Month: February 2013

Actual significant technological progress, at least potentially

by  Tyler Cowen in

Drought tolerance would be the most significant new biotech trait introduced in the near future, Mr James said, “because drought is, by far, the single most important constraint to biotech to increased productivity for crops worldwide”. Monsanto will launch the first drought tolerant GM maize in the US this year.

From the FT, here is more.  Furthermore this is additional evidence that we have been wise to stick with GM crops.

Facts about Britain and France and Belgium

by  Tyler Cowen in

Britain’s Royal Air Force now has just a quarter of the number of combat aircraft it had in the 1970s. The Royal Navy has 19 destroyers and frigates, compared with 69 in 1977. The British army is scheduled to shrink to 82,000 soldiers, its smallest size since the Napoleonic wars. In 1990 Britain had 27 submarines (excluding those that carry ballistic missiles) and France had 17. The two countries now have seven and six respectively.

And yet Britain and France are commonly regarded as the only two European countries that still take defence seriously.

That is from Gideon Rachmann.  Here is one possibly rude remark:

The Belgians distinguished themselves in the Libyan campaign of 2011. But about 75 per cent of Belgian military spending now goes on personnel – causing one critic to call the Belgian military “an unusually well-armed pension fund”.

Assorted links

by  Tyler Cowen

1. Where does Greece stand right now?  Another take here.

2. NYT reports on Israeli Ethiopian birth control.  I’ve read some of the supposed debunkings of this episode, but I still think it newsworthy and the NYT account largely supports this view.

3. Markets which were never meant to be (celebrity perfumes), and how’s Detroit doing?

4. Why do we get bored with really great works of art?

5. What will the digital reading revolution look like in Africa?

6. The future of weaponized drones.  And 3-D printers and gun control.

7. What data can’t do, by David Brooks.

8. Japan expert Donald Richie has passed away.

Armen Alchian

by  Alex Tabarrok in

Armen Alchian has died. Alchian was both clever and wise, an unusual combination. His 1950 paper Uncertainty, Evolution and Economic Theory applied basic insights from evolutionary theory to suggest new approaches to economic ideas.  Alchian, particularly with Demsetz, began the analysis of property rights not only what property rights do but how they evolve with changing circumstances (the link goes to Alchian’s entry on this topic in the CEE). Alchian’s textbook with Allen, University Economics which became Exchange and Production, is a classic; never a bestseller among students but avidly read by masters. The Alchian-Allen theorem, sometimes called the third law of demand, continues to bedevil theorists despite its simplicity. I am a fan of his paper Costs and Outputs which generalized some ideas about production and time and inspired Fisher Black.  I never met Alchian but have always profited from reading his papers and I was truly grateful and also thrilled when he blurbed my book Entrepreneurial Economics. Fred McChesney has a good appreciation including Alchian’s pioneering event study which was suppressed for national security reasons; Bob Higgs remembers Alchian’s legendary class at UCLA and here is Larry White interviewing William Allen about A Life Among the Econ his memoir of UCLA economics during its glory years.

You can find all of these works and more in Alchian’s Collected Works.

Aviation, Liability Law, and Moral Hazard

by  Alex Tabarrok in

File:Cessna172-CatalinaTakeOff.JPGBy 1994 the threat of lawsuits had driven the general aviation industry into the ground. Cessna and Beech ceased production in the 1990s and the other major player, Piper, went bankrupt. The problem was caused by liability law and the long-tail. Cessna, Beech, and Piper had been producing planes since 1927, 1932, and 1927, respectively, and airplanes last a long time. Thousands of aircraft built in the 1930s and 1940s are actively flown today and the average age of the general aviation fleet (small non-commercial aircraft) is more than 24 years. Liability law also grew stronger in the 1980s and 1990s so aircraft manufacturers found themselves being sued for aircraft that they had produced decades earlier. Essentially, the manufacturers found that they could be sued for any aircraft that they had ever produced.

In 1994, however, Congress passed GARA, the General Aviation Revitalization Act. GARA said that small airplane manufacturers could not be held liable for accidents involving aircraft more than 18 years old. When it was passed a huge stock of potential liability claims were lifted from the manufacturers and the industry was indeed revitalized. GARA also provided an interesting test of moral hazard theory. Usually, when liability is moved from producers to consumers, both the producers and the consumers adjust; the product changes and so does behavior, so it is difficult to parse out the effect of moral hazard alone. In the case of GARA, however, liability was lifted from the manufacturers on planes that they had produced decades earlier and no longer controlled so we can isolate the influence of the liability change on the consumers of aircraft.

