Month: February 2008

Antitrust Protectionism

Best evidence that the merger between Microsoft and Yahoo will increase competition?

Publicly, Google came out against the deal, contending in a statement
that the pairing, proposed by Microsoft on Friday in the form of a
hostile offer, would pose threats to competition that need to be
examined by policy makers around the world.

Here’s an Open Letter on Antitrust Protectionism (pdf) that I drafted nearly ten years ago during the Microsoft trial.  It’s still relevant today.

Don’t assume that mandates are cheaper

Remember Milton Friedman’s arguments that a volunteer army is more cost effective than a draft?  That is true even though a volunteer army has a higher budgetary cost.  Paul Krugman today does not deny those arguments, but he elides them.  When it comes to mandates he clearly refers to budgetary costs rather than social costs but of course it is the job of the economist to stress that social costs are what matters, not to offer up to the public a comparison of budgetary costs alone.  There are lots of things we could do "more cheaply" with mandates but most of them (not all) are bad ideas.  Today Arnold Kling makes the same point.  Of course Friedman was persuasive on the draft so the argument can be made successfully in a public setting.  Elsewhere Megan McArdle writes:

Now that you are braced for the shock, here it is: comprehensive health care program costs much, much more than the government anticipated.

If you wish to compare notes, here is Krugman’s responseThe piece he links to tells us: "So the “$400 million” isn’t all unanticipated and isn’t all coming from state taxpayers."

The silence of the pundits

French Finance Minister Christine Lagarde said Monday that some internal controls at Societe Generale failed or were ignored before the banking giant announced massive losses attributed to a single trader.

Here is one version of the story.  It’s gotten plenty of news coverage.  It’s gotten relatively little pundit coverage.  It neither fits the pro-market narrative of one side, nor the "blame it on the Bush administration and deregulation and bad U.S. corporate governance" narrative of the other.  By noting the story, and pondering its broader implications ("your favorite hobby horse matters less than you think"), I would like to do my small amount to counteract the silence of the pundits.  By the way, I owe this concept to Daniel Klein.

Squaring the circle on trade

Via Brad DeLong and Mark Thoma, here is Mark quoting Brad:

But as Rodrik points out, "…saying that the impact of globalization
on advanced-country labor markets is quantitatively rather small in the
real world and is overshadowed by other phenomena (such as
technological change) is no different [in the Heckscher-Ohlin-Vanek
framework] from saying that the gains from trade have in practice been
small."  There is a problem of cognitive dissonance here.

I worry about this, but I am not so sure that trade advocates have painted themselves into a corner.  Trade can improve the global economy in at least three ways: a) factor price equalization and the resulting higher output, b) spreading innovations, new technologies, and new products, and c) by improving domestic politics.  The existence of b) and c) means that the gains from trade can in principle be large while the factor price equalization effect is relatively small.  Factor b) points us toward a very favorable opinion of trade.  Rodrik of course also worries about c):

How does Rodrik believe that globalization undermines social democracy?
First, because globalization has undermined governments’ ability to
carry out social insurance programs.

I’m not sure that Rodrik’s view is so uniform on this question; for instance he has a JPE piece suggesting that more open economies are more likely to be interventionist.  In any case my view is that the wonders of Sweden, Denmark and Norway rely very heavily on external trade.  Note that "openness" and "smallness" are distinct but correlated variables here; most likely both qualities are necessary for welfare states of the Nordic kind.  Or look at it from the other side.  In recent times (though it has been changing) Brazil and India were relatively closed to trade, and I don’t see that it led them to take better care of their poor.  International trade also makes countries more tolerant and it makes people more interesting.  That’s the old classical liberal case for trade from Wilhelm von Humboldt and Richard Cobden; let’s not toss it out just because Heckscher-Ohlin came along.

Is divorce bad for the children?

Rereading Tim Harford’s chapter three, this question runs through my mind.  Numerous studies correlate divorce with subpar outcomes for the children, though Justin Wolfers once told me he was not convinced these studies had proved a causal relationship.  Perhaps divorce-prone families have other dysfunctionalities which correlate with the kids having later problems in life and that the divorce is not causing those problems.

My wondering is more fundamental.  Does a marginal (expected) increase in divorce increase or decrease the number of children who end up being born?  On one hand the prospect of divorce may cause some people to limit the number of children they have.  On the other hand, there is a surplus of women on the marriage market.  Divorce, followed by male remarriage or at least siring, tends to increase the total number of children.  I suspect this latter effect predominates.  If divorce is unexpected, this latter effect almost certainly predominates.

