Month: March 2011

Privatize the Spectrum

The proposed merger between AT&T and T-Mobile is getting a lot of attention with most of the focus being on whether consumers will pay higher prices. The answer is maybe. Prices per minute have been falling and this was true even following the two big mergers in 2004-05 (Cingular/AT&T Wireless, and Sprint/Nextel). Quality-adjusted prices, i.e. taking into account the post-merger buildout of 3G networks, have fallen even further.  On the other hand, although there are competitors in many large local markets and potential competitors (the Cable companies own a chunk of spectrum not yet in use) a merger could increase market power. But even if consumer prices did rise the merger is probably still a good idea. It’s long been known that even small cost savings can outweigh losses to consumers from a price increase (Nobelist Oliver Williamson was one of the first to drive this point home.)

The big issue, however, is not the merger. The big issue is reallocating spectrum from low to high value uses. My colleague Thomas Hazlett argues that spectrum currently being used for low-value over-the-air broadcast of television could, if it were reallocated to high-value uses like wireless, increase consumer welfare by over a trillion dollars. Moreover, for a price of about 3 billion we could switch almost all of the tv-viewers to cable or satellite.  President Obama has pledged to move a big chunk of spectrum, about 500 mhz, to wireless but the process is slow and highly politicized. What really needs to be done is to auction off as much spectrum as possible with as few restrictions on it use as possible. Let the market allocate spectrum across all uses, allowing value maximizing trades. More spectrum would not only be good in itself it would alleviate any concerns about the merger.

Does a government shutdown boost fiscal conservatism?

Matt Mitchell says no:

It turns out that in 23 U.S. states, the government will automatically shut down in the event that the governor and the legislature fail to agree on a budget. In his work on budget rules, David Primo examined the theoretical impact of these provisions from a game theoretic perspective. He noted that in states with an automatic shutdown provision, “the legislature will be able to achieve its ideal budget, so long as the governor prefers it to no spending.” (p. 102)

He therefore predicted that states with such a provision will spend more than states without such a rule. He then tested the hypothesis, controlling for a number of other factors known to impact state spending and found that states with an automatic shutdown provision actually spend about $64 more per capita than other states. As he notes, “This effect is remarkably large, given that shutdowns occur rarely.” (p. 103)

This suggests that the federal government’s automatic shutdown provision—by making Congress’s desired spending level a take-it-or-leave-it offer—tends to bias the government toward more spending. By extension, it also suggests that a government shutdown will shift negotiating power toward those who favor more spending. So, paradoxically, fiscally-conservative Tea Partiers stand to lose the most if the federal government shuts down.

Maybe you’re not convinced by that $64 difference.  Maybe you ascribe it to unobserved variables.  Still, it is hard to argue, based on the evidence, that shutdowns help the cause of fiscal conservatism.

Why is Finland so rich?

James, a loyal MR reader, has a request:

Why is Finland, with its tax distortions and subsidies, as rich as it is?

1. Finland’s taxes and subsidies do not much discourage the adoption of cutting-edge technologies and thus Finland has moved relatively close to “the frontier.”  Ed Prescott and Stephen Parente have a very important paper about the difference between interventions which have this effect and those which do not.  It’s one of the best papers on economic development.

2. Finland’s high taxes do discourage male labor supply and that is one reason why the country is not as wealthy, in per capita terms, as the United States.

3. There are extensive day care and child care subsidies, which in part counteracts the effects of high taxes on female labor supply.

4. Finland has one of the best educational systems in the world and high levels of human capital.  You might re-ask your same question about living standards in Russia, which had far worse economic policies than Finland, yet is not too far from first world standards in the major cities.

5. Finland invested in communications and IT at exactly the right time.  For a relatively small economy this had a huge payoff.

6. Some people might cite Finnish industrial policy as having driven growth; I am not sure how significant it was.

7. An open economy, with lots of trade, is usually much freer than traditional statistics will make it seem.  International markets are a disciplining force and they cannot be ruled by the domestic government.

8. That all said, I am not especially optimistic about Finland.  Their current investment and R&D stats are not those of an economy on the move.  They will be hit hard by aging and they have not made immigration policy work in their favor.  Public sector productivity is not as high as you might think (see also the McKinsey report).  Do they have another big success on the way?  Can they get further productivity gains in cell phones and timber?  It’s not obvious.  They’ll do “well enough,” however, see #1.

Here is a McKinsey study of Finland (pdf).  Here is a good Charles Sabel essay (pdf) on the economic future of Finland.

Endgames for basketball, the 2-for-1

When should a team try for two shots near the end of a game or quarter?  Here is part of Mr. Winston’s request:

Hypothetically, your team is tied with about a minute left. Your team should shoot the ball with no less than 45 seconds left on the clock, so that if you miss and fail to get the offensive rebound, you are almost guaranteed to get the ball back. Here is his reasoning: “2-for-1 is a basic fundamental premise – I get 2 shots, you get 1. If we are tied before that begins, I am going to win more often than you. Period. Even if the first shot is less-than-great, you have to take a decent look early.

Here are a few points against the 2-for-1:

1. Taking a bad shot too early can lead to long rebounds and leave a team unable to get back to defend.

2. Turnovers and offensive rebounds and fouls are common near the end of games.  No one  knows how many shots are left in the game, so don’t think that backwards induction will work.