My latest paper (with Eric Helland) just appeared in the JLE. We use the exemption at age 18 to estimate the impact of tort liability on accidents as well as on a wide variety of behaviors and safety investments by pilots and owners. Our estimates show that the end of manufacturers’ liability for aircraft was associated with a significant (on the order of 13.6 percent) reduction in the probability of an accident. The evidence suggests that modest decreases in the amount and nature of flying were largely responsible. After GARA, for example, aircraft owners and pilots retired older aircraft, took fewer night flights, and invested more in a variety of safety procedures and precautions, such as wearing seat belts and filing flight plans. Minor and major accidents not involving mechanical failure—those more likely to be under the control of the pilot—declined notably.

GARA thus appears to be a win-win because it revitalized the industry and increased safety. The latter came, in a sense, at the expense of the pilots and owners who now bore a greater liability burden but they were the least cost avoiders of accidents. Moreover, the pilots and owners of small aircraft were big supporters of GARA thus suggesting strongly that prior to GARA liability law for aircraft had been inefficient and destructive.

Economic agents ponder the collapse of the pooling equilibrium

by  Tyler Cowen in

Robert Pear reports:

 “The new health care law created powerful incentives for smaller employers to self-insure,” said Deborah J. Chollet, a senior fellow at Mathematica Policy Research who has been studying the insurance industry for more than 25 years. “This trend could destabilize small-group insurance markets and erode protections provided by the Affordable Care Act.”

It is not clear how many companies have already self-insured in response to the law or are planning to do so. Federal and state officials do not keep comprehensive statistics on the practice.

Self-insurance was already growing before Mr. Obama signed the law in 2010, making it difficult to know whether the law is responsible for any recent changes. A study by the nonpartisan Employee Benefit Research Institute found that about 59 percent of private sector workers with health coverage were in self-insured plans in 2011, up from 41 percent in 1998.

And:

 Large employers with hundreds or thousands of employees have historically been much more likely to insure themselves because they have cash to pay most claims directly.

Now, employee benefit consultants are promoting self-insurance for employers with as few as 10 or 20 employees.

And from the FT:

The penalty for not providing coverage is $2,000 per worker. According to the Kaiser Family Foundation, a non-partisan policy group, the average annual cost to employers of insurance is $4,664 for a single worker and $11,429 for a family.

(Do note that the worker will find the job less attractive without health insurance., so this may not translate into a net gain for the employer.)

Here is an update on the 50% premium that can be charged to smokers, assuming the repeal movement for that feature does not succeed.

And now let me stress that you should not expect salvation from the (stand-alone) private sector.  DNA sequencing seems to be making real progress, which will make private solutions harder to sustain, a problem which Alex pioneered the analysis of.

Addendum: Here is a good Christensen, Flier, and Vijayaraghavan Op-Ed on ACOs and their problems.

#thirdworldproblems

by  Tyler Cowen in

If a case of soap is pilfered from a U.S. military base here or pinched from a NATO shipping container, it will probably, sooner or later, end up for sale in the Bush Market, a sort of thieves’ outlet mall in central Kabul.

Named after George W. Bush, the U.S. president who launched the war in Afghanistan, the bazaar has flourished for more than eight years, thanks to the long presence of foreign troops that provided war booty aplenty. But in the Obama era, with its steady withdrawal of U.S. forces, the good times are ending in the sprawling hive of vendors who hawk mountains of Pop-tarts and enough Head & Shoulders shampoo to combat the dandruff of untold army divisions.

The story is here, and for the pointer I thank Peter Metrinko.  By the way:

A pack of Wrigley’s 5 gum fetches $2, more than in the States.

Are your views on sticky nominal wages and the minimum wage consistent?

by  Tyler Cowen

Let’s say your labor is worth $10 an hour but you won’t go back to work for less than $12, thereby leading to the unemployment of you.

In essence you are self-imposing a minimum wage on that market, but the employer is responding by leaving you jobless.  (Analogous to “self-deportation,” a sarcastic wag might suggest.)

Let’s say, alternatively, that you finally decided to settle for $10 but the law now stipulates $12.  It’s not quite the same (“the public regime has shifted”), but still I can imagine that an employer, if he did not hire you in the first setting, also would not hire you in the second setting with the higher legal minimum.

Keynesians believe that worker-imposed minimum wages do not lead to reemployment very readily.  Other people, some of whom are also Keynesians, believe that state-imposed minimum wages are reasonably consistent with employment/reemployment.

If there is significant monopsony in labor markets, can a worker-imposed minimum wage improve outcomes?

I know many economists who will argue: “let’s raise the state-imposed minimum wage.  Employers will respond by creating higher-productivity jobs, or by paying more, and few jobs will be lost.”  I do not know many Keynesians who will argue: “In light of the worker-imposed minimum wage, employers will respond by creating higher-productivity jobs, or by paying more, and few jobs will be lost.”

