Month: February 2008

Book forum: Tim Harford’s chapter six on Schelling’s segregation model

Tim Harford has the best exposition of Tom Schelling’s segregation model I have read.  Maybe no one prefers segregation, but if you mind being a minority in a neighborhood an invisible hand process can lead to segregated outcomes.  Individuals will move closer to their compatriots, giving rise to an overall separation of groups.  This paper has some good models and fills out the main conditions behind the result.

But is it true?  Schelling would be the first to admit he created only a partial model.  Human genetics show more and more out-breeding over time.  Those first cousins just don’t cut it any more.  No, the earth isn’t flat but outmigration is increasing and many more people are choosing to live as minorities in foreign lands, most of all in the EU.  I live in Northern Virginia, one of the most successfully integrated regions of the United States, whether it be along lines of race, religion, or nationality.  Latino arrivals are concentrated in the American Southwest but over time they are spreading out to many other states.  What is the segregation model missing?

Gains from trade, in a nutshell.  If I’m the first Mexican to arrive in North Carolina, yes maybe I feel lonely.  But I also can fill some empty economic niches and overall it may beat East L.A.  Other immigrants will follow, but if too many come some of them will move on to South Carolina.  And so on.

High levels of inequality often bring more integration, at least in terms of spatial proximity.  Even with high rents there is a large community of Latinos living just outside of Aspen, Colorado.  Guess why.  They don’t live right next to the very rich but they do live among non-Latinos.  And the greater availability of cheap services is one reason I prefer life in the United States to Western Europe.  Cheap shipping of goods means I still can get French cheese and German books.

It is harder to ship services.  The more we become a service economy, the more you have to live near the people you trade with.

So what’s the problem in Newark, NJ or for that matter Northeast Washington?  Schelling’s model seems to work better there perhaps because of high unemployment and fewer services.  That said, both areas have seen considerable Latino integration over the last twenty years, as well as outmigration to the suburbs.

Thus the more general model starts with the idea of gains from trade and then asks when those gains won’t be especially strong, or when they won’t require much physical proximity.  Note that Schelling’s original paper, published in 1971, very much represents a 1960s perspective on its topic.

Addendum: Tim Harford also discusses urban crime and its control; here’s a good new paper on that topic.


The Atlantic Monthly had an interesting story on why women should settle for "Mr. Good Enough."  Eugene Volokh had some insightful comments.  I am sympathetic to the idea of modest expectations but I don’t favor cheerleading for settling.  More precisely I worry about The Paradox of the Underrated (is Shawn Marion still underrated?  Nope, and by the way Phoenix had nothing to lose from that deal).  If this article talks you into the prospect of settling, settling will start to seem pretty good to you.  If your expectations were too high in the first place you’ll keep your old set of unrealistic expectations (personalities and pathologies don’t change so quickly) and simply apply them to a new option, namely a marriage to a dullard.  "Settling" works best when you are stuck on a desert island and you do not expect so much from your surrender to the inevitable.  The AM article would do more good if it tried to convince people how terrible settling would be.  You just have to plant the idea in people’s minds, as they’ll make their own decisions anyway.

In other words, "have modest expectations — it will be great for you!!!" can’t really be winning advice.

Buy, hold, and slow down too!

If you get speeding tickets, watch out: The chances are good that
you will also engage in possibly dangerous investing behavior, too.
That is the implication of a new study that found that individuals who
receive more speeding tickets tend to churn their portfolios…They found that, other things being equal, an investor’s portfolio
turnover rate rose 11 percent after each additional speeding ticket he

Here is the paper.  Here is a longer description of the piece.  The researchers do control for many variables, including age; the most likely conclusion is that there is a general propensity for thrill-seeking behind both speeding and trading behavior.  Do note this is a study of the Finns.

Addendum: Via Deron Bauman, here is a good article that sadness triggers consumer spending.

