Month: September 2009

The Devil Wears Fake Prada

It's no surprise that people who buy fake merchandise are more likely to cheat in other ways but in this video Dan Ariely, author of Predictably Irrational, explains another one of his ingenious experiments.  Ariely was able to show that randomly inducing people to choose or wear fake merchandise can make them significantly more likely to cheat on a subsequent task.  You are what you wear, or another example of the fundamental attribution error.

Hat tip Freakonomics.

James Hamilton replies to Scott Sumner

Over at CatoUnbound:

Let me mention one other real-world complication that has made it difficult for the Fed to achieve a faster growth of nominal GDP. Macroeconomists often like to think of inflation in terms of an aggregate price index, the variable P in the equation of exchange. But, particularly in the current environment, aggressive stimulus by the Fed is unlikely to show up as higher wages or the prices of most services, but instead would raise relative commodity prices and could in a worst case scenario precipitate a currency crisis, both of which would be highly destabilizing in their own right. I agree with Sumner that the Fed could and should have done more, but would caution that it is also possible for the Fed to try to do too much. I come back to the perspective with which I opened – given the earlier regulatory lapses, significant economic losses could not have been prevented by any monetary policy that could have been implemented in the fall of 2008.

There are many more points of interest in this dialogue and further comments to come.

Where do countries stand on the Laffer Curve?

From Mathias Trabandt and Harald Uhlig, there is a new study:

We characterize the Laffer curves for labor taxation and capital income taxation quantitatively for the US, the EU-14 and individual European countries by comparing the balanced growth paths of a neoclassical growth model featuring “constant Frisch elasticity” (CFE) preferences. We derive properties of CFE preferences. We provide new tax rate data. For benchmark parameters, we find that the US can increase tax revenues by 30% by raising labor taxes and 6% by raising capital income taxes. For the EU-14 we obtain 8% and 1%. Denmark and Sweden are on the wrong side of the Laffer curve for capital income taxation.

I guess some of those countries should cut their tax rates.  The title of the paper is How Far Are We From the Slippery Slope?  The Laffer Curve Revisited.  You'll find some ungated versions here

What do economists believe?

When it comes to the tax code, there is less of a consensus than I had expected to find:

Health insurance receives preferential tax treatment. Should the U.S. change the income tax code so that health insurance benefits are taxed the same as income? Economists lean ever so slightly against this idea–44 percent oppose it, while 42 percent favor it. Should the U.S. amend the income tax code to eliminate the mortgage interest deduction? Again, economists are almost evenly split. Should internet sales be exempted from taxation? The majority of economists (57 percent) say “no,” while less than a quarter favor special treatment of internet-based sales.

That's from a survey of AEA members, conducted by Robert Whaples.  The paper has other results of interest.

The culture that is Brazil

Reborn in Christ is among a growing number of evangelical churches in Brazil
that are finding ways to connect with younger people to swell their
ranks. From fight nights to reggae music to video games and on-site
tattoo parlors, the churches have helped make evangelicalism the
fastest-growing spiritual movement in Brazil.

…The night of the Extreme Fight, dozens of teenagers and young adults
hovered around the church. In the front room, booths sold hot dogs and
pizza, and young people lined up in one corner to get religious-theme
tattoos like “I Belong to Jesus.” In the main room, there were video
games, a D.J. spinning a mix of hip-hop and funk, and a projection
screen showing a DVD of the Harlem Globetrotters.

Though most
came for the main event, the Extreme Fight, they lingered. After four
fights and Pastor Maffei’s sermon, members paired up. One placed his
hand over the other’s forehead and spoke of Jesus Christ; the other
closed his eyes tightly.

Here is more.

The ethics and economics of randomized trials — a bleg

In late October I'm supposed to talk on this topic at the National Institutes of Health.  It's not so much a lecture (this is not my area) as me offering some introductory remarks — from the perspective of an outsider — and then serving as discussion leader.

What should I read?  Do you have any particular points to offer on this topic?  I (and the NIH) thank you in advance for the assistance.

The cost of the Medicare prescription drug benefit

Megan and Andrew Sullivan are having a squabble about how much it cost (and here).  I would remind everyone of this recent research result:

In spite of its relatively low benefit levels, the Medicare Part D benefit generate $3.5 billion of annual static deadweight loss reduction, and at least $2.8 billion of annual value from extra innovation.  These two components alone cover 87% of the social cost of publicly financing the benefit. 

And here's another research result:

Overall, a $1 increase in prescription drug spending is associated with a $2.06 reduction in Medicare spending.

Both papers are from very reputable sources.  Left-wingers focus on the "giveaways" in this plan and conservatives focus on the cost or maybe they don't walk to talk about it at all.  It's a little late to go through all the usual pro and con arguments on the policy as a whole.  I'd just like to note that – relative to its reputation – the Medicare prescription drug benefit is one of the most underrated government programs of our time.  If the goal is to cut or check Medicare spending, and I think it should be, we should do it elsewhere in the program.

