Yglesias on Occupational Licensing
I am outsourcing this post entirely to Matt Yglesias because it's awesome and it made me very happy to see how public choice has moved out in the world:
A number of people, including many commenters here and even alleged
conservative James Joyner think you should need a professional license to become
a barber because you might hurt
someone with a straight razor. Uh huh. At best this would be an argument for
regulating people who do shaves with a straight razor, which would be
considerably narrower than current comprehensive regulation of hair
stylists.Meanwhile, though “torts and the free market will take care of it” isn’t the
answer to everything, it’s surely the answer to some things. Getting
some kind of training before you shave a dude with a straight razor is obviously
desirable in terms of strict self-interest. If you screw it up in a serious way,
you’ll face serious personal consequences and the only way to make money doing
it–and we’re talking about a very modest sum of money–is to do it properly.
People also ought to try to think twice about whether their views are being
driven by pure status quo bias. Barbers are totally unregulated in
the United Kingdom, is there some social crisis resulting
from this? Barber regulations differ from state to state, are the stricter
states experiencing some kind of important public health gains?Last you really do need to look at how these things play out in practice. If
you just assume optimal implementation of regulation, then regulation always
looks good. But as I noted
in the initial post the way this works in practice is the boards are
dominated by incumbent practitioners looking to limit supply. One result is that
in Michigan (and perhaps elsewhere) it’s hard for
ex-convicts to get barber licenses which harms the public interest not only
by raising the cost of haircuts, but by preventing people from making a
legitimate living. States generally don’t grant reciprocity to other states’
licensing boards, which limits supply even though no rational person worries
about state-to-state variance in barber licensing when they move to a New Place.
In New Jersey, you need to take the
straight razor shaving test to cut women’s hair because they’re thinking up
arbitrary ways to incrementally raise the barrier to entry.In principle, you could deal with all these problems piecemeal. But
realistically this sort of problem is inevitably going to arise when you pit the
concentrated interest of incumbent haircutters against the diffuse interest of
consumers. It’s hard enough to make sure that really important regulatory
functions related to environmental protection, public safety, and financial
stability are done properly.
Afternoon at the Treasury
Yesterday, Tyler, myself and a handful of other economics bloggers had a chance to discuss the economy with Treasury Secretary Geithner and other treasury officials. Here are a few random notes.
There was deep skepticism about the financial industry and about reform from some of the bloggers. More let’s say “radical” approaches such as Treasury taking an equity stake in underwater homes or giving everyone a guaranteed income were brought up. I was surprised to find myself on the side of the more conservative Treasury officials who cogently argued that such reforms were neither politically viable nor likely to work. Treasury gave a good argument that reform had been deep and meaningful.
A few good lines from a senior treasury official as I recall the gist:
- “Markets believe we can borrow. The public doesn’t. We need both to move forward on the fiscal front."
- “Businesses are investing in a way that shows more confidence than they are talking.” (graph here, see the last year or so AT)
There was a recognition that the Fed could do “dramatic” things but a sense that the theory here was uncertain and untested.
The best question of the day came from Tyler. The discussion was on the financial reform bill and how it changed the incentives of players in the financial industry by creating more risk for them. Tyler interrupted with “What I really want to know is how your incentives have been changed! What is to say that next time the decision will not be made to again bailout the bondholders?”
As Tyler said after an earlier visit, Geithner is smart and deep. Geithner took questions on any topic. Bear in mind that taking questions from people like Mike Konczal, Tyler, or Interfluidity is not like taking questions from the press. Geithner quickly identified the heart of every question and responded in a way that showed a command of both theory and fact. We went way over scheduled time. He seemed to be having fun.
Assorted Links
1. Jazz is (was?) the best word to play in Hangman.
2. 3-D print your own designs.
3. Cool incentives.
4. Steve Eisman, who called the subprime debacle, on the (nominally) private-education scam (pdf, another link here). (Of course, some public education isn't much better it's just harder to short.)
