Month: April 2007

One meal at Per Se

Many people consider Per Se the best restaurant in Manhattan, here are some trade-offs:

The single most caloric menu item was the foie gras, weighing in at
435.4 calories; followed by café Liégeois (basically a gourmet brownie
with ice cream), with 185.8 calories.  The single least caloric was the
buttermilk sorbet, owing in part to its spoon-size portion (23
calories).  All told, the nine courses tallied 1,230.8 calories, 59.7
grams of fat, and 101.7 grams of carbs.  The total rises to 2,416.2
calories, 107.8 grams of fat, and 203.7 grams of carbs if you include
the extras: a salmon amuse-bouche, wine, dinner rolls with
butter, and chocolate candies.  These might not seem like giant numbers,
but that one lunch has 60 percent more fat than the average adult, on a
2,000-calorie regimen, should eat in a day, according to the FDA.  To
work off that meal, a 155-pound person would have to walk the route of
the New York City Marathon, plus an additional five miles.  Or he could
swim round-trip from Battery Park to the Statue of Liberty nearly three
times, or do basic yoga for 13 hours and 42 minutes.  It’s also roughly
equal in calories to six slices of DiFara‘s cheese pizza, ten Gray’s Papaya‘s hot dogs, or, it seems appropriate to note, four and a half Big Macs.

If we can assume linearity, this $250 meal (plus wine and tax and tip) costs you about $9 worth of health.  In other words, don’t worry about it.  Here is more, via Jason Kottke.

Did Paul Krugman commit the Junker fallacy?

It’s possible that sluggish business investment reflects lack of confidence in the economic outlook –… that’s understandable given the bursting of the housing bubble…But…there is a more disturbing possibility.  Instead of investing in physical capital, many companies are using profits to buy back their own stock.

Here are longer excerpts.  Of course stock buy-backs do not take away resources for subsequent investment.  The money used to buy shares can still be funneled into the purchase of capital goods, as no real opportunities have been taken off the table. 

That said, cash "in the firm" is more likely to be invested than "cash in the hands of investors," for reasons of credit rationing and other institutional rigidities (for instance borrowing money brings more outside scrutiny).  Given the size and profitability of these firms, however, I do not expect that the credit rationing effect is a large one.  The causes of the sluggishness of investment are thus to be found elsewhere than through this financial mechanism.

Here is my earlier post on the Junker fallacy.  I believe this sort of argument was first criticized by Fritz Machlup in his book on the stock market.  Of course if you wish to save the claim through various second best arguments, comments are open…

Trade and the Moral Community

Much of the recent trade debate between Rodrik, Mankiw, Tyler and others (see Tyler’s excellent post for links) is primarily not about positive economics but about the relevant moral community. Rodrik, for example, hasn’t argued that trade does not increase aggregate wealth he has argued that trade is not guaranteed to increase national wealth – something quite different.  I consider three moral communities and the case for trade.

Peter wishes to trade with Jose.  The individualist says the relevant moral community is Peter and Jose and presumptively no one else.  Trade, the right of association, is a human right and on issues of rights the moral community is the individual.  When Jose offers Peter a better deal than Joe it’s wrong – a moral outrage – for Joe to prevent Jose at gun point from trading with Peter.

The more common view expressed implicitly by Dani Rodrik, but by many others as well, is the nationalist view, the moral community is Peter and Joe.  Joe gets a vote on Peter’s trades.  Peter should be allowed to trade only if both Peter and Joe benefit, otherwise too bad.  Jose counts for less.

A third view, that of the liberal internationalist, says that Peter, Jose and Joe count equally and are together the moral community.

Now how does the positive economics apply to these three cases?  Peter and Jose presumptively are better off from trade otherwise they wouldn’t trade so the individualist economist (the economist who takes Peter and Jose as the relevant moral community) will support free trade.  The liberal internationalist will also support free trade because there is a strong argument from positive economics that trade increases total wealth (comparative advantage, specialization, competition etc.).

In between, we have the nationalist economist for whom it depends.  The case for trade for the nationalist economist is pretty good – after all the individuals involved benefit and the world benefits – so the case is reasonably strong that Peter and Joe taken together will also benefit especially if we consider many trade pacts on some of which Joe benefits directly.  Nevertheless, Rodrik is correct that when you exclude Jose it is possible to come up with examples where Joe’s losses exceed Peter’s gains.

