Month: February 2008

Valentine’s Day in Saudi Arabia

Every year, officials with the conservative Muslim kingdom’s
Commission for the Promotion of Virtue and Prevention of Vice clamp
down on shops a few days before February 14, instructing them to remove
red roses, red wrapping paper, gift boxes and teddy bears. On the eve
of the holiday, they raid stores and seize symbols of love.

Here is more, with a thanks to BZ for the pointer.  Yes, this morning I was crying at Heathrow, and not just because they didn’t have an open gate to receive our flight.

Book Forum: Harford and Caplan on Statistical Discrimination

The Logic of Life contains an excellent chapter explaining statistical discrimination but does the theory hold up?  Bryan Caplan says no

…[Tim] heavily emphasizes a few experiments showing that statistical
discrimination could be a "self-fulfilling prophesy." For example, he
describes a resume experiment where otherwise identical fake resumes
with "black names" were less likely to get a response. "High-quality
applicants were more likely to be invited for an interview, but only if
they were white. Employers didn’t seem to notice whether black
applicants had extra skills or experience." If that is how employers
treat black applicants, what’s the point of trying? As Tim asks, "Why
bother to get a degree or work experience if you are young, gifted, and

But is it really true that the market fails to reward blacks for
getting more education? Is it even true that the market rewards them
less? I tested these claims using one of the world’s best labor data
sets, the NLSY.  The results directly contradict Tim’s self-fulfilling prophesy story.  Blacks actually get a substantially larger
return to education than non-blacks! The same goes for experience,
though the result is not statistically significant. The real lesson of
the data is that if you are young, gifted, and black, you should get a
ton of education, because it has an exceptionally large pay-off.

Why would this be so?  I’m not sure, but one simple story is that counter-stereotypical
behavior stands out. When my sons were young, my wife was working a
lot, so I often took my kids places on my own. Funny thing: Time and
again, strangers came up and said, "Wow, you’re such a great dad!" But
there were moms of young kids doing the same thing in plain sight, and
the strangers rarely praised them.  Why not?  Because a dad taking care of two babies is counter-stereotypical, which grabs people’s attention. 

Purely anecdotal, yes. But it is consistent with the small academic
literature on counter-stereotypical behavior. If you clearly violate
expectations, people not only notice; they often over-react.

The upshot is that stereotypes may actually be self-reversing
rather than self-fulfilling. The marginal payoff of distinguishing
yourself from the pack is high if people think poorly of the typical
member of the pack.

Bryan has much more on the unpleasant truths about discrimination.  Read the whole thing.

Department of “No”!

Yet the rich devote a smaller percentage of their earnings to
buying things than the rest of us… They already have most of what they want.
Instead of buying, and thus stimulating the American economy, the rich are more
likely to invest their earnings wherever around the world they can get the
highest return.

That’s Robert Reich, here is much more.  How shall I put it?  Savings are good for the economy!  Savings are invested!  (and this is about the long run)  Arguably Americans don’t save enough!  America is a net importer of capital, not a net exporter!


Addendum: This, from Barack Obama, belongs to the same department.

Consumption vs. income inequality, revisited

Numerous bloggers, often from the left, are jumping on the recent Cox and Alm NYT Op-Ed on consumption inequality.  Via Greg Mankiw, here is one excerpt:

…if we compare the incomes of the top and bottom fifths, we see a ratio of 15 to 1. If we turn to consumption, the gap declines to around 4 to 1…. If we look at consumption per person, the difference between the richest and poorest households falls to just 2.1 to 1.

Here is Mark Thoma and here is Paul Krugman, both of whom offer good criticisms on the particular numbers.  Nonetheless it would be a mistake to go back to focusing on income inequality, or for that matter rising income inequality.  Keep in mind a few points:

1. Global income inequality is way down over the last thirty years.

2. Inequality of welfare, even within the United States, is way down over long time horizons, such as the last century. 

3. We do not know how inequality of welfare in America is faring over say the last thirty years.  This is a point of overriding importance.  Just in case you missed it, let me repeat: when it comes to the kind of intra-nation inequality that we should really care about (if we are going to worry about intra-nation inequality at all), we "do not know."  As in "know" and "not" put together.  "Not" is the word of negation, by the way.  And the last I looked, not = not, as it usually does on most Wednesdays.  Would you like to hear more on what is implied by the conjunction of "not" and "know"?

4. We do know that welfare inequality doesn’t track income inequality in any simple way, especially when new goods are being introduced, there is mass production, there is diminishing marginal utility, and non-marketed benefits and costs are important in human life.

5. Here is the latest and most serious attempt to weigh the problems with consumption data; overall it reinforces the importance of looking at consumption.  And it is not denied that consumption inequality is much less than income inequality and also consumption inequality rising less rapidly over time.

Here are some previous MR posts on consumption inequality.  Here is Andy Warhol on consumption inequality.

In general, when you see cherry-picking — or lemon-picking — of these numbers, you should be very suspicious.

How off is InTrade?

David Leonhardt weighs in.  The other day John Nye and I were discussing that de facto limits on the size of effective bets are the biggest problem hindering effective price discovery.  When you can become a millionaire on InTrade, that’s when its prices will become much better forecasters.  Nonetheless I agree with the piece’s conclusion:

If you have any better ideas of where to look, let me know.

But some inefficiencies need to be taken with a grain of salt:

Mr. Ravitch has made a nice profit betting against Ron Paul,
the libertarian who late last year was, amazingly, given almost a 10
percent chance of becoming the Republican nominee. “If you asked anyone
in politics whether there was ever, at any point, a 10 percent chance
of Ron Paul being the nominee,” Mr. Ravitch said, without finishing the
sentence. “That sort of makes my case for me.”

