Sticky wage transmission mechanisms
The most obvious way in which sticky wages impede employment is by keeping the cost of hiring workers above the equilibrium wage. The standard story explains that sticky wages increase unemployment. The standard story, however, is not the only and perhaps not the most important transmission mechanism.
Wages are the largest component of costs thus sticky wages keep costs high and profits low. The point is obvious once stated but it has implications for how we look at sticky wages. Tyler, for example, writes:
[Consider] illegal immigrant Mexican construction workers, a group which lost jobs in large numbers following the crash. Are they — who often came from $1 a day environments — also supposed to have sticky wages? They are out of work in massive numbers.
The focus here is on the unemployed workers with the argument implicit that it's the stickiness of their wages which counts (which makes sense given the standard story). But suppose that the problem is that firms can't get capital to expand–perhaps because the banking system is not working well–then what matters for firm expansion is free cash flow. But sticky wages keep firm costs high, reducing free cash flow and inhibiting expansion. In this argument, the stickiness that matters is the sticky wages of the employed workers.
A story which focuses on employed workers has several advantages. First, the wages of employed workers are clearly more sticky than the wages of unemployed workers–in fact, if you are employed real wages are up slightly. Moreover, since more than 90% of workers are employed this type of argument has leverage.
If there are fixed costs, new firms do not arise instantly so infra-marginal sticky wages can be important for a number of "balance-sheet" reasons in addition but related to the free cash flow story such as debt constraints or various coordination and risk reasons.
Sentence of the Day
… 10 percent of the electricity Americans use comes from Russian missiles and bombs.
From Stewart Brand's excellent and highly quotable Whole Earth Discipline: An Ecopragmatist Manifesto.
Secession
In advance of July 4, Patri Friedman and co-bloggers are discussing secession (remember, we call it the American revolution they call it secession) at Let a Thousand Nations Bloom. Here is Patri on secession as a startup:
America did not merely secede and copy the governing documents or style of the United Kingdom. Rather, it innovated, creating a system based on the English Common Law, yet different, one with explicit checks and balances to restrain government, and with no place for a monarch. It was an experiment with a more radical form of democracy than existed anywhere in the 18th-century world.
And it was an incredibly successful experiment, as the combination of that innovative rule-set and the empty frontier resulted in America growing rapidly in population, wealth, and influence. During the open immigration periods of the 19th century, some years saw over a million new immigrants arrive “yearning to breathe free”. As a result, the new American state had influence far beyond its shores.
This influence occured in two major ways. First, America served as a test of the brand-new American Constitution, and the Founding Fathers’ philosophy about the role of government. By showing that it worked well in practice, political philosophers, politicians, voters, and revolutionaries around the world were (slowly) convinced that this was the best government technology to be had. Second, America dramatically outcompeted existing states, based on the simple metric of net migration. Those million+ people a year who went to America can be thought of as customers of government services voting with their feet, which means that other countries were losing market share.
You may not be used to thinking of government in this sort of economic and business framework, but it is a core part of our philosophy here at Let A Thousand Nations Bloom, and we find it provides a unique and refreshing angle on government. In this case, it shows us the invisible, long-term effects of the American Revolution.
They are covering a lot of other related material such as the optimal size and number of nations this week as well. Here is a guide. On a related point, I argued earlier for The Great State of Northern Virginia.
Finally, don’t forget: If at first you don’t secede, try, try again.
Not from the Onion: EPA Classifies Milk as Oil
New Environmental Protection Agency regulations treat spilled milk like oil, requiring farmers to build extra storage tanks and form emergency spill plans.
Local farming advocates says it’s ridiculous to regulate a liquid with a small percentage of butter fat the same way as the now-infamous BP oil spill.
“It’s just another, unnecessary over-regulation by the government just lacking any common sense,” said Bill Robb, dairy educator for Michigan State University Extension…
The EPA regulations state that “milk typically contains a percentage of animal fat, which is a non-petroleum oil. Thus, containers storing milk are subject to the Oil Spill Prevention, Control and Countermeasure Program rule when they meet the applicability criteria…"
Seriously, this is not from The Onion.
Do note that the issue is not even regulation of milk spills it's regulation of milk under the oil spill prevention law. Given the power of farmers, my bet is that these laws will not go into effect; even so I do not expect a milk gusher.
Hat tip to Joshua Hedlund.
Two MP3s, Circa 1956
Two MP3s, Circa 1956 (An IBM 350 drive capable of about 5 MB of storage.)
800,000 MP3s Circa 2010 2014? – see the comments.
Hat tip Boing Boing and Alex in the comments.
Optimizing Kidney Allocation: LYFT for LIFE
Under the current system, kidneys are allocated to patients primarily based on the time that the patient has been on the waiting list and the quality of the match. If we evaluate these criteria "locally" there's nothing obviously wrong but if we step back and think globally, that is think about what the ultimate goal of the transplant system should be, then the current system is deeply misguided. Suppose that we want the transplant system to maximize total life expectancy or, as it is known in the literature, to maximize the life-years from transplant (LYFT).
The current system does not maximize life expectancy. In the current system, a 60 year old patient can be given a 20 year old kidney–that's a waste because the life expectancy of the kidney is longer than that of the patient; it's like putting a new clutch in a car that is rusting away. If we had 20 year-old kidneys to spare, this wouldn't be a big problem. But we don't have 20-year old kidneys to spare, so we also give 20-year old patients 60-year old kidneys which means the kidney is likely to die early taking the patient along with it. If we want to maximize total life expectancy, younger people should get younger kidneys.
Here is a simple example to illustrate the principle. Suppose that the life expectancy of both patients and kidneys is 75 years of age so everyone dies when they are 75 or when their kidney is 75, whichever comes first. Thus, if we allocate the 20 year old kidney to the 60 year old patient and vice-versa we gain a total of 30 years of life expectancy.
| Kidney Age |
Patient Age | Life Years | |
| 20 | 60 | 15 | |
| 60 | 20 | 15 | |
| 30 years | Total |
But if we allocate the 60 year old kidney to the 60 year old patient and the 20 year old kidney to the 20 year old patient we more than double life expectancy to 70 years in total.
| Kidney Age |
Patient Age | Life Years | |
| 60 | 60 | 15 | |
| 20 | 20 | 55 | |
| 70 years | Total |
It's not just age that matters, it turns out that the longer a patient has been on dialysis the less is their life expectancy after transplant (dialysis stresses the body so the sooner we get someone a transplant the better). Although it may seem unfair, if we want to maximize total life expectancy we are doing the wrong thing by giving more points to patients who have been on the list longer.
An optimized allocation system that took into account these considerations would increase total life
expectancy (modestly but significantly, about 11,500 extra life years) but it wouldn't benefit every individual. Maximizing life expectancy would shift organs away from older people and people who have been on the waiting list a long time towards younger people. As a result, some patients have argued that LYFT is unfair. