# Month: January 2013

## Development Economics – Final Exam

We have posted the last section of our course on Development Economics to MRU and the final exam is now open. Have fun!

New courses coming soon!

## Questions which are rarely asked

All Scrabble players know that Q and Z are the highest scoring tiles. You can get 10 points for each, in the English language version of the game.

But according to one American researcher, Z really only deserves six points.

And it’s not just Z that’s under fire. After 75 years of Scrabble, some argue that the current tile values are out of date as certain letters have become more common than they used to be.

“The dictionary of legal words in Scrabble has changed,” says Joshua Lewis, researcher and creator of a software programme which allocates new, up-to-date values to Scrabble tiles.

“Among the notable additions are all of these short words which make it easier to play Z, Q and X, so even though Q and Z are the highest value letters in Scrabble, they are now much easier to play.”

Here are some details on the reforms:

According to Lewis’s system, X (worth eight points in the current game) is worth only five points and Z (worth 10 points now) is worth six points.

Other letter values change too, but less radically. For example, U (one point currently) is worth two in the new version, G (two points) becomes three and M (three points) becomes two.

Here is more, via @timharford, and here is further information.

## Facts about cities

The average tract density of all these (U.S.) cities taken together declined in every decade since 1910, from 69.6 persons per hectare in 1910 to 14.6 persons per hectare in 2000, almost a fivefold decline.  Fitting an exponential curve to this average density in every decade from 1910 to 2000, we found that the average annual rate of decline for the entire period, assuming a constant rate, was 1.92 percent.  Declines in average tract density between any two consecutive censuses were registered in 124 of the 153 observations, or 81 percent of the time.

That is from the new and quite interesting Planet of Cities, by Shlomo Angel.  My takeaway is that the Avent-Yglesias push for greater urban density, which I sympathize with, is unlikely to happen on a significant scale.  If you are looking for hopeful signs, there is this:

…between 1990 and 2000, six cities in this group registered an increase in average tract density: New York, Washington, Los Angeles, St. Paul, Syracuse, and Nashville.  Hence, while average densities in U.S. cities have been in general decline for almost a century, they may now be reaching a plateau and even gradually increasing.

I definitely recommend this book to all those with an interest in urban issues.

## Digitalization and the value of various tourist locales

Miles, a loyal MR reader, writes to me:

I’ve spent a fair amount of time today at my desk in California looking at this, and it got me thinking about an interesting interplay between the tourism industry and the “digital revolution”:

https://s3.amazonaws.com/Gigapans/EBC_Pumori_050112_8bit_FLAT/EBC_Pumori_050112_8bit_FLAT.html

(use the +/- buttons to zoom and drag to shift the view)

After finding people and understanding the scale of those mountains, I am in awe of Everest and the Himalayas, but feel absolutely no need to travel there. A digital representation has given me an amazing experience of a place on the other side of the world, and at least for this particular occasion, has convinced me never to go there (try to find the people climbing the upper portion of the glacier and you’ll understand why). So maybe some amazing (non deadly) location would convince me that I need to visit in person, but at some point, the digital experience gets so good that it’s a better, cheaper alternative to travelling. If in a few hundred years we can create digital experiences far more immersive than physical visits to locations, what experiences/amenities/etc will induce people to travel? Where will tourism die off (Himalayas), where will it increase (Paris)? As you say, solve for the equilibrium.

Thought it might make for an interesting discussion.

I predict that bustling, interactive locations — such as Guatemala — will do fine, and it is the static nature settings which will face a bit more competition.  That said, while I have never visited the Himalayas, I suspect the trip there involves a lot of bustling interaction with local cultures and that the final destination is in part an excuse for the process.  Keep also in mind that most of us do not in fact enjoy travel but enjoy only the memories of travel, with our minds playing a fairly active role as editor.  I doubt if the memory of visiting the digital image will ever compare, even if the image itself is more beautiful and more convenient than the reality of an actual physical site.  Finally, there is marketing to consider.  The digital image may market the original, just as the rather vivid LOTR movies have boosted tourism to New Zealand rather than replacing it.  So overall I still see tourism as a continuing growth industry.