I would argue, however, that economists are too quick to take the nation as the relevant moral community.  It is quite possible, for example, for Peter to benefit from trade but for Peter’s city to be harmed, for Peter’s state to benefit but for his region to be harmed, for his country to benefit but for his continent to be harmed.  Why should we cut the cake in one way, excluding some from the moral community, but not in another?  Indeed, geography is not the only way we can define the moral community.  Why not ask whether English speakers benefit from free trade or Christians or left handed people?  Each of these is just as valid as asking whether the collection of people called the nation benefit from free trade.

I understand individual rights and I understand counting everyone equally but I see less value in counting some in and some out based on arbitrary characteristics like which side of the border the actors fall on.

Jacob Hacker’s *The Great Risk Shift*, part II

Jacob Hacker writes:

I have received many questions about the Congressional Budget Office’s (CBO) recent report that finds that individual earnings volatility, while extremely high, has not risen since the 1980s.  Although this new research significantly expands what we know about individual earnings volatility, it does not challenge my contention that family income volatility has grown, nor is it at odds with my larger argument that the level of economic risk that families face has risen dramatically.

Do read his entire response, and ask exactly how many of the paragraphs speak to the point at hand.  The CBO data appear perfectly good, and point in an overwhelmingly consistent direction across different measures; in contrast Hacker’s measure of volatility is extremely complicated and non-intuitive.  In his response, Hacker never challenges the claim that individual volatility of income doesn’t seem to be rising.

His response focuses on the difference between individual and family income, but this comparison should not in general favor him.  Note that a) divorce rates generally are falling, b) on net families provide income and wealth insurance, c) volatility swings in the upward direction are good rather than bad, and d) if a woman darts in and out of the workforce, for optimizing reasons, this will boost family income volatility but that is fine.  Try telling any of the standard Hackeresque stories — "we are now more buffeted by the winds of change" — and making it consistent with an essentially unchanged level of individual income volatility.  That is very hard to do in a convincing manner.

Go again to Hacker’s calculationsHis volatility index is especially high today and especially low for 1974-1982.  Those were the days of double-digit unemployment, rampant inflation, prime rates of 20 percent, oil price spikes, and universal feelings of volatility and decline, not to mention lower transfer payments from government.  That doesn’t pass the "huh?" test.

You’ll notice other funny features of his measure; for instance 1993 is about "twice as volatile" by Hacker’s pre-tax metric as 1991.  Was America getting so much shakier over those two years, otherwise considered economically healthy?  For purposes of contrast, the difference between 1974 (the first year in the series) and 2000 (the next to last year) is also by a factor of two.

Here is the CBO report, do paw through those graphs (sadly I can’t get them to reproduce on this page but they are crystal clear).

See what Hacker is pinning his hopes on:

Unlike earnings volatility, family income volatility hinges on (1) the joint labor supply decisions of workers in the family; (2) family formation, expansion, contraction, and dissolution; (3) the earnings and losses of family-owned businesses and capital holdings; and (4) government taxes and benefits. Each of these could cause individual earnings volatility and family income volatility to follow different paths.

Factor 1) works against him, given the families diversify risk to some extent.  On 2) he doesn’t mention falling divorce rates but rather stays vague, 3) might help him but if the family owns a business or great deal of capital it is probably not a public policy problem, noting that much of this volatility may be in the upward direction, and 4) government benefits should provide insurance on net.  His last sentence in that paragraph — "Each of these could cause individual earnings volatility and family income volatility to follow different paths" — simply isn’t very potent.

Also recall that Hacker’s original estimates try to convert family income into individual income by a mathematical operating involving the division by the square root of family size.  That is admittedly an imperfect conversion but how does it square with his claim #2 that varying family size will help his argument?  He claimed his attempted conversion to an individual level measure as a virtue of his original method, but now that we have a direct measure of individual volatility he is moving back in the direction of claiming the family estimate is on his side.

It can plausibly be argued that unemployment duration has increased, and that this class of losers is simply stuck in a bad state without necessarily seeing much income volatility.  This is a) far weaker than Hacker’s thesis, b) does not affect the population as a whole, and c) unemployment rates are generally low even if many spells of unemployment are longer.

Here is my first post on Hacker’s book, which criticizes some of his non-income volatility claims. 

Does free trade bring lower prices?

Dani Rodrik says not really:

Advocates of globalization love to argue
that free trade lowers prices, and the argument seems sensible enough.
Think of all the cheap goods from China that we can buy at Wal-Mart.  But anyone who understands comparative advantage knows that free trade affects relative prices, not the price level (the latter being the province of macro and monetary factors).  When
a country opens up to trade (or liberalizes its trade), it is the
relative price of imports that comes down; by necessity, the relative
prices of its exports must go up!  Consumers are
better off to the extent that their consumption basket is weighted
towards importables, but we cannot always rely on this to be the case.

