Month: April 2007

The Democratic party wants to help me

House Democratic leaders, in an effort to upstage Republicans on the issue of tax cuts, are preparing legislation that would permanently shield all but the very richest taxpayers from the alternative minimum tax, which is likely to affect tens of millions of families as early as next year if it is left unchanged.

Here is more.  Of course this rather non-egalitarian policy, very costly in terms of revenue, is the Democratic attempt to reward their wealthy urban and suburban supporters.  One response — common in the contemporary blogosphere — is to press the Democrats to become more and more "progressive."  Another response, more popular on, is to accept modest aspirations for politics and look to entrepreneurship, trade, and productivity growth for progressive gains.

It was ugly what years and years of power did to the Republican Party.  The particular interest groups will differ, but I do not understand why the progressives expect anything better from the Democrats.

The Sushi Economy

The centers of the sushi economy in the twenty-first century are sites of exchange and connection.  Today, the places with the freshest fish — and often, the telltale aroma that draws attention to such privileged locations — are airport cargo hangars and refrigerated storage facilities located near highway interchanges.

That is from the splendid The Sushi Economy: Globalization and the Making of a Modern Delicacy, by Sasha Issenberg.  Most people do not know how much sushi is shipped across borders, and how much the very "freshest" fish has in fact been frozen.

The Golden Age of Medical Innovation

Writing in The American John Calfee surveys the recent history of medical innovation.  I was especially struck by Lucentis, a new drug that Science magazine ranked sixth in its ten breakthroughs of the year (number one was the solution to Poincare’s conjecture).   Lucentis has had stunning success in treating age-related macular degeneration, the leading cause of blindness in seniors. 

What makes Lucentis, as Calfee notes, especially interesting is that Lucentis is what industry critics call a "me-too" drug, a simple twist on another drug.  Moreover, it’s a twist on a drug originally approved to to treat cancer but subsequently used off-label to treat AMD.

Why won’t they allow cell phones on planes?

Notice that this post is filed under "Economics."

The airlines fear "crowd control" problems if cell phones are allowed
in flights.  They believe cell phone calls might promote rude behavior
and conflict between passengers, which flight attendants would have to
deal with.  The airlines also benefit in general from passengers
remaining ignorant about what’s happening on the ground during flights,
including personal problems, terrorist attacks, plane crashes and other
information that might upset passengers.

This is also relevant:

However, the airlines know that some kind of plane-to-ground
communication is coming, and they want to profit from it.  Simply
allowing passengers to use their own cell phones in flight would leave
the airlines out of the profit-taking.  Airlines would prefer that
phones be banned while they come up with new ways to charge for
communication, such as the coming wave of Wi-Fi access.  Meanwhile, the
ban is potentially more profitable.

Here is more.

Economic heterogeneity and Latin America

A loyal MR reader tries to stop me from reaching #50:

Economic Development for the heterogeneous Latin America.  Or how the social, economic and cultural heterogeneity between and within Latin American countries affect their development prospects and/or strategies.  You have mentioned that a stronger (not bigger) state seems necessary; but does that mean different things for Bolivia, Guatemala, Ecuador and Peru, versus Colombia, El Salvador, Costa Rica, Paraguay and Argentina?

In response (non-response?) I’ll quote Jeff Sachs (this link is also an excellent piece on him):

I’m optimistic about Brazil.  And if you look at a map, being
optimistic about Brazil takes you a long way to being optimistic about
the whole of Latin America.  I don’t lose huge sleep over Latin America
– it’s at peace, it’s not riven by terrorism, it’s democratic and it
has made huge strides in human development.  What have been hugely
unequal and divided societies are becoming slowly more equal, and even
very deep ethnic and racial divisions are being ameliorated through
democratic politics.

I’ll add that Latin American states are usually a disaster when it comes to collecting taxes.  This might sound good from a libertarian point of view, but those governments instead resort to distortionary monopolies and corruption to raise revenue or capture political rents.  The solution is not higher taxes per se (governance improvements are also needed), but rather a series of sideways squiggles into the "greater accountability, more tax-based" modes of government.  That doesn’t come easy, and that is also why the usual recipe of privatization so frequently disappoints or backfires.  These territories have yet to build well-functioning nation-states.

Western-style neoclassical economics was designed for settings where national institutions are already in place.  In most of the world, they are not.  The question is not "market vs. government," but how to strengthen the norms and institutions that will build both markets and governments at the same time and in the right directions.  Along that dimension, Latin America is making real strides ahead, and that includes all of the countries listed in the initial query, with the possible exception of Bolivia.

#38 in a series of 50.

Why are free trade agreements “contagious”?

In Venice I read how the Japanese are concerned about the U.S.-South Korea free trade agreement, and might seek their own trade deal with the United States.  The Japanese are afraid of being "left out in the cold."  I’ve also read speculation that a South Korean trade agreement might make Congress look more favorably upon free trade agreements with Latin America.  So why might one free trade agreement lead to others?  I can think of a few hypotheses:

1. Free trade agreements lead to considerable amounts of trade diversion, not just more trade.  The "left out" countries fear that trade diversion and thus wish to cut their own bilateral deals.

2. Free trade agreements show that other governments have found a commitment to greater trade worthwhile.  This may signal that either that benefits of trade are especially high, or that anti-trade interest groups are especially weak.

