Month: September 2007

The Divorce Myth

by  Justin Wolfers in

I want to start my week guest blogging by talking about divorce. Betsey Stevenson and
I had an
op-ed in yesterday’s New York Times noting a very simple fact: those
married in the 1990s have proved less likely to divorce than those wed in the
1980s, which were less likely to divorce than those wed in the 1970s. The
Divorce Facts are that divorce is falling, and marriages are more stable.

What is surprising, is just how easily and how often the
Divorce Facts lose out to the Divorce Myth. The Divorce Myth is that divorce
is rising. When the latest
divorce numbers came out last week, they once again confirm this
quarter-century long decline in divorce, but the media (including the Times,
Post,
and the Inquirer)
chose instead to write (incorrectly) about rising divorce. (In their defense, the data were presented in
a way that invited misinterpretation, a subject that I shall return to in a
future post.)

Why the persistence of the Divorce Myth?

  1. Blame the
    public for underestimating divorce    : Tyler
    has argued     that Americans “underestimate the probability of divorce”, and
    so when the statistics show that divorce is quite common, they infer divorce
    must have risen.
  2. Blame the
    public for overestimating divorce    : Greg
    Mankiw thinks     that this “seems be an example of what Bryan Caplan calls ‘the
    pessimistic bias’, a tendency to overestimate the severity of economic problems.”
  3. Blame the
    press    : Mankiw may be a bit unfair on Joe Citizen: the average person gets
    their news from the press, and in this case, the press reported falsehoods as
    facts.
  4. Blame the
    politics    : We argued that “Reporting on our families is a lot like reporting
    on the economy: statistical tales of woe provide the foundation for reform
    proposals. The only difference is that
    conservatives use these data to make the case for greater government
    intervention in the marriage market, while liberals use them to promote
    deregulation of marriage.”
  5. Blame the
    professors    : Academics are meant to provide the facts offsetting the
    political hacks. But we don’t. Economists have had too little respect for
    simple facts; publication glory lies with grand theories. Ideologically-motivated profs teaching family
    sociology or family law would rather reinforce the Myth than offset it.

Personally, I go for #4 causing #3, unchecked by #5, and
would love to see research by Bryan testing #1 v. #2.  Your thoughts?

Justin Wolfers to Guest Blog!

by  Alex Tabarrok in

Justin Wolfer’s work on prediction markets, racial bias in the NBA, happiness, and divorce has been mentioned on this blog many times so we decided to cut out the middlemen, i.e. us, and let Justin do all the work.  The amazing thing is he said yes.  Tyler and I are delighted to have Justin guest blogging with us this week.

The aforementioned works are just a portion of Justin’s output.  The media love his work on sports and betting but Justin’s work with Oliver Blanchard on European unemployment, for example, has been influential in the profession (and come to think of it also made the papers).  Justin has also worked on business cycle theory and with Greg Mankiw on inflation expectations.

Justin is known for careful, thorough and compelling empirical work.  He often has what I think of as the last word on a subject as with his paper on the Coase theorem and divorce or his work with John Donohue on the death penalty.

An open secret and an open sin in economics is that many empirical studies are difficult to replicate, even when journals supposedly require authors to make their data publicly available.   Here is how you replicate a Wolfers paper:  You go to his web page you  download the data and often the code, you run it – and damn it you get exactly what is in the journal.  I have done this several times and every time I am shocked that this actually works.   (And before being accused of being a hypocrite let me acknowledge that I too have sinned but under Justin’s example I am resolved to do better in the future.)

With all this in his favor I almost want to report to you that this guy may be a excellent economist but oh what a jerk.  Alas, Justin is modest to a fault, highly supportive of the work of others and great fun to talk with over a beer.  The worst thing I can say about him – and I feel I must say something bad if only to be credible – is that he really needs a haircut.  Welcome to MR, Justin!

Inequality and unhappiness

by  Tyler Cowen in

What I found was that economic inequality doesn’t frustrate Americans at all.  It is, rather, the perceived lack of economic opportunity that makes us unhappy.  To focus our policies on inequality, instead of opportunity, is to make a grave error–one that will worsen the very problem we seek to solve and make us generally unhappier to boot.