Interview with Paul Romer on Mauritius

Via Mark Thoma, here is an interview with Paul Romer about growth in Mauritius.  One question is how much Romer’s growth theory was needed to generate this advice.  Second, I am surprised how little attention he gives to Mauritius being a small country.  I don’t think that country size makes the advice much different, but perhaps expectations should be adjusted.  Most small countries aren’t well-diversified and their growth rates depend heavily on real shocks.  Singapore is an exception, most of all because its citizenry is obsessed with accumulating human capital and thus it depends upon a general flow of foreign capital rather than specific sectors.  I don’t see harm in Mauritius trying to follow this same path but I wouldn’t expect them to succeed to a comparable degree.

Speaking of small countries, Fred Sautet has an interesting blog post on what happened to the New Zealand reforms.  Since the reforms starting in the 1980s, New Zealand has had excellent economic policies, probably better than Mauritius can expect to implement.  But New Zealand has not had stunning rates of economic growth.  A big part of the answer is simply that New Zealand still depends on the demands for dairy and agriculture.  Yes, many parts of the country are booming but the worldwide demand for commodities is a big part of the reason why.  The deregulation of agriculture helped but without rising food prices growth would be lower yet.  Earlier, it was Britain’s removal of imperial preference in 1972 that sent the country tumbling over the edge in the first place.  Yes freedom is still better but in general small countries are less of an "economic laboratory" than we might think.  Conversely, while there are some good explanations for "the Irish miracle," a small country with a few million people can with good luck grow quite rapidly. 

Just think about the determinants of your own family income; probably for most years policy changes are not #1 on the list.  A country of 1.2 million people, such as Mauritius, is more diversifed than your family, but not as much more diversified as you might think.  When it comes to real factors, Say’s Law does hold.  Demand for your labor depends on the production decisions of 300 million mostly wealthy and often quite diversified Americans.  That offers your income a great deal of protection, relative to what suppliers on Mauritius can expect.

Winter reading

Here is a short piece of mine on

The Long Embrace: Raymond Chandler and the Woman He Loved by Judith Freeman. This book is essential to anyone looking for a) a love letter to Los Angeles, b) a chance to cultivate an obsession with Raymond Chandler, or c) a new model for writing intelligent nonfiction. It’s a colorful local history of the California metropolis in the first half of the 20th century plus an erotic biography with lots of speculative commentary interspersed, most of all on how Chandler conducted his unorthodox love life (he married a woman 18 years his senior). Freeman often veers into the first person, yet she retains some level of objectivity by always presenting multiple hypotheses. The Long Embrace sheds more light on its subject than do most standard biographies. It turns out that Chandler’s love for his wife, Cissy, is essential to understanding how he constructed his female temptresses. And in evoking a centerless Los Angeles, Freeman helps us appreciate the essential vision of the Chandlerian mystery: that people, like the vast cities they inhabit, are really unknowable.

Here is the whole winter books symposium.

Robbery fact of the day

In 2004, the total cost of all robberies in the United States was $525 million…every year, employees’ theft and fraud at the workplace are estimated at about $600 billion.

That contrast is from Dan Ariely’s Predictably Irrational.  Even if you add in auto theft, burglary, and larceny-theft, the former sum does not exceed $16 billion.

Addendum: Some people are questioning the $600 billion number, see the discussion in the comments.

Should we consider a gold standard?

Lawrence H. White responds to critics.  In my Cato email I received:

"A gold standard does not guarantee perfect steadiness in the growth of the money supply, but historical comparison shows that it has provided more moderate and steadier money growth in practice than the present-day alternative, politically empowering a central banking committee to determine growth in the stock of fiat money," White concludes. "From the perspective of limiting money growth appropriately, the gold standard is far from a crazy idea.”

"Far from a crazy idea," OK.  But would you push the button for it?  I say no.  There is little doubt that over the broad sweep of world history, commodity standards have outperformed paper money.  But we don’t live in the broad sweep of world history, we live in 2008 and our ability to monitor and control central banks is unparalleled.  The central banks of the wealthier nations work pretty well.  My main worry with the gold standard is simply the pro-cyclicality of the money supply and for all its talk of money demand the paper doesn’t much address this concern.  For instance would you really want a contracting money supply in today’s environment?  And yes credit crunches of this kind happen in market settings too so you can’t blame it all on Alan Greenspan. 