CAPTCHA Economics
CAPTCHA (Completely Automated Public Turing test to tell Computers and Humans Apart) are the distorted text puzzles that are designed to keep spammers out of websites. Although some AI systems have been developed to solve CAPTCHAs the market has discovered that it is cheaper to farm out the problems to workers in developing countries.
Here is an amazingly detailed investigation from researchers at UC San Deigo of the market for solving CAPTCHAs.
Bottom line:
- Prices run about $1 per thousand CAPTCHAs solved, depending on the time of
day and demand.
- The median response time to solve a CAPTCHA is 14
seconds and accuracy runs about 90%.
- “[T]he
business of solving CAPTCHAs,…is a well developed, highly-competitive industry with the capacity to solve on the order of a million CAPTCHAs per
day.”
Hat tip: Mim’s Bits.
Tradeoffs
From David Foster Wallace's 1995 essay, The String Theory:
… it's better for us not to know the kinds of sacrifices the professional-grade athlete has made to get so very good at one particular thing. Oh, we'll invoke lush cliches about the lonely heroism of Olympic athletes, the pain and analgesia of football, the early rising and hours of practice and restricted diets, the preflight celibacy, et cetera. But the actual facts of the sacrifices repel us when we see them: basketball geniuses who cannot read, sprinters who dope themselves, defensive tackles who shoot up with bovine hormones until they collapse or explode. We prefer not to consider closely the shockingly vapid and primitive comments uttered by athletes in postcontest interviews or to consider what impoverishments in one's mental life would allow people actually to think the way great athletes seem to think. Note the way "up close and personal" profiles of professional athletes strain so hard to find evidence of a rounded human life — outside interests and activities, values beyond the sport. We ignore what's obvious, that most of this straining is farce. It's farce because the realities of top-level athletics today require an early and total commitment to one area of excellence. An ascetic focus. A subsumption of almost all other features of human life to one chosen talent and pursuit. A consent to live in a world that, like a child's world, is very small.
Hat tip to Tim Carmody filling in at Kottke.
Spontaneous order on the road
Here’s a video of a small town in Britain that turned its traffic lights off. Order ensued.
The experiment is not unique. Tom Vanderbilt wrote an excellent piece in The Wilson Quarterly a few years ago on traffic revolutionary Hans Monderman (see also this NYTimes piece) who has redesigned a number of city centers:
At the town center, in a crowded four-way intersection called the Laweiplein, Monderman removed not only the traffic lights but virtually every other traffic control. Instead of a space cluttered with poles, lights, “traffic islands,” and restrictive arrows, Monderman installed a radical kind of roundabout (a “squareabout,” in his words, because it really seemed more a town square than a traditional roundabout), marked only by a raised circle of grass in the middle, several fountains, and some very discreet indicators of the direction of traffic, which were required by law.
As I watched the intricate social ballet that occurred as cars and bikes slowed to enter the circle (pedestrians were meant to cross at crosswalks placed a bit before the intersection), Monderman performed a favorite trick. He walked, backward and with eyes closed, into the Laweiplein. The traffic made its way around him. No one honked, he wasn’t struck. Instead of a binary, mechanistic process–stop, go–the movement of traffic and pedestrians in the circle felt human and organic.
A year after the change, the results of this “extreme makeover” were striking: Not only had congestion decreased in the intersection–buses spent less time waiting to get through, for example–but there were half as many accidents, even though total car traffic was up by a third.
The experiments are interesting in their own right but they are also very good illustrations of spontaneous order; how order is possible without orders.
Hat tip: Dan Klein.
Weight Loss and Incentives
Ted Frank reports on his 60k weight-loss bet with Ray Lehmann:
In late 2008, Ray Lehmann and I made an audacious bet: we would put up $60,000 that we would lose 60 pounds in nine months, and pay each other $1,000 for each pound the other lost.
…I lost 32 pounds, Ray lost 41, and we were on pace to lose 60 each. StickK.com was offering to make us their official spokespeople.