## Ryan Avent is correct about Draghi and the eurozone

I find it shocking how readily we all seem to be accepting the European Central Bank’s inaction on euro-zone economic weakness. Some perspective is in order. Real euro-area output is at roughly the level of the end of 2006 and it is declining. The euro-area economy hasn’t grown since the third quarter of 2011. Total employment is below the level first attained in the second quarter of 2006 and it is declining. The unemployment rate is of course at a record high 11.8%. And inflation—both core and headline—was virtually nil in the second half of 2012.

I would stress that it is even worse than Ryan is suggesting.  Countries such as Greece, Portugal, and Spain have consumed remarkable amounts of political capital.  Britain is considering leaving the EU.  Credit channels are still either in tatters or on life support, relying on ECB guarantees.  More countries are seeing zero or negative growth.  Eurogeddon is here, as a variety of countries have situations worse, in relative terms, than the Great Depression of the 1930s.  It seems the bailout funds, especially the ESM, have given up on the notion of detaching sovereign and bank liabilities from each other.  The so-called banking union is at best a common supervisor rather than real risk-sharing for deposit liabilities.  The fact that we don’t have daily bond market crises, filling up my Twitter feed, is certainly welcome but constitutes a remarkable lowering of the bar for what success means.  Just how would one, these days, articulate why the eurozone should be considered a success and worth preserving going forward?  Is this case no better than the (possibly correct) claim that dissolution would bring economic anarchy?  In my rather (currently) unfashionable view, the eurozone crisis is still getting worse, not better.

## Adam Posen on Japanese fiscal stimulus

The case for continued deficit spending in Japan ended by mid-2003.

…The additional stimulus in Japan is counterproductive because it adds to the long-term costs without addressing Japan’s real problem: a return to deflation and an overvalued exchange rate. The BoJ pursuing a higher inflation target through large-scale purchases of a wide range of assets, as Mr Abe and his economic adviser Koichi Hamada rightly advocate, would be sufficient and appropriate.

Here is much more (FT).  You will note that Posen is in general famous for being an advocate of stimulus for the UK and he is no enemy of Keynesianism or aggregate demand analysis.

## Japan fact of the day

The unemployment rate is 4.1 percent.

In recent discussions of Japanese fiscal stimulus, this point could use a little more…emphasis.

Here is one source for the data.

## Uncovering Union Violence

Union violence against non-unionized workers and their employers is an under-reported story. Everyone knows it happens but they look the other way. It’s hard to look the other way, however, when the violence and vandalism is videotaped and put on the web–that’s what two Philadelphia developers did and the result is making waves far beyond the workplace.

Since the first videos went up in spring, the tide of public sentiment has turned, and the Pestronks won a court order restricting the picketers’ behavior. But in coming years, the Goldtex battle and the techniques employed there may be seen in grander, historical terms: as the moment that started the unraveling of Building Trades’ vast economic and political power, and perhaps of Philadelphia’s entire power structure.

The above-market wages, featherbedding and absurd work rules make low-cost development difficult:

…According to Gillen, the economics of our Trades unions hinder middle-income developments and force developers toward high-end luxury residences. Yet Building Trades flaunts its power with labyrinthine work rules and outrageous demands. Most famously, the Comcast tower was equipped with two sets of pipes—one “green” and functional, the other old-fashioned and disconnected—to feed the union beast. But the Trades are an everyday drag on the local economy. Union plumbers must call in the electricians if a single wire needs to be moved.

As is usual, in these situations, the rents do not go the workers alone but instead are partially distributed to inside developers who accede because they get monopoly power:

…The Pestronks say they’ve been told by people within the development community that certain established builders get better labor rates than they were offered. Multiple sources inside Philadelphia’s development community say that information is correct. “It isn’t like the unions ever work for market rate,” says one developer, who requested anonymity for fear of retribution from the Trades. “But instead of coming in 40 or even 50 percent over market, they’ll come in at 20 percent. Maybe throw in some government subsidy, and it’s just enough to get the deal done.”