The intuition is this: if my household suddenly trades with the outside world, bread is cheaper but my wife has superior opportunities than before.  It might be harder for me to bid for her time and I will have no one to play tennis with.  If I enjoy tennis enough, I might be worse off.  If you want a real world example, American
ethanol use is bidding up the price of Mexican corn; not every
campesino is better off.

Greg Mankiw responds, and Rodrik in turn, then Mankiw again.  I would put it as such.  The real gain from trade is the additional output; it should not be surprising if the pecuniary externalities (higher and lower prices) should prove a wash rather than an additional net gain.  In fact a wash of the pecuniary externalities helps ensure that the output effect dominates the welfare calculus. 

More empirically, having your export prices bid up is a wonderful driver of growth more than it is a distributional or efficiency nightmare.  The net externalities of that process are usually positive rather than negative, even without firm- or industry-level increasing returns in the traditional sense.  The exports help build a middle class and in the long run make democracy and rule of law possible.  The dynamic effects are the key to the benefits of trade, and neither the Ricardian nor the Heckscher-Ohlin model is satisfactory.  The best simple (ha!) model has trade bringing more innovation, new goods with high consumer surplus, greater reason to work hard and get ahead, greater domestic inequality, a growing middle class, and new and usually more liberal political coalitions.

Empirically, the troubled cases of trade typically involve exports of oil or diamonds and subsequent corruption.  The relevant problem with trade is not higher prices for home consumption, in fact home consumption of those commodities is usually quite low.  How much oil does Guinea-Bisseau use?  We’re left with Mexico and corn prices as a possible example, but note that Mexico would have much lower corn prices with free trade in corn.  And it is U.S. government subsidy, not the market, bidding up the price of corn in the first place.

Maybe we’re left with this as the relevant real world example: outsourcing in India drives up wages and makes life harder for people who want lots of servants.

My Inner Misesian is uncomfortable with Rodrik’s strong distinction between relative prices and the absolute price level.  Productivity shocks (which are in critical regards analogous to an expansion of trade) can and do lower most of the prices we face, albeit not all of them.

I don’t disagree with Rodrik’s claims about positive economics, although they don’t quite "shade" as I might wish.  I would have liked to have seen the sentence: "The early 20th century trade theorists discussed by Jacob Viner and Gottfried Haberler knew about these problems, but they also realized they did not, when viewed in a realistic context, weaken the case for free trade."

Addendum: Read this survey paper on trade.

Why is Brazil so messed up?

History matters, once again:

This paper analyzes the roots and implications of variations in de facto institutions, within a constant de jure institutional setting.  We explore the role of rent-seeking episodes in colonial Brazil as determinants of the quality of current local institutions, and argue that this variation reveals a dimension of institutional quality.  We show that municipalities with origins tracing back to the sugar-cane colonial cycle – characterized by a polarized and oligarchic socioeconomic structure – display today more inequality in the distribution of land.  Municipalities with origins tracing back to the gold colonial cycle – characterized by an overbureaucratic and heavily intervening presence of the Portuguese state – display today worse governance practices and less access to justice.  Using variables created from the rent-seeking colonial episodes as instruments to current institutions, we show that local governance and access to justice are significantly related to long-term development across Brazilian municipalities.

Here is the paper.  Hat tip to Leonardo Monasterio, who now has his own blog.

How to get good grades

Reading, Writing, and S*x: The Effect of Losing Virginity on Academic Performance:

Controlling for a wide set of individual- and family-level observables
available in the National Longitudinal Study of Adolescent Health,
ordinary least squares (OLS) estimates show that sexually active
adolescents have grade point averages that are approximately 0.2 points
lower than virgins.  However, when information on the timing of
intercourse decisions is exploited and individual fixed effects are
included, the negative effect of sexual intercourse disappears for
females, but persists for males.  Taken together, the results of this
study suggest that while there may be adverse academic spillovers from
engaging in intercourse for some adolescents, previous studies’ estimates
are overstated due to unmeasured heterogeneity.

That is from economist Joseph J. Sabia.  Robin Hanson, my source, wrote:

My interpretation:  Teen boys who want sex out of teen girls have to
spend a lot of time in sports, fights, clubs, signaling their
attractiveness.  Teen girls who want sex just have to say
"yes", and the sex itself takes little time, especially given
that teenage boys are the partners.