Here is the full article, interesting throughout.  This paragraph is right on the mark:

One of the many problems with the egalitarians’ line of reasoning is that it misinterprets the experimental evidence.  The two famous studies mentioned above don’t necessarily mean, as the egalitarians claim, that people would be happier in a world of total equality.  Rather, they suggest that in a world of inequality, people like having more than others and dislike having less–even to the point of neglecting their financial interests.  How people would react to a miraculously equal world is something that the studies don’t attempt to address.

And this:

But there is another, more fundamental, reason that the arguments linking economic inequality to unhappiness are mistaken.  If the egalitarians are right, then average happiness levels should be falling.  But they aren’t.  The GSS shows that in 1972, 30 percent of the population said that they were “very happy” with their lives; in 1982, 31 percent; in 1993, 32 percent; in 2004, 31 percent.  In other words, no significant change in reported happiness occurred–even as income inequality increased by nearly half.  Happiness levels have certainly shown some fluctuations over the last three decades, but income inequality explains none of them.

Thanks to Michael Cragg for the pointer.  You might also revisit my earlier post on mobility.

I knew sooner or later someone would write this paper

by  Tyler Cowen in

Yes Pigou taxes can possibly have counterintuitive results:

Judged by the principle of intertemporal Pareto optimality, insecure property rights and the greenhouse effect both imply overly rapid extraction of fossil carbon resources.  A gradual expansion of demand-reducing public policies — such as increasing ad-valorem taxes on carbon consumption or increasing subsidies for replacement technologies — may exacerbate the problem as it gives resource owners the incentive to avoid future price reductions by anticipating their sales.  Useful policies instead involve sequestration, afforestation, stabilization of property rights and emissions trading.  Among the public finance measures, constant unit carbon taxes and source taxes on capital income for resource owners stand out.

Here is the full paper, here are non-gated versions.

The point is this: carbon taxes drive down the net post-tax price which fossil fuel suppliers receive; in fact the resulting transfer of wealth from the Saudis to the U.S. is a common argument for such taxes.  But the lower net supply price is not in every way a blessing.

One possibility is that at the new and lower (supply) price, other (non-Pigou-taxing) countries will buy more fossil fuels, picking up some of the slack and counteracting the carbon taxes at the global level.  This effect is strongest for low marginal cost oil.  If Americans buy less oil but all the oil will end up sold in any case, demand simply has been redistributed rather than lowered.  Instead the key is to get that oil to stay in the ground.

Second, at a lower supply price the intertemporal Hotelling resource extraction problem is tricky rather than straightforward, again especially for low marginal cost oil.  Lower (supply) prices today also mean lower (supply) prices in the future, so, after a tax is imposed, the time path of extraction can easily tilt toward the present rather than away from it.

Note that the higher the (posted) oil price goes, the lower are extraction costs relative to price and the more likely these counterintuitive results become a potential problem.  In 2006 average extraction costs were only 15% of the average spot price.  Obviously if extraction costs are high the lower net supply price to the producer does keep the stuff in the ground.

Further counterintuitive results can arise if market players expect a Pigouvian tax to rise over time.  A (politically impractical) alternative is to make the tax very high today and lower it over time.  We are more likely to do the opposite.

The bottom line is this: paying countries to blow up their oil fields may be more effective than taxing the resource.  (TC: don’t some people volunteer to do this work for free?)

Empirically, I still suspect that the "naive" first-order demand side effects predominate.  But if you want to know all the ins and outs of Pigou taxes, it’s worth spending some time thinking through these problems.  Taxing intertemporal resource stocks doesn’t always lead to simple, predictable results.

How to lower your discount rate

by  Tyler Cowen in

Mark Broski, a loyal MR reader, asks:

If you woke up one morning and said to yourself, "You know what my problem is? My damn discount rate is too high."  What would you do, if anything, to lower it?