If divorce causes more children to be brought into the world, it is hard for me to believe that divorce is bad for "the children" overall.  It’s better to be born, at least for most kids.  You might argue that "children existing now" have a special moral privilege over "children in the abstract."  Sometimes, yes (we don’t value human life at replacement cost), but if we are asking "will divorce be good for children thirty years from now" currently they are all "children in the abstract."

I believe this defense of divorce is consistent with Tim’s overall take.  Of course a person who fears overpopulation might see this as additional reason to oppose divorce or make it more costly.

Predictably Irrational, by Dan Ariely

When we set the price of a Lindt truffle at 15 cents and a Kiss at one cent, we were not surprised to find that our customers acted with a good deal of rationality: they compared the price and quality of the Kiss with the price and quality of the the truffle, and then made their choice: About 73 percent of them chose the truffle and 27 percent chose a Kiss.

Now we decided to see how FREE! might change the situation.  So we offered the Lindt truffle for 14 cents and the Kisses free…

But what a difference FREE! made.  The humble Hershey’s Kiss became a big favorite.  Some 69 percent of our customers (up from 27 percent before) chose the FREE! Kiss, giving up the opportunity to get the LIndt truffle for a very good price. 

That is from Dan Ariely’s new and excellent Predictably Irrational: The Hidden Forces that Shape Our Decisions.  Here is Dan’s book-related blog.  All of a sudden my head is spinning, wondering what a relative price ratio really means (we can’t divide by zero).  Or is this just the Alchian and Allen theorem on steroids, namely the claim that fixed charges encourage the consumption of the higher quality good?  Or I think: "Zero, is there something special about that number?"

There is more on the way in behavioral economics.  There is Sway: The Irresistible Pull of Irrational Behavior, by Ori and Rom Brafman and Nudge: Improving Decisions About Health, Wealth and Happiness, the defense of voluntary paternalism from Richard Thaler and Cass Sunstein, due out later this June and April respectively.

Betting markets in everything, Super Bowl edition

I have found odds on how long Jordin Sparks
will take to sing "The Star Spangled Banner” (wager under or
over one minute and 42 seconds) and which advertisement shown
during Super Bowl will top USA Today’s Ad Meter popularity
contest.  Budweiser is the -200 favorite (bet $200 to make $100
profit), followed by Go Daddy at +300 and Pepsi at +600.   

Looking through betting Web sites I have found more than
2,000 different "proposition bets,” the name bookmakers give
to markets that are about what happens around the game rather
than on the result.      

Here is the full story, and thanks to John De Palma for the pointer.  But in baseball, regulators are shutting down one nascent market.   

Six Degrees

I learned from this new book.  Most of all it shows how the earth likely will change as temperatures rise.

For instance Lima and the Andean parts of Ecuador and Boliva are heavily dependent on Andean glacial melting for their water.  An earth warmer by two degrees would create very serious problems for them, once the glaciers disappear.  Most of all I came away with a renewed sense of the importance of water issues and the need for greater investment in desalination technologies (yes I know it’s not easy and transporting the desalinized water is often a greater problem than getting the salt out.)  Stopping the destruction of tropical forests is another partial remedy for warming and it seems more doable than shutting down all or most carbon emissions.

That said, parts of the book struck me as very weak.  The discussions of biodiversity destruction did not convince me that the scope of pending losses is unacceptable.  There’s a lot of handwaving and listing of lost species as if that ends the argument.  We’re in a mass extinction anyway and I’d like a serious analysis of the marginal impact on global warming on this process.  "It’s so bad anyway that further species loss must be unacceptable" doesn’t cut it for me.

It is also claimed (p.236) that an earth five degrees warmer would result in the culling of "billions."  Of humans that is.  There is little talk of substitution or technological adaptation.  Nor do I buy the claim that carbon rationing would bring "a dramatic improvement in our quality of life" by getting us off the streets, out of the planes, and bringing us closer to the rest of the community. 

Overall I found this the best, most accessible, and most vivid book for visualizing the actual problems from global warming.  But the Cassandras of global warming need to be more responsible, and more wary of overstatement, if they wish to press home their very important arguments.

Jonathan Adler has a good recent round-up post on some global warming issues.

What would it cost to cover the uninsured?

Jonathan Gruber has just written a very useful and comprehensive paper on health insurance (I don’t yet see ungated versions).  He estimates that without a universal mandate, but using subsidies, a typical plan for covering the uninsured would cost $4500-$5000 a year per person, and that is cost in the narrow budgetary sense.  With a mandate the fiscal cost of the government (again, not social cost, which includes the cost of paternalistically forcing people to buy health insurance) is estimated at $2732 per person per year.  Of course it is cheaper to tell people what to do, comparing to paying them to do it.  That cost estimate is assuming that the mandate is effectively enforced, which I do not expect.