And I am not reassured by this (admittedly true) sentence: "At the right reentry rate, dollar prices would not need to jump [from the transition]."  One five or ten percent deflation is enough to crush the economy and indeed the whole gold standard idea.  Given the socialist calculation debate, can we really know the right transition price?  Gold at $900 an ounce?  $600 an ounce?  Anybody?

Addendum: Here is White’s response; see also the exchange in the comments with White and others.

What I’ve Been Reading

1. Uncouth Nation: Why Europe Dislikes America, by Andrei S. Markovits.  Not the usual swill on this topic; sadly the main prediction of this book is that the passing of Bush will not make America much more popular in Europe.  Read this short article on the same.

2. Dante, Paradiso, translated by Robert and Jean Hollander.  There still is not a gripping English-language Paradiso on the market, as the Mandelbaum translation is flawed as well and don’t ever trust Penguin translations with anything.  This one doesn’t elevate me as the text should.  But it has the best notes of any edition, is laid out most nicely, and is the best for trying to follow the Italian and cross-reference the translation.  If you buy only one English-language Paradiso maybe it is this one.  An alternative is the Henry Wadsworth Longfellow edition, lyrical but archaic, on-line for free.

3. Castles, Battles, and Bombs: How Economics Explains Military History, by Jurgen Brauer and Hubert van Tuyll.  The table of contents looks amazing, but my browsing indicated this book to be boring.  Still, some of you should read it.  It is full of factual substance, slotted into an economic framework.

4. Americanos: Latin America’s Struggle for Independence, by John Chasteen.  Every now and then a history book sweeps you up into its world; this one did it for me, most of all the treatment of Alexander von Humboldt but from beginning to end as well.  The best and most readable book on its topic.

5. William Gibson, Neuromancer.  Wow, this is now twenty-four years old.  I’m teaching it next week in Law and Literature class.  Upon rereading what strikes me most is how little science fiction it offers and how much it follows in the stylistic footsteps of Hammett and Chandler.

Who are the five best Baroque composers?

Bryan Caplan raises the question, in a post that offers a very good description of my view on the arts and modernity.

My list is Bach, Handel, Purcell, Scarlatti, Rameau, in that order.  What about Vivaldi?  Corelli?  They are next in line for me.  Monteverdi comes in second if you count him as Baroque (I don’t).  What are your picks?

And to pursue Bryan’s question, who are the five best punk rock bands?  The Clash, The Sex Pistols, early XTC, Iggy Pop, and maybe The Ramones.  Honorable mention goes to The Minutemen, Wire, MC5, Rancid, The Dead Kennedys, and The New York Dolls.  X seems overrated to me, and Patti Smith and Sonic Youth and Velvet Underground I don’t quite count as punk, though I like their work and think it is important.  For that matter I wonder if Eugene Chadbourne might count.

I don’t agree with Bryan that the fifth best punk rock group is better than the fifth best Baroque composer, but I will say this: Baroque style dominated European music for many decades, whereas most of the best punk was from an unrespected niche genre produced in about a five-year time window.

David Cutler on mandates

Cutler is very smart, tenured at Harvard, arguably the leading health care economist, and yes he is an advisor to Barack Obama.  He says mandates are not the way to go, and no I do not think he is just "falling in line" here.  Read the whole thing.  Yes, the key is to make insurance cheaper, not more expensive.  Yes, mandates are a political loser.  Yes, ex post fiddling can make up for a lot of the problems in the "no mandate" approach and there is going to be lots of ex post fiddling anyway.

Of course Ezra is right that the non-mandate plans, such as Obama’s, don’t do much to lower the cost of insurance.  But I would like to make a more general point about the correct direction to move in.