Then things fell apart. We couldn't negotiate an appropriate contract with StickK, which wanted exclusive rights to our story without any compensation. The delay caused us to stop writing about the diet while we had false dreams of fame and glory from StickK promotion, and then we both got distracted with starting new jobs and the disappointment of shattered expectations when StickK stopped returning our calls.
Alex Tabarrok correctly predicted that the danger of the two-person bet was that we would collude not to enforce it.
And, indeed that was what happened. We started gaining weight, and started pushing back the goal-line for the end of the bet…neither of us held the other's feet to the fire….
Professor Tabarrok's solution was to create a third-party Leviathan to enforce the bet: he facetiously offered to pay us $500 to be the collector [not facetious, Ted!, AT]. Of course, that was a negative-expectation transaction for each of us, unless we thought we had a 90%+ chance of succeeding…Even the threat of public humiliation on Marginal Revolution wasn't enough to stop us from colluding.
But Ted isn't giving up. He is looking for other people to take the bet to reduce the possibility of collusion or he would like to auction off leviathan rights.
Are there three other people out there willing to wager that they can lose 50 pounds over a reasonable amount of time? (Forty? Sixty?) Who's in, and under what conditions?
…In the alternative, how much is someone willing to pay to be Leviathan and have the opportunity to collect tens of thousands of dollars from me or Ray for failing to lose weight? I suppose I could put Leviathan rights up on eBay; if Marginal Revolution and a few other blogs publicized it, we could reach a good solid equilibrium price. What do people think?
I see this is as a good case study in the difficult of setting up an appropriate incentive scheme and also the difficulty of losing weight. When I put on my Tyler hat, however, I have to wonder whether all this effort put into clever incentive schemes is not a way of avoiding the real issues. "Less blogging, more jogging," my friends.
What Ted and Ray are trying to do is to sail between Scylla and Charybdis by offsetting the pull of food with the pull of lost money. Carrot cake versus stick. But in this tug of war, how long will the balance last? How permanent will the weight loss be?
The real trick in weight loss, as in other areas of life, is to change wants not oppose them. Unfortunately, Seth Roberts nothwithstanding, this is a struggle with no easy solutions.
Nevertheless, I have proudly helped others to lose weight with unusual incentives, and my $500 bid for leviathan rights over Ted and Ray still stands. Good luck guys.
Markets in Everything: Divorce Insurance
NYTimes–Here’s a new option for those worried they’ll end up on the wrong side of the statistics that show so many marriages ending over time: divorce insurance.
SafeGuard Guaranty Corp., an insurance start-up based in North Carolina, recently released what it’s billing as the first world’s first divorce insurance product. Here’s how its WedLock product works.
The casualty insurance is designed to provide financial assistance
in the form of cash to cover the costs of a divorce, such as legal proceedings or setting up a new apartment or house. It is sold in “units of protection.” Each unit costs $15.99 per month and provides $1,250 in coverage. So, if you bought 10 units, your initial coverage would be $12,500 and you’d be paying $15.99 per month for each of those units. In addition, every year, the company adds $250 in coverage for each unit.
My wife tells me she already has divorce insurance, it's called a job.
Hat tip Mark Perry.
Downward Revision in 2nd Quarter GDP?
Secretary of the Treasury Geithner in the NYTimes on August 2:
While the economy has a long way to go before reaching its full potential, last week’s data on economic growth show that large parts of the private sector continue to strengthen.
Catherine Rampell at the NYTimes blog Economix on August 3:
On Friday, in its preliminary estimate of gross domestic product, the Bureau of Economic Analysis said it believed the economy grew at an annual rate of 2.4 percent last quarter.
…G.D.P. numbers go through several revisions as the bureau receives more complete data, and it now looks as if the revisions may be significant. According to the June factory order data, released today, the number the bureau used to calculated the inventory component of G.D.P. was way off.