I would have preferred the primary estimates to be in terms of social cost.  And I would have liked a discussion of how mandates and minimum benefit requirements distort the price of health insurance and limit competition.  Read Shikha Dalmia.  Nonetheless this remains is one of the best papers on health care economics to be had.

Gruber also poses an interesting philosophical question for the paternalists: would you rather be uninsured in today’s America or obese?  And if you, like I, answer "uninsured," why not first direct paternalistic interventions toward obesity?  And I’m not talking about subsidies to olive oil, I mean real mandates.  After all, they will lower health care costs, no?

Chapter 3 of Logic of Life: Many Could Have Been Mrs. Rojas, but There is Only One Mrs. Rojas

This review is cross posted at the, the management and social science blog.

In chapter three, "Divorce is Underrated," Tim Harford explores the economics of love, marriage, and divorce. It’s the kind of topic that makes people hate economists. Of all the subjects studied by economists, can’t love be spared the rational choice treatment? Of course not! If you spend a few moments thinking about how men and women scheme in the dating world, you’ll quickly see that a rational choice theory of relationships isn’t such a crazy idea after all.

Harford hits the major points you’d expect. People make substitutions, and they respond to supply and demand in dating and sex. One interesting section talks about the “optimal” divorce rate and how in the post-1970s era, we’re probably switching from a situation of many marriages with many divorces, to less frequent marriages and less frequent divorce. Harford quotes MR regular Justin Wolfers in saying that there is social learning and that we should appreciate that the optimal divorce rate is not zero, lest we believe in perfect marriages.

The average person probably hates this econo-talk because it seems to devalue love. Here’s where it helps to be a sociologist. Yes, from the bird’s eye view, there is a “love market” and you are just a love widget. But let’s take the symbolic interactionist perspective. Relationships are highly customizable. Once you bond with a person, you can make the relationship highly unique and hard to substitute. Even if two people are similar, they can form very different relationships with different histories. If you’ve done that, then you’ve created a fairly unique thing that’s hard to replace. By yourself you might be generic, but in a relationship you can be very special.

Translating back into econo-talk, people in loving relationships differentiate their “love product.” A person in a couple with a special history knows that there will never be another person who has lived the same life with them. That knowledge makes them stick it out. If you can do that in a way that improves both parties, then you won’t contribute to the optimal divorce rate.

I don’t quite agree with Jason Furman today

I very often do, but I think he overreaches when responding to Steven Landsburg (who himself overreaches).  Jason writes:

…there is near universal agreement (and if it were not for you I probably would not have needed the word "near") that when the economy is operating below its productive capacity the problem is insufficient aggregate demand, and the solution is to temporarily boost spending or investment through monetary or fiscal policy.

Usually, yes.  Sixty percent of the time, I will agree.  But sometimes real shocks and sectoral shifts are the problem.  Can expansionary monetary policy help an economy adjust to sectoral shifts?  Sometimes but not always.  Is Furman correct that deregulation won’t help in the short run?  Yes.  Is "the solution…to temporarily boost spending or investment through monetary or fiscal policy"?  Probably not.  The solution is for the economy to adjust.  The flow of investment is hard to encourage and the best monetary policy can do in such instances is to prevent a deflation.  If the government can do something to help short-run sectoral adjustments, it is usually clarity of expectations and legal and regulatory benchmarking in the interests of transparency.  Today that means clear standards for future lending and securitization.

As an aside, if you are someone who complains about stagnant American median wages, that means many particular nominal and real wages have been falling.  (It could be in theory that the entire distribution is strictly stagnant but in reality no.)  Tricky distinctions between real and nominal wages lie beneath the surface, but overall this flexibility of wages makes it harder to embrace the Keynesian framework.  Keynesianism requires sticky nominal wages and since we have been having low inflation times (until now, at least) that means relatively sticky real wages as well.  Yet it is claimed implicitly that many real and nominal wages have been falling.  Beware the Keynesian who wants to have it both ways (I’m not accusing Jason of this).

Do “influentials” drive The Tipping Point?

In the past few years, Watts–a network-theory scientist who recently
took a sabbatical from Columbia University and is now working for Yahoo
(NASDAQ:YHOO) –has performed a series of controversial, barn-burning
experiments challenging the whole Influentials thesis. He has analyzed
email patterns and found that highly connected people are not, in fact,
crucial social hubs. He has written computer models of rumor spreading
and found that your average slob is just as likely as a well-connected
person to start a huge new trend. And last year, Watts demonstrated
that even the breakout success of a hot new pop band might be nearly
random. Any attempt to engineer success through Influentials, he
argues, is almost certainly doomed to failure.

Here is the full article.  Here is the home page of Duncan Watts.  Thanks to John DePalma for the pointer.