The way most goods and services become excellent — I mean really excellent — is through competition.  Yes, right now health insurance has lots of screwy incentives, most of all cost shedding.  But if you stifle competition and write off hope of getting a better-functioning private insurance market…well…I believe you have not thought long and hard enough about just how much of the social value on Planet Earth has come, ultimately, from competition in the provision of goods and services.  How do you think we got from subsistence agriculture to super-cheap food?  By mandates?

Mandates, of course, tend to require minimum coverage and thus they limit competition in the content of policies and also the expense of policies.  It’s unclear if they are truly cheaper, all things considered.

I might that mandates make social cost less transparent and they encourage government to commit societal real resources outside of the usual budgetary process.  Those were two good general criticisms of the last eight years of the Bush administration; let’s not carry those principles of governance over into our health care policy.

If someone needs covering, for whatever reason, give them some stuff.  If need be give them some government stuff.  Some kind of plan.  Give them whatever.  But don’t overregulate private insurance companies and take them off the table as a source of future productivity improvements and super cheap coverage, however partial it may be. 

The pointer is from Brad DeLong.

By the way, if you’re looking for a ray of competitive good news on the health care front, start here.  We need something similar on the insurance front and yes I know that means not every illness will be covered.  Given the Grim Reaper, it’s all about marginal choices anyway.

Energy policy fact of the day

The tax credit for ethanol is an example of a cost ineffective subsidy.
The cost of reducing CO2 emissions through this subsidy exceeded $1,700
per ton of CO2 avoided in 2006 and the cost of reducing oil consumption
over $85 per barrel.

I am not shocked, but it is worse than I had thought.  Here is the full paper.  But the funny thing is, that’s not even the worse thing I read about biofuels today.  Courtesy of Daniel Akst, try this article:

…a growing body of scientific evidence suggests these gasoline
alternatives will actually boost carbon-dioxide levels and thereby
aggravate the problem of global warming. A study published in
the latest issue of Science finds that corn-based ethanol, instead of
reducing greenhouse-gas emissions by a hoped-for 20%, will nearly
double the output of CO2 and other gases that trap the sun’s heat. A
separate paper in Science concludes that the clearing of native
habitats around the world to grow more biofuel crops will lead to more
carbon emissions.

Or try this ungated version of a similar result.  Wonderful.

Book Forum continues, Megan McArdle on CEO pay

For commentary on chapter four from Tim Harford’s The Logic of Life, Megan McArdle steps up.  The post is over at her blog, go over there to leave your opinions and show the Atlantic Monthly who’s got the better commentators!

Addendum: In the comments it is written: "I think the we should distinguish ourselves from them by ending the comments with ‘MR’."

A Real Stimulus Plan

As you know, I’m not enthusiastic about a fiscal stimulus plan.  What we need is a stimulus plan that does not increasing the budget deficit or waste taxpayer funds but that does increase the incentive to produce output.  So what would I do?  Here’s a new idea.

The IRS knows how much income that each taxpayer reported last year.  So let’s cut everyone’s marginal tax rate based on last year’s income.  In other words, suppose that last year Joe earned $66,520 which puts him in a 25% tax bracket.  Joe’s tax schedule this year will be exactly the same as last year except for every dollar earned above $66,520 the tax rate drops to 15%.   We do this for all taxpayers so that each taxpayer has their own schedule and for each taxpayer there is a decreasing marginal tax rate.

Note that this plan increases the incentive to work and it doesn’t increase the deficit.  In fact, the Tabarrok plan increases tax revenues!  The key is a marginal tax cut with a different margin for every taxpayer based upon last year’s return.

That’s the basic idea but there are some obvious modifications that could solve various problems.  For example, the new schedule could be based on an average of say the last three years of income or the average plus some roundup for growth etc.  It’s also possible to cap the base on which the lower marginal tax rate applies, for example, we could create a lower tax rate on every dollar of income above last year’s income up to an increase of 20%.

It is true that a permanent system like this could be (partially) gamed but the system can work very well if used occasionally, say for the most serious recessions.  We would also learn a lot by applying this system and looking at the taxpayer response.