As a result, economists are predicting that the second quarter G.D.P. number will be revised downward from 2.4 percent to somewhere around 1.7 percent.
Previous revisions to GDP show the recession began earlier and had a deeper trough than first thought. Moreover, on balance, the previous revisions also suggest that the recovery has been even weaker than first thought. If the argument above holds up, that trend will continue. The news is not good.
GDP is lower today than it was at its peak in 2007.
Negative Equity in Underwater Homes
Calculated Risk gathers the data on underwater homes:
- There are 14.75 million underwater homes and 4.1 million of these have more than 50% negative equity (the homeowners owe 50%+ more than their homes are worth).
- The total negative equity is $771 billion.
I decided to create a picture:
Why are so many homes unemployed?
Theories of unemployed labor are a subset of theories of unemployed resources.
The U.S. housing vacancy rate–an unemployment rate for homes–is at its highest level since at least 1965 (see figure). Why? Is it sticky prices? Lack of aggregate demand? Structural?
House prices may be sticky but they have fallen a lot–maybe not enough–but they have fallen a lot more than have wages. On the other hand, house prices rose a lot more than wages. Maybe house prices are sticky relative to the required variation in market clearing levels.
What about lack of aggregate demand? The homeownership rate was 67.2 in 2000 and today it’s 66.9. Thus, we don’t have too great a supply of houses in the aggregate so aggregate demand is likely a factor.
Is the problem structural? It does seem that we have too many houses in the South and the West where the boom was concentrated. If we think of the unemployment rate as a measure of where there are too many houses then the following figure shows that there is a positive correlation between the home vacancy rate and the unemployment rate. It’s not as tight as one might expect, however. California, for example, has a high unemployment rate but a home vacancy rate slightly below the national average and many states such as Wisconsin have plenty of unemployment but a very low home vacancy rate.
My guesstimate is 50% AD, 25% sticky prices, 25% structural. Tyler would read it differently. I do think more progress could be made if greater attention were given to theories of unemployed resources and not just unemployed labor.
Does Beer Make Bud Wiser?
Here from Razib Khan at Gene Expression is a chart of percentage alcohol drinkers against score on the Wordsum test (0-10 score; a quick and dirty correlate .71 of adult IQ.). I will let you debate causality.
Credit Scores, Criminal Background Checks and Hiding the Bad Apples
A number of people (Slacktivist, Kevin Drum, Matt Yglesias, Megan Mcardle) are debating the use of credit scores in employment. Credit scores are useful at predicting all kinds of things including, for example, car accidents so there is good reason to believe that they are useful in employment. The above commentators tend to focus on the potential for scores to hurt the poor but that is not obvious. Consider a similar issue: Should employers be allowed to use background criminal checks when hiring?
One argument against is that black men are more likely to have criminal backgrounds and thus these criminal background checks discriminate against black men. Let's put aside the normative issues. What’s surprising is that under plausible circumstances criminal background checks can lead to an increase in the employment of black men. The reason is that without the background check employers face a risk that their employees are ex-cons. If employers are very averse to hiring ex-cons then they will seek to reduce this risk and one way of doing so is by not hiring any black men. As a result, a background check allows non ex-cons to distinguish themselves from the pack and to be hired. Furthermore, when background checks exist, non ex-cons know that they will not face statistical discrimination and thus have an increased incentive to invest in skills.
Consistent with this reasoning, although not demonstrative of the net effect, Holzer, Raphael and Stoll find that:
…employers who check criminal backgrounds are more likely to hire
African American workers, especially men. This effect is stronger among
those employers who report an aversion to hiring those with criminal
records than among those who do not.
My view is actually that criminals face too many post-crime impediments to reintegrating themselves within the workforce. Private incentives not to take a risk on an ex-con do not cohere with social incentives to reintegrate workers into society and thus we get too little hiring of ex-cons. As a result, ex-cons face a low opportunity cost of recidivism.