Maybe Mark should lower his discount rate later, not now, thus solving the problem right away. 

Alternatively, you can view lack of patience and lack of concern for his future self as conceptually distinct problems.  To cure lack of patience, develop routines for interrupting episodes of irresponsible present-oriented behavior.  Ring up each purchase at a separate store register, or write a journal entry before each cookie you eat.

When it comes to lack of concern for your future self, whoop de doo.  If you are going to ignore anyone else’s interest, your future self is a good place to start.  This is only a problem if you attach special status to your future self, in which case maybe you are not ignoring its interests, at least not relative to your other moral omissions in life. 

If you need to be more altruistic more generally, precommit to developing personal ties to those you wish to help.  As for your future self, start adopting some old people’s habits now, to build the tie between the 2007 you and the 2027 you.

Do you all have any other advice for Mark?

The Coldest Winter

by  Tyler Cowen in

…this is my first visit to Thomas Keller’s temple of haute cuisine in Yountville, California, and I can’t wait to see whether it lives up to its reputation.  More importantly, however, my dining companions are three outstanding chefs from Sichuan province, a heartland of Chinese gastronomy…None of them has ever been to the West before, or had any real encounters with what is known in China as "Western food," and I am as much interested in their reactions to the meal as my own.

Driving down HIghway 29 to the restaurant, I had prepared my guests by casually remarking, "You’re very lucky, because we are going to visit one of the best restaurants in the world."

In the world? asked Lan Guijun.  "According to whom?"

..as I warm up to the pleasures of this utterly satisfying dinner, I can’t help noticing that my companions are having a rather different experience.  Yu Bo, the most adventurous of the three, is intent of savoring every mouthful and studying the composition of our meal.  He is solemn in his concentration.  But the other two are simply soldiering on.  And for all three of them, I realize with devastating clarity, this is a most difficult, a most alien, a most challenging experience.

They find the creaminess of the sabayon offputting, the rareness of the lamb unhealthy, and the olives to taste like Chinese medicine.  Don’t ask about the cheese, and they are amazed that "a bowl of soupy rice" [risotto] could cost so much.  A few days of dining later, they find eating salad to be barbaric (it is raw), and sourdough bread to be tough and chewy.

Yu Bo, to my great satisfaction, is pleasantly impressed with the first raw oyster of his life, and even ventures to take a second.  When I ask him how they taste, he nods furiously in approval.  "Not bad, not bad; a bit like jellyfish."

That is from Gourmet magazine, August 2005 issue.  Here is my previous post on inaccessibility and large cultures.

Rehashed hash

by  Tyler Cowen in

When blogging I try to keep book rehash to a minimum.  But tonight I cannot resist making a point from Good and Plenty:

In the past most people didn’t much like or listen to most of the music they bought, or in any case most of the value came from their very favorites.  A relatively small percentage of our music purchases accounted for most of our listening pleasure.  So if people can sample music in advance, and know in advance what they will like, music sales will plummet.  This will be a sign of market efficiency, not market failure.

Admittedly copyright issues are being superimposed on this scenario at the same time, so the net assessment of current music trends is complex.  But when there is uncertainty about consumer tastes, falling output can be a strong Pareto improvement.  (It’s just like how having lots of dates is not necessarily the sign of a happy love life.)  Less music is being produced, but we’re getting more of the stuff we want.

Does illegal file-sharing cut into CD sales?

by  Tyler Cowen in

Stan Liebowitz says yes, rebutting the well-known arguments of Koleman Strumpf, published in the Journal of Political Economy.  I would be happy to link to a response by Strumpf.  In the meantime, two notes: a) I suspect non-fair use CD burning is in any case the bigger issue, and b) significantly lower musical sales, and yes sales are falling, still can be welfare-improving.  The real consumption of music seems to be up.

Wow

by  Tyler Cowen in

Robert Day has just pledged $200 million to support economics and public policy at Claremont-McKenna College.

