods.  Over a five year time horizon I’ll guess at 50 percent pass through, adding that most of these goods are bought by other laborers.  Just to be flippant, for each dollar gained by a union member, I’ll guess that labor market "outsiders" lose 50 cents.

Notice we haven’t even counted negative effects on the rate of future economic growth, or for that matter costs to employers.

We already don’t have workers, viewed as a class, coming out ahead.

I would be curious to hear the numbers assumed by those who wish to encourage labor markets by law.  I would be curious to hear how much they think, over say a ten-year time horizon, wages deviate from labor productivity.

Inquiring minds wish to know.

Does marginal cost equal price?

We’re all taught that in a competitive industry price will equal marginal cost.  Well, what is a competitive industry?  There are lots of Chinese restaurants in or near Fairfax, and with a few noble exceptions they have more or less the same menu.  Each could serve an extra diner at essentially zero marginal cost, yet the price of the food is not zero.  Not even marginal meals are given away for free, except perhaps to the staff.  If price is equal to marginal cost, we have to ask equal to which marginal cost?  The marginal cost of one more Kung Pao Chicken?  The marginal cost of being known for giving some meals away?  The marginal cost of possibly setting off destructive price competition with rivals?  The concept of marginal cost relies on a definition of time horizon, strategic assumptions, and the counterfactual against which real world action is being compared.  Yikes.

Armen Alchian and Fischer Black are the guys to read on what cost really means (Buchanan and the Austrians only get you so far).  If you really want to get dizzy read Lester Telser on when there is a core, and wonder whether the industry you have in mind meets his screwy but essentially correct standards for MC, AC, and no coherent equilibrium.  It’s not just the airlines.  So when is price equal to marginal cost, average cost, or some blend of the two?  And which definitions of average and marginal cost? 

What about "reality"?  Toss a bone to social frictions, then ask for some micro-studies of how "competitive" industries price in the short run.  Use interviews and ethnography to supplement the formal models.  In practical terms, you might end up with some understanding of a) why prices can be sticky in apparently competitive industries, and b) why few businessmen — including high IQ types — will admit to pricing at marginal cost or even understand what that means.

The bottom line: I’ll say that MC is flat if truly all inputs are replicated.  But that’s never the case, so MC is usually zero under one set of counterfactuals and sloping upward dramatically under another set.  That’s not the end of the world, live with it.

The second bottom line: When it comes to teaching the students, just tell them that marginal cost slopes upward at some point.  After all, sooner or later they all stop studying.

The third bottom line: #13 out of 50.

Why isn’t The Wall Street Journal free on-line?

Steve Levitt wonders.  My view: in a given WSJ issue, there will be a small number of wonderful bits, and a whole lot most people don’t care about, like the notices of the debentures.  A free web site would make it too easy to cherry-pick the interesting content, strip it down, and reproduce it and circulate it without the ads.  Even if WSJ could enforce a price on the unbundled content, bundling can facilitate price discrimination, especially when the diversity of valuations of bits is high.

The FT, which also has a gated web site, is similar; their best article on a given day is wonderful, but I don’t read most of what they offer.  Many mornings I won’t even open up the second section, who cares about European debentures? 

When your newspaper is more like a "thicket," the best packaged version of that paper is the paper’s website itself and useful unbundling is difficult.  Note that the so-called chaff business notices in the WSJ are in fact intensely interesting to the few people they immediately affect.  That makes it possible to charge for such news, even though it doesn’t contribute to producing a thicket of content for most readers.  We return to the potential dangers of unbundling, and the possibility of picking apart the WSJ until it isn’t a newspaper any more.  An upfront charge makes sure the value is reaped before most of the paper is discarded.

Agreeing on unions?

Ezra Klein has an interesting post on union elections, favoring greater unionization; Jane Galt is not persuaded. [Addendum: Mark Thoma has more.] 

I propose a deal.  I’ll agree that unions, in the best natural experiments we have, boost wages by about 10 to 20 percent.  On the other hand, will Ezra (and others) agree that unions are mostly detrimental to the rate of economic growth?

If so, the utilitarian evaluation will boil down to the choice of discount rate, keeping in mind that under the left-wing account the gains follow mostly from redistribution more than from wealth creation.

Admittedly the empirical literature on unions and economic growth is murky.  But it does seem that in non-socialist societies, more unionization lowers the growth rate.  (In socialist societies, it may be that economy-wide unions internalize some poliitical externalities and lead to better policy, a’la Mancur Olson.)  These papers are easy enough to criticize, so I’ll admit I am more convinced by simple theory here than by any empirics.  Unionization raises the cost of many growth-enhancing business decisions, such as layoffs or implementing technical progress.

Union supporters?  Do we have an epistemic deal about how you are willing to lower the growth rate?  And can we pull your true discount rate from the Stern/global warming debates?  (I recall Jane once writing that a zero discount rate would require her to revise everything she believed, but I think the opposite is sooner true.)

Oh, did I mention that the union wage premium, especially for private sector employees, has been declining and may be disappearing altogether?

And no, I will not be moved by sarcastic attempted reductios which pretend that enslaving the workers would raise the growth rate too.  Figure out yourself what is wrong with that.

Addendum: Johan Richter asked for: "Your preferred policy towards unions," so I’m calling this #12 out of 50.  My preferred policy is laissez-faire, noting I have never been a right-wing, union basher, Morgan Reynolds sort of guy.  But I see encouraging unions through the law as a relatively short-sighted solution to the problems of labor and the desire to raise living standards.

Hong Kong

[Milton] Friedman routinely overlooked three key facts about the city in the years of its rapid growth: as much 50 percent of its housing receives a substantial government subsidy; its citizens enjoy almost free medical treatment at government clinics and hospitals; and the cost of its defense has been borne entirely by the United Kingdom and now China.  Mark these services to their market prices, said the Sentinel, and the famously low share of government spending in GDP climbs sharply.

That is David Warsh.  Here is more, including also a discussion of the sale of Paul Romer’s on-line Aplia to Thomson.

Assorted links

1. Summarizing a blog, alternatively try the new Alina Stefanescu, or how about this new hybrid genre, starring Megan McArdle and Will Wilkinson? 

2. New open access economics journal: "The quality of an article is decided not just by the editors and referees, but also by the entire community of Registered Readers."

3. Tim Harford on race, discrimination, and outcomes, Tim Harford on good looks, and Tim Harford on me.