3. Your chance of drawing fouls, or inducing sheer defensive lapses, goes down if you take the rapid shot.

4. Taking the bad shot early may disrupt shooting rhythms, dispirit the team if there is a miss, and lead to too much play focused on the shot clock rather than quality execution.

5. You still might get a final shot attempt even if the first two shot attempts, by you and the opposing team, run down the shot clock a fair amount.

Overall I am not one to insist on the 2-for-1.  Basically you are immediately spending a valuable asset — a possession — without that much information about its value.  The deeper economic lesson is that infinite horizon models are more plausible than you think, because no one knows how rapidly events will be taking place.

Here is one paper on endgame strategy in basketball, focusing on the intentional foul.

Tyrone’s top ten favorite movies

That was a request from Nick L.  My (longer) list is on my home page, scroll down a bit.  Tyrone of course is my long-lost brother and evil twin.  His list, in no particular order, is:

Pee Wee’s Big Adventure


Faster, Pussycat! Kill! Kill!


Wild Things

Ella Enchanted

The Cable Guy, Ace Ventura, The Nutty Professor

Booty Call

Flash Gordon

Pasolini’s Teorema

New arguments against capitalism the dog that didn’t bark

From Hugo Chavez:

Capitalism may be to blame for the lack of life on the planet Mars, Venezuela’s socialist President Hugo Chavez said on Tuesday.

“I have always said, heard, that it would not be strange that there had been civilization on Mars, but maybe capitalism arrived there, imperialism arrived and finished off the planet,” Chavez said in speech to mark World Water Day.

For the pointer I thank Brandon Robison.

Assorted links

1. What is the UK doing to spur growth?

2. NYT symposium on inequality.

3. Thresholds and military spending.

4. Obamacare update.

5. The culture that is Japan, baseball highlight reel.

6. Baggage-free travel, he forgot the Kindle and iPad.

7. Of Gods and Men and Even the Rain are two of the best movies I’ve seen in years.

8. Brookings Papers goes open access, including forty years of excellent archives.

The history of Libyan unity and partition

In 1949, Benjamin Rivlin wrote an instructive piece “Unity and Nationalism in Libya” (JSTOR), excerpt:

…the Big Four have been sharply divided on the question of Libyan unity…In supporting the Sanusi claims, Great Britain has become the chief advocate of a divided Libya…Similarly, the United States has given support to a divided Libya by abandoning its original proposal for an international trusteeship, in favor of support for the British position…Not to be forgotten is…France, also, advocated a partitioning of Libya, but a partition of its own special variety.  Under the guise of “border rectifications,” France has laid claim to the Fezzan in southwestern Tripolitania and to all of Libya south of the Tropic of Cancer…The French claim is based primarily on the fact that Free French troops wrested this desert region from Italian control, and is an attempt to bolster the sagging prestige of France as a world power by a tangible reward for its role in the war.

The Soviet Union opposed a partition of Libya and favored Italian trusteeship.  Back then, it seems that Europe took the lead role and the U.S. followed along.  Here is one good sentence:

In examining the history of Libya one is struck with the fact that only on rare occasions has the area constituted a unified political entitity…there have never been firm bonds of union.

The difference between the two territories goes back to antiquity, when the territory was divided by rule by Greece and rule by Phoenicia.  Even when Italy claimed the country in 1912, it effectively governed over two separate territories, Tripolitania and Cyrenaica.  What is the fundamental principle of division?:

The division of Libya into Cyrenaica and Tripolitania down through the ages is no mere quirk of history.  It reflects, rather, the basic physiographic character of the territory.  A great natural barrier — the Gulf of Sirte [now Sidra] and the projection of Libyan desert along its 400-mile shore — divides Cyrenaica from Tripolitania, limiting communication between the two territories and to a very large extent shaping their economies.  Trade between the two territories has played a minor role, and the movement of the nomadic tribes in both territories has been and remains north-south, not east-west.


Unity vs. separatism has been the chief concern of all political leaders in Tripolitania and Cyrenaica ever since the relaxation of military administration controls during the past three years…

Here is a summary of the Sanusi.  Here is a useful map.  Having read this article, I have revised upwards my priors on the likelihood of partition as the result of the current conflict, whether or not Gaddafi falls.

Who gets a job?

Which factors determine unemployment duration for the individual?  It’s not just objective macroeconomic conditions:

For our econometric duration analysis, we use the well-accepted taxonomy “Big Five” to classify personality traits. Based on individual unemployment data taken from the German Socio-Economic Panel (SOEP) our empirical findings reveal that the personality traits Conscientiousness and Neuroticism have a strong impact on the instantaneous probability of finding a job, where the former has a positive effect and the latter has a negative effect.

Here is more.  Here is one version of the paper.

These results do not discriminate against all theories of nominal wage stickiness, but they may discriminate against some matching models which suggest that the employer and worker never come together in the first place.  They also discriminate against models which suggest the employer won’t consider making any lower wage offer to any group of workers.  Under one alternative option, there is a chance for a mutually beneficial transaction, if the laborers can demonstrate that they will be flexible and productive and non-resentful.  Another alternative model (and to me less plausible) on the table is that the workers get some offer in any case, but the more neurotic workers do not take it.  In any case, labor quality very much matters.