It's also possible that the prescription drug benefit will do more for peoples' health (as opposed to their financial security) than will the Obama plan.  Try getting people to consider that.  The debate has become very emotional and not for the better.

I am more than willing to listen to criticisms of those cited studies.  But in the meantime it seems I should rationally believe what I do.

Here is a related post of relevance.

Assorted links

1. Profile of Robert Shiller.

2. Markets in everything: road kill toys.

3. Dynamic pricing for hockey games; why doesn't everyone do this?

4. Five questions for Doug Irwin.

5. The historical roots of the financial crisis, by Arnold Kling.

6. What if yesterday's books were retitled today?  Two of my favorites were:

Then: Declaration of Independence
Now: The Pursuit of Happiness: How to get control of your continent and have fun doing it!

And this:

Then: Quotations from Chairman Mao (or "the Little Red Book")
Now: You're Telling Me Comrade! Hilarious but helpful sayings from China's Best Selling Author

*When Brute Force Fails*

That is the new and excellent book by Mark Kleiman and the subtitle is How to Have Less Crime and Less Punishment.

The reader learns many interesting facts.  In 1974 the average burglary resulted in about four days behind bars (that's the average sentence adjusted by the chance of being caught).  The average 1974 burglary yielded about $320 (in today's dollars), which amounts to about $80 a day payment for time behind bars.  Even forgetting about the fixed costs of getting a criminal record, or a longer criminal record, that screams out to me: "It isn't worth it!"

Today, for burglary, the average return per day in jail is $22.  That is one reason why crime has gone down but the real question is why crime has not fallen even more.

Many burglars are not risk-averse or they underestimate their chances of being caught.

There are many excellent bits and segments in this book.

Bankruptcy court as government intervention

Remember that debate? Many of you argued something like this:

You don't support your statement that "today's bankruptcy procedures
are ill-suited for disposing of a large financial institution in a
timely manner".

Mark me down for preferring a procedure that's established and known over some seat of the pants, unpredictable bailout.

Here is an update:

Lehman Brothers' European clients and creditors could have to wait
another two years before they get back billions of dollars of assets
tied up in the bank when it collapsed a year ago.

Tony Lomas,
partner at PwC and administrator for the bank's European operations,
said he had hoped to have "broken the back" of the case by this time
next year, substantially reconciling claims, returning assets to
clients and putting in place a process for paying dividends to
unsecured creditors.

He said it could now take two more years
after an English judge decided last month that he could not approve a
scheme of arrangement that would have helped hasten the winding up.

European business is one of the biggest and most complex parts of the
bank, with thousands of intricate investments, and client and trading
relationships that are still being unravelled.

"I had hoped to
break the back of this within 24 months but with the setback around the
scheme and other issues, a more realistic estimate is now 24-36
months," Mr Lomas told the Financial Times in an interview.

There is a reason why we should be afraid of putting large financial institutions into bankruptcy court as those courts currently operate.  So many of you bash the Fed and the regulators, so few of you bash bankruptcy court.  It's not always the "fault" of the court, these are simply difficult cases to unravel and resolve.  But so far we're just not trying hard enough to improve bankruptcy procedures as they apply to Lehman and others.

Assorted links

1. Critical Review blog; CausesoftheCrisis.  Vernon Smith and David Colander have posts up.

2. Boston Globe article on Hyman Minsky.

3. Arnold Kling: "One could argue that this country is on the verge of a crisis of legitimacy. The progressive elite is starting to dismiss rural white America as illegitimate, and vice-versa. I see the chances of both sides losing as much greater than the chance of either force winning."

4. 1990-2007: In which countries were health care costs rising the fastest?

5. Women with masculine names have better shots at judgeships.

New issue of Econ Journal Watch

Great apprehensions,
prolonged Depression.
Writing in 2008 in the American Economic
, Gauti Eggertsson claims that Hoover instantiated three
policy dogmas, and that, by overcoming Hoover’s dogmas, Roosevelt
shifted expectations and brought recovery by the end of his first term.
A thoroughgoing critique is offered here by Steven Horwitz. (Professor
Eggertsson is invited to reply in a future issue.)

The policy views of
American Economic Association members.
Robert Whaples shares the
results of a new survey that includes many new policy-opinion questions.

Economic Notes from
Four confessions:

  • Bruce Benson tells his
    troubled story—afflicted for 25 years with economic dissociative
    identity disorder—but it ends happily.
  • David Hakes tells how he
    complicated the math to get a paper published.
  • Stephen Kinsella tells of
    having to teach what you don’t believe in.
  • William P. Leonard tells
    how he teaches one thing in economics courses but, as college
    administrator, practices unconscionably to the contrary.


Invisible hand—metaphor
of moment?
Gavin Kennedy replies to Daniel Klein over Smith’s
famous phrase.

The Scottish tradition in
economic thought:
This 1955 lecture by Alec L. Macfie (1898-1980)
richly treats two centuries of Scottish economic thinkers and suggests
distinctiveness in the line.