Nevertheless, banning criminal background checks or credit scores is probably not the best way to combat these types of problem. Banning criminal background checks increases the incentive to rely on less accurate statistical discrimination which discriminates against the innocent and reduces the incentive to invest in skills. In short, hiding the bad apples among the good comes at the expense of the good.
Preachers who are not believers
In Preachers who are not believers, a provocative new paper in Evolutionary Psychology, Daniel Dennett and Linda LaScola interview five preachers who no longer believe in God. Here's one bit:
A gulf opened up between what one says from the pulpit and what one has been taught in seminary. This gulf is well-known in religious circles. The eminent biblical scholar Bart D. Ehrman’s widely read book, Misquoting Jesus (2005), recounts his own odyssey from the seminary into secular scholarship, beginning in the Moody Bible Institute in Chicago, a famously conservative seminary which required its professors to sign a statement declaring the Bible to be the inerrant word of God, a declaration that was increasingly hard for Ehrman to underwrite by his own research. The Dishonest Church (2003), by retired United Church of Christ minister, Jack Good, explores this “tragic divide” that poisons the relationship between the laity and the clergy. Every Christian minister, not just those in our little study, has to confront this awkwardness, and no doubt there are many more ways of responding to it than our small sample illustrates. How widespread is this phenomenon? When we asked one of the other pastors we talked with initially if he thought clergy with his views were rare in the church, he responded, “Oh, you can’t go through seminary and come out believing in God!” Surely an overstatement, but a telling one. As Wes put it:
…there are a lot of clergy out there who — if you were to ask them — if you were to list the five things that you think may be the most central beliefs of Christianity, they would reject every one of them.
One can be initiated into a conspiracy without a single word exchanged or secret handshake; all it takes is the dawning realization, beginning in seminary, that you and the others are privy to a secret, and that they know that you know, and you know that they know that you know. This is what is known to philosophers and linguists as mutual knowledge, and it plays a potent role in many social circumstances. Without any explicit agreement, mutual knowledge seals the deal: you then have no right to betray this bond by unilaterally divulging it, or even discussing it.
It was interesting to me that this account is related to the ideas of preference falsification developed by Timur Kuran, sacrifice and stigma developed by Larry Iannaccone and common knowledge by Robert Aumann.
The History and Future of Private Space Exploration
In The Rational Optimist Matt Ridley asks:
Can you doubt that if NASA had not existed some rich man would by now have spent his fortune on a man-on-the-moon programme for the prestige alone?
In fact, we have some pretty good historical data on this issue. Bearing in mind that observatories are an early form of space exploration, Alex MacDonald, a NASA research economist, notes:
For the majority of its history, space exploration in America has been funded privately. The trend
of wealthy individuals, such as Paul Allen, Jeff Bezos, Robert Bigelow, and Elon Musk,
devoting some of their resources to the exploration of space is not an emerging one, it is the
long-run, dominant trend which is now re-emerging.
MacDonald gives the following list of major observatories and their costs (click to enlarge). Privately funded observatories are in bold.
Private spending on space exploration is even more impressive when we scale by personal wealth.
…rather than scaling the expenditure as a share of the total resources of the U.S. economy, the expenditure can be scaled as a share of the resources of the individuals who undertook the projects. James Lick was the richest man in California and the Lick Observatory expenditure represented 17.5% of his entire estate. The equivalent share of the wealth of the richest man in California today, Larry Ellison, is $3.9 billion dollars, approximately four times higher than the GDP equivalent share.
Private space exploration and commercialization are likely to increase substantially in this century and, perhaps surprisingly, President Obama is pushing NASA in this direction. Here, for example, is a headline you don't see very often, "Obama defends privatization of space travel."
What is really going on is contracting-out rather than privatization per se and as such there is significant room for abuse. Nevertheless, if done carefully, I think Obama's efforts to encourage private efforts in space are a step in the right direction. What would be much more welcome and useful, however, would be a titling system for establishing property rights in space (see also here). Homesteading the highest frontier is our best bet for moving humanity off planet.