3. There is a big copycat effect in politics and public opinion, as evidenced by the historical clustering of revolutions and reforms.

4. A bilateral free trade agreement means that the U.S. will regard South Korea as a closer political ally than before, and Japan (and others) wish to keep in step.  In particular Japan wishes to keep "first dibs" on U.S. military protection and be the "go-to" country in international fora and joint endeavors.

What have I left out?

Note that under #1, bilateral trade agreements might lead to inefficient trade diversion, but the resulting spread of trade agreements will reverse many of those costs.

Here is John Nye on the historical tendency of free trade agreements to prove contagious.  Here is Mark Thoma on trade diversion.

The bottom line: I haven’t read the details of the U.S.-South Korea agreement, but I suspect that in this setting even a highly imperfect trade agreement is a net plus.

It’s only one data point, but…

Employers are not only hiring more, but they are paying more, too.  The
average hourly earnings for workers rose 4 percent in March compared
with those a year earlier, to $17.22 an hour.  The gains in weekly
earnings were even stronger, up 4.4 percent, to $583.67.

Here is the story.  I believe that the much-heralded "real wage stagnation" consists of three major factors: a) potential real wage increases being absorbed by rising health care premiums in the broader employment package, b) unmeasured improvements in the quality of economic life, the internet being one example, and c) an unusually long lag between rising productivity and real wage gains.  I am increasingly of the belief that the third factor no longer operates.

Elton John baits my view on globalized culture

Conservation organisations say that St Mark’s Square in Venice could be damaged by two concerts to be staged there on 5 and 6 June by British pop star Elton John. The concerts are part of Sir Elton’s Red Piano tour and will coincide with the opening of the Venice Biennale.  Although the City of Venice has not yet granted official permission for the concerts to take place, tickets for the events are already for sale online.  Prices start at 200 euros with the top advertised price set at 1,000 euros.  Around 5,000 tickets are available for each event.

Note it is the crowd which would damage the square, not the concert itself.  Here is the story.  Venice was splendid, and Yana, who came along, enjoyed it as well.  I learned you have to walk, from the square, about twenty minutes to arrive in any part of town which could at least vaguely be considered "real."  Thirty minutes, if you take away the quotation marks and demand the actual real.

Markets in everything, or markets that will fail?

On-line flirting.  You bid with real-valued points for the chance to contact members of the opposite sex.  You lose points if you bid for women beyond your reach, you can get more points, it seems, by watching more advertisements.  But is staged flirting any fun at all?  And should a woman be more impressed if you can bid with more points? 

Thanks to Jerry Brito for the pointer.

Corn prices in Mexico

A loyal MR reader asks:

[Please discuss] food prices in Mexico (especially in light of the recent corn/tortilla issue)

Tortilla prices have long been subsidized and controlled, though the market was liberalized in 1999.  Due largely to ethanol demand, corn prices in Mexico rose 14 percent last year.  There are now new price controls on tortillas, circa 2007.  Mexico also continues to restrict the importation of American corn.

Tortillas provide about half of the protein and calories of the Mexican poor.

Those looking for "optimal worlds" might argue that tortilla subsidies are an efficient means of transferring income.  Mexican governments aren’t honest or organized enough to administer a traditional welfare state with much effectiveness.  For instance Mexican bureaucrats may be too corrupt to stop the non-poor from claiming direct welfare payments.  But low tortilla prices select for poor consumers automatically, as tortillas are an inferior good.

Note that tortilla price controls require, in the long run, subsidies for tortilla producers.  The low price transfers real income and the subsidy ensures that supply continues and that quality does not fall apart. 

American corn ethanol policy seems like a bad idea for sure.  Let’s open up our markets to superior Brazilian sugar-based ethanol.  That would lower American and also Mexican corn prices.

And Mexico?  My head knows what is right but my heart is torn.  Can Mexico can afford the protectionism which keeps local producers going and gives it the world’s best and most diverse corn, the world’s best tortillas, and supports a major part of its national identity, most of all for its most oppressed and politically sensitive groups?  I am emotionally torn and will not proceed with the question any further.

I might add that the flour tortillas of northern Mexico are, slowly but surely, gaining ground on the corn tortillas of the Mexican interior.  Flour tortillas are in any case cheaper and easier to transport and store.

#37 in a series of 50.

Joseph Schumpeter at Harvard

In grading his daily performances, he gave himself numerical credit for writing and research — including his endless effort to master mathematics — but seldom for teaching, counseling students, or any other duty.  He enjoyed reading Latin and Greek texts, as well as European novels and biographies — Tolstoy’s Anna Karenina, Morley’s multivolume Gladstone, Lytton Strachey’s Eminent Victorians.  Sometimes he indulged himself with Ellery Queen and other detective novelists.  He loved to dine out and to attend art exhibitions and classical music concerts.  But he regarded most of these activities as unseemly distractions.  The only thing that really counted as work.  On that dimension Schumpeter held himself to unattainable standards and wrestled constantly with his conscience.  He was still trying to work out an "exact economics; and in doing so he was setting a real intellectual trap for himself.

That is from Thomas McCraw’s superlative Prophet of Innovation: Joseph Schumpeter and Creative Destruction.  Here is David Warsh on the book.