Addendum: The L.A. Times reports:

However, the gift has triggered debate on the 50-acre campus in
Claremont. Some professors, while recognizing the generosity, said they
worried that the money could tilt the college too much toward economics
and financial studies. A letter to Gann, drafted by literature
department chairman Robert Faggen and signed by other literature
professors, said they are concerned that the gift will "distort the
college into a single focus trade school."

Wunderkind Ben Casnocha will be offering further reports.

Heroes are not Replicable

by  Alex Tabarrok in

You know the plot.  Young, idealistic teacher goes to inner-city high school.  Said idealistic teacher is shocked by students who don’t know the basics and who are too preoccupied with the burdens of violence, poverty and indifference to want to learn.  But the hero perseveres and at great personal sacrifice wins over the students using innovative teaching methods and heart.  The kids go on to win the state spelling/chess/mathematics championship.  c.f. Stand and Deliver, Freedom Writers, Dangerous Minds etc.

We are supposed to be uplifted by these stories but they depress me.  If it takes a hero to save an inner city school then there is no hope.  Heroes are not replicable.

What we need to save inner-city schools, and poor schools everywhere, is a method that works when the teachers aren’t heroes.  Even better if the method works when teachers are ordinary people, poorly paid and ill-motivated – i.e. the system we have today. 

In Super Crunchers, Ian Ayres argues that just such a method exists.  Overall, Super Crunchers is a light but entertaining account of how large amounts of data and cheap computing power are improving forecasting and decision making in social science, government and business.  I enjoyed the book.  Chapter 7, however, was a real highlight.

Ayres argues that large experimental studies have shown that the teaching method which works best is Direct Instruction (here and here are two non-academic discussions which summarizes much of the same academic evidence discussed in Ayres).  In Direct Instruction the teacher follows a script, a carefully designed and evaluated script.  As Ayres notes this is key:

DI is scalable.  Its success isn’t contingent on the personality of some uber-teacher….You don’t need to be a genius to be an effective DI teacher.  DI can be implemented in dozens upon dozens of classrooms with just ordinary teachers.  You just need to be able to follow the script.

Contrary to what you might think, the data also show that DI does not impede creativity or self-esteem.  The education establishment, however, hates DI because it is a threat to the power and prestige of teaching, they prefer the model of teacher as hero.  As Ayres says "The education establishment is wedded to its pet theories regardless of what the evidence says."  As a result they have fought it tooth and nail so that "Direct Instruction, the oldest and most validated program, has captured only a little more than 1 percent of the grade-school market." 

Does the Coase theorem hold even for Saddam Hussein?

by  Tyler Cowen in

Less than a month before the U.S. invasion of Iraq, Saddam Hussein signaled that he was willing to go into exile as long as he could take
with him $1 billion and information on weapons of mass destruction,
according to a report of a Feb. 22, 2003, meeting between President Bushand his Spanish counterpart published by a Spanish newspaper yesterday.

Here is the story; admittedly it is hard to judge the truthfulness of this report but in probabilistic terms it does not raise my estimate of whether the Coase theorem applies to President Bush.

A simple public choice theory of Russia

by  Tyler Cowen in

This one is crude, but it cannot be dismissed:

Putin doesn’t run a country, he runs a corporation. He is the ugliest mixture of Karl Marx and Adam Smith. He is not interested in restoring the Russian influence, he’s just interested in Gazprom’s and Rosneft’s influence. Actually, Putin is destroying the Russian state. If we look at the functions of the state, they are gradually transferred to the state companies: now the Duma voted that Gazprom and Rosneft can have its own armies. These so-called state companies are run by Putin and his KGB-buddies – him being a sort of "capo di tutti capi". And for those doing business with KGB Inc., I  remind them that the KGB shareholders are very active shareholders.

That’s Garry Kasparov, here is one commentator summarizing:

In Kasparov’s view, the main goal of Russian foreign policy is to raise the oil price, no matter what – that’s why the tensions in the Middle East are so important to Putin…

We live in a nice world, no?  Megan McArdle ponders life or death incentives in the former Soviet Union.  Here is the excellent New Yorker article on Kasparov.