When it comes to the long shots, remember that InTrade takes deposits in non-interest-bearing cash rather than T-Bills.  In the meantime observers need to adjust their expectations accordingly and not interpret all the prices are pure percentages.  I recall Paul trading at about 7 or 8 percent.  Let’s say you shorted Paul last December.  You’re locking up your cash for quite a while at zero percent interest and when Paul fails you’re not going to net as much as you thought.  In other words, there is a partial short sale constraint on this market and its prices need to be understood accordingly.

Of course there is a reason why InTrade insists on earning the float and that directs our attention back to the zero-sum property of the bets.  That’s another reason why prediction markets probably won’t ever forecast as well as the stock market: their users have to be charged or taxed at a higher rate.  The expected rate of return in InTrade is negative; the expected rate of return in the stock market is seven percent minus commissions.  Where would you rather put your smarts to work?

Free trade websites

Here is a meta-blog on free trade from the Netherlands, but in English.

Here is translation by Wiki, in this case translating Bastiat into German.  How long will it take?

Here is my podcast with Ha-Joon Chang on free trade, courtesy of the Chronicle of Higher Education.  Chang is the author of Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism.  I believe in that myth and I try to hold his feet to the fire.

Department of Unintended Consequences, a continuing series

A rigorous statistical examination has found that smoking bans increase
drunken-driving fatalities. One might expect that a ban on smoking in
bars would deter some people from showing up, thereby reducing the
number of people driving home drunk. But jurisdictions with smoking
bans often border jurisdictions without bans, and some bars may skirt
the ban, so that smokers can bypass the ban with extra driving. There
is also a large overlap between the smoker and alcoholic populations,
which would exacerbate the danger from extra driving. The authors
estimate that smoking bans increase fatal drunken-driving accidents by
about 13 percent, or about 2.5 such accidents per year for a typical

That’s coming out in the Journal of Public Economics, so it might even be true.  Here is the short source article, which surveys other interesting results as well; worth a read. 

Why is competition between health insurance companies useful?

Kevin Drum (and Matt Yglesias) asks an excellent and important question:

Tyler is arguing for keeping the insurance industry
competitive. But I simply don’t see what that buys us. Even if the
health insurance industry were dramatically improved, this wouldn’t
especially make healthcare any more efficient. It would only make the
insurance industry more efficient. That would be nice, but hardly

Let me be clear: the incentives today are screwy.  Let me also tell you my ideal world.  Insurance companies are judged by honest third party intermediaries.  Insurance companies compete like heck to make customers satisfied.  Insurance companies monitor doctors, read Robin Hanson, and require evidence-based medicine.  Insurance companies which fail at these pursuits either go bankrupt or they must abide by an ex ante contract to permit the exile of their CEOs to Greenland.  Every year prices would fall in real terms, quality would improve, and coverage would be expanded.  Imagine the whole health care sector working like laser eye surgery or cosmetic surgery.

This is not the world we live in, but it is the world we should aim for and I am more than willing to consider how government might get us there.  (Mandating greater price transparency is but one step.)  But if we institute a single-payer system, or highly regulated mandates, we will never have much chance of arriving in that world.  Ever.  We will have a fairly static sector with high coverage levels but rising costs long term and less innovation. 

I believe we know why insurance companies don’t work this way, namely monitoring problems; they screw you over instead of serving you and they can get away with it.  Go ahead, call me a pollyanna, but modern information technology and measurement can indeed resolve many monitoring problems.  We can now monitor central bank performance quite well or show up in Sicily with a credit card and rent a car.  Neither was the case forty years ago.

Here is one summary of how health insurance companies are improving information technology for claims processing, medicine itself, and promoting evidence-based medicine.  I don’t mean this industry-supplied link to be a good summary of the current truth; take it as one vision of what might be possible.  To put the point another way, insurance companies are not just risk assessors or dollar transfer mechanisms; they also can be monitors and buyer agents and that is why competition is potentially so useful.

The policy point is not: "you must die today so that the reign of Milton Friedman can arrive in forty years’ time."  It is more like: "whatever transfers we wish to do today, let us proceed so that such a future remains someday possible."

Medical care is just starting to cure human beings, so don’t think the future will look like the past.  I know that preaching the virtues of insurance company competition is not a popular position in the blogosphere but like Arnold Kling, I see the single-payer advocates and mandate advocates as the conservatives, not the visionaries.

Addendum: A month or two ago, one MR reader left a long and very good comment about all the innovations provided by private health insurance companies.  I can’t find it, can any of you?  Please let us know in the comments or email me.

Addendum: Kevin Drum responds.

The costs and benefits of long-distance relationships

From The National Post, the main sources are Tim Harford and yours truly.  Excerpt:

The answer, says Mr. Cowen, lies in the Alchian-Allen Theorem. Developed in 1964 by economists Armen Alchian and William R. Allen, the theorem states that adding a per unit charge to the price of two substitute goods increases the relative consumption of the higher price good.

In layman’s terms, "you don’t take a long trip unless you are going to make it worth your while," he says. Very few people in a long-distance relationship are going to fly across the country just to hang out in sweatpants with their sweetheart.

The result is overblown expectations ("are we having fun now?") and excess pressure on the relationship.  Here is a previous MR post on this topic

China fact of the day

Like many developing countries, China gets little money from the personal income tax, which provides 6.5% of government revenue.  Most Chinese have never filed a tax return.

One implication is that a Chinese business slowdown and stock market crash would put a big dent in Chinese government revenue.  That is from today’s Wall Street Journal, p.A12, "In China, Collecting Income Tax Proves Problematic."