The arrangement has dark ramifications for the city’s economy. “The issue,” says one elected official, who also asked for anonymity, “is that a younger developer or an out-of-town developer gets a vastly different price than someone who has a relationship with the unions. There is a kind of old-boy ne­twork involved. And there is an element of protectionism to it. The established developers complain about the unions. But they cut deals with them and enjoy the fact that the unions reduce any competition they might face.”

The politicians also get their share of the cut:

..Inquirer reporter Bob Warner has published a series of stories quantifying the amount of money Johnny “Doc” Dougherty donates to local politicians. Dougherty, the boss of Local 98, annually funnels \$2 million into state and city races, circumventing campaign contribution limits by funding political action committees that lavish his favored candidates with cash. The Trades have it in their power to acquire huge stakes in any city politician. A review of 2011 political campaign filings shows City Council representatives Bill Green, Mark Squilla and Bobby Henon each received roughly 20 to 25 percent of their funding from Trades-related sources.

Read the whole excellent piece. Hat tip to EconJeff who notes that the article is flawed only by a bit of lazy history suggesting that the 40 hour work week and good working conditions are primarily due to unions (there is also a bit of weak economics in a suggestion that the wages of builders and city rents should be closely related). Still it’s a very astute article that connects the dots in the iron triangle.

## How to protect workers against robots

Noah Smith has an excellent proposal:

First of all, it should be easier for the common people to own their own capital – their own private army of robots. That will mean making “small business owner” a much more common occupation than it is today (some would argue that with the rise of freelancing, this is already happening). Small businesses should be very easy to start, and regulation should continue to favor them. It’s a bit odd to think of small businesses as a tool of wealth redistribution, but strange times require strange measures.

Read the whole thing.

## Don’t pay for all of your kids’ college education

…a new study…found that the more money (in total and as a share of total college costs) that parents provide for higher education, the lower the grades their children earn.

The findings — particularly grouped with other work by the researcher who made them — suggest that the students least likely to excel are those who receive essentially blank checks for college expenses.

The Inside Higher Ed piece is here.  The NYT piece is here.  Here is a summary of the research from the researcher, Laura Hamilton.  Here is the paper itself, forthcoming in the American Sociological Review, available to subscribers and university systems only I suspect.

I should note that this piece includes all of the appropriate controls, but still we do not know how good those controls are and perhaps parental paying practices are proxying for other features of the situation.

## Richard McKenzie writes a tribute to James Buchanan

You will find it under the fold…

At a conference organized in the early 1990s to celebrate Professor James M. Buchanan’s Nobel Prize in Economics, the speakers were asked to tie their comments on economic education to Professor Buchanan’s prodigious works.  My opening line crystallized the importance of my serendipitously coming within Professor Buchanan’s orbit of influence: “When I was in Professor James Buchanan’s microeconomics class in the fall of 1969, he taught me very little.  I say that with pride here in this august setting because Professor Buchanan would be the first among you to realize that I could not offer a higher compliment. He understands, as he got me to see, that the measure of good teaching is not how much you teach, but how much is learned by students – and then how much students can do with what little is taught and learned.  The first principle in economics should be economy in the principles covered,” a point rarely driven home for young economists today.

With his death at age 93, much will be written about Professor Buchanan’s prodigious scholarship that has changed the way people view political and government arenas.  My perspective is more personal, that of a student who came to know an admirable side of Professor Buchanan that his critics and devoted readers will never know.  Professor Buchanan was my dissertation director.  Most dissertation directors take weeks, if not months, to return first drafts of their students’ dissertations.  In my case, I vividly remember placing all 250 pages of my first draft on Professor Buchanan’s desk just before 5 PM one day, only to find a marked-up version, as well as an untold number of typed single-spaced pages of comments, the very next morning!