Again, I am not saying that the worker-imposed minimum wage and the state-imposed minimum wage are identical in their nature.  Still, it would be interesting, in terms of a model, to deduce where the relevant difference comes from.

Is the difference that the worker-imposed minimum wage is too high?  That the worker has not publicly precommitted to his or her personal stubbornness?  That a legal minimum wage applies to a larger and broader class of workers?  Something else?

In policy terms, does it suffice to argue that minimum wage increases should be restricted to periods of high or at least adequate demand?  Have you noticed that is not what we are seeing?

Addendum: For an additional exercise, under what model are your views on the minimum wage, sticky nominal wages, and payroll tax cuts consistent?  Consider please a payroll tax for each side of the market.  Toss in the liquidity trap for true extra credit.

In case you are wondering about Chinese growth…

by  Tyler Cowen in

I still do not believe that the Chinese “recovery” is for real:

Chinese credit issuance surged to a record high in January on the back of a boom in shadow banking, stoking concerns that the economy could overheat.

Total new financing in January reached Rmb2.5tn ($400bn) – up more than 50 per cent from December and more than double the figure a year ago – eclipsing even the start of 2009 when China unleashed stimulus spending to battle the global financial crisis.

…The big increase in credit issuance stems from last year when China slouched to 7.8 per cent growth, its weakest in more than a decade. To revive the economy, the government stepped up the pace of infrastructure investment and gave a green light to banks to provide more funding, including through off-balance-sheet channels.

This succeeded in fuelling a recovery in the final quarter of 2012 and the momentum of that upturn has continued through into the start of this year.

But I would gladly be proven wrong.  The FT article is here, and I will admit, at the very least, to needing to revise my views on how often the fires can be restoked.  I had been expecting 3 to 5 percent “real growth” for China in 2012.  By the way, also from the FT, you will find a more optimistic take on Chinese matters here.

Now there are two new estimates, each revising downward actual Chinese gdp.  Here is one report:

Wiemer argues that “household services and manufacturing upkeep” component of the official CPI index is a better measure of services inflation.

And, given that adjustment, from Stephen Green:

…our [gdp] guesstimates for 2011 and 2012 are 7.2% and 5.5%, respectively, compared with the official prints of 9.3% and 7.3%.

From Toshiya Tsugami, here are further worrying signs.  About half of measured growth is coming from fixed investment, and yet bank data suggest these investments are a) not close to self-financing, and b) the figures are “grossly inflated” in the first place.  By the way, these fixed investments rose 20% from 2011 to 2012, not exactly the rebalancing which everyone is looking for.

I would again stress that we do not yet know what is going on, but it is a mistake to assume that China is in the clear.  If you put together the Green and Tsugami modifications into one revision, what kind of growth would we be measuring?

The 20 Greatest Songs About Work?

by  Tyler Cowen in

The list is here.  Number one is Tennessee Ernie Ford’s “Sixteen Tons,” followed by Dylan’s “Maggie’s Farm.”  “Atlantic City” would not have been my Springsteen pick but overall the list is better than expected.  There is, however, an odd under-representation of folk music, see for instance this list.

Why are the service sectors underrepresented on such lists?  There is “Dr. Robert,” “Lawyers, Guns, and Money,” “Police and Thieves,” and many others from the more stagnant sectors of the economy, although arguably police productivity has risen quite a bit.

For the pointer I thank the estimable Chug.

From my email, about the deadweight loss of Valentine’s Day

by  Tyler Cowen in

Consider:

Single people report feelings of inadequacy, anxiety.
People in relationships suffer from the tyranny of expectations. Good experiences are met with hedonic adaptation, bad experiences can be, I’m reliably informed, remembered for decades.
Florists, restaurateurs, etc., demand – and receive – excess producer surplus for their services.

For years, my solution has been to randomly select a surprise Valentine’s day substitute. Our private utility is well served (the wife loves the arrangement), and as a bonus I think I am minimizing the negative consumption externality.

In my estimation, 1 and 2 outweigh 3, resulting in a deadweight loss.  I’m not a naive utilitarian; yes, I understand there is value in signaling, and, believe it or not, I’m a romantic. I just think that by coordinating this behavior in holiday form we suffer on both demand side (expectations, zero-sum positional goods) and supply (constraints in providing flowers, restaurant tables).

That is from Shiraz Allidina, MR reader.

*The Battle of Bretton Woods*

by  Tyler Cowen in

This is an excellent book.  The author is Benn Steil and the subtitle is John Maynard Keynes, Harry Dexter White, and the Making of a New World Order.

If you enjoyed Liaquat Ahamed’s Lords of Finance, and his take on the 1920’s, and you are looking for something comparable on postwar economic reconstruction, this is the place to go.

The book also contains some explosive revelations about White’s work as a Soviet spy, very well documented I might add.