After graduating and taking an assistant professorship, I started churning out a stream of papers, anxious to move up the academic ladder. But I had an advantage that other young professors could only wish for.  I had Professor Buchanan in my corner, giving generously of his time to review and comment on my work, and all with unbelievable promptness.   I would send Professor Buchanan a paper, and he would have it back to me in no time at all, with pages of comments – long ago, when papers and messages traveled at the snail’s pace of the Post Office.  He was so prompt and predictable on getting papers back that on occasion I would put a paper in an envelope and then go to one of my colleagues and say something to this effect: “Notice that I am putting this paper in the mail to Jim Buchanan today.  I am willing to bet you a cup of coffee that I will get this paper back with one or more single-spaced pages of comments a week from now.”  Without fail, I won the bets and had any number of cups of coffee off Professor Buchanan’s tireless generosity with his time and wisdom with a former student.

I once told Professor Buchanan’s longtime assistant Betty Tillman how remarkable it was that he would get my papers back so promptly and with obvious attention to detail.  I was struck by her reaction, “Honey, I hate to tell you this, but he doesn’t just do it for you.  He does it for everyone.  There’s hardly a day that goes by that he doesn’t get at least one paper in for review, and he almost always has his comments written by the next morning.”

Professor Buchanan’s comments on my papers followed a somewhat predictable format.  He would always start by saying something positive about the content, perhaps focusing on how well the paper was written, if lost for positive comments on content. He would then add his incisive comments, which sometimes forced me to set the paper aside.  But on one paper I remember well that he didn’t start with his usual positive remarks.  He wrote to this effect: “Dear Dick, we all write good papers and bad papers.  With some papers we pursue publication.  With others, we trash them.  In the process of writing any number of papers, we acquire great wisdom in deciding which papers are which.  You will acquire great wisdom in deciding what to do with this paper.”  I didn’t need for him to say more, which he didn’t.  I never tried to revise that paper.

Today, I am pleased to call James Buchanan my professor for pressing on me a remarkably simple but important point that escapes so many colleagues across the country:  Being a professor is a privileged position.  It demands scholarship, but it also demands that you give of yourself in ways that will never show up on your resume, or in your obituary.

Richard McKenzie is the Walter B. Gerken Professor of Economics and Management Emeritus in the Merage School of Business at the University of California, Irvine.

## What should we be afraid of?

That is the topic of the new Edge symposium and many of the answers are interesting.  Here is the take from Bruce Sterling, who fears that when it comes to the Singularity there is “no there there”:

Since it’s 2013, ten years have passed since Vernor Vinge wrote his remarkably interesting essay about “the Singularity.”

This aging sci-fi notion has lost its conceptual teeth. Plus, its chief evangelist, visionary Ray Kurzweil, just got a straight engineering job with Google. Despite its weird fondness for AR goggles and self-driving cars, Google is not going to finance any eschatological cataclysm in which superhuman intelligence abruptly ends the human era. Google is a firmly commercial enterprise.

It’s just not happening. All the symptoms are absent. Computer hardware is not accelerating on any exponential runway beyond all hope of control. We’re no closer to “self-aware” machines than we were in the remote 1960s. Modern wireless devices in a modern Cloud are an entirely different cyber-paradigm than imaginary 1990s “minds on nonbiological substrates” that might allegedly have the “computational power of a human brain.” A Singularity has no business model, no major power group in our society is interested in provoking one, nobody who matters sees any reason to create one, there’s no there there.

So, as a Pope once remarked, “Be not afraid.” We’re getting what Vinge predicted would happen without a Singularity, which is “a glut of technical riches never properly absorbed.” There’s all kinds of mayhem in that junkyard, but the AI Rapture isn’t lurking in there. It’s no more to be fretted about than a landing of Martian tripods.

For the pointer I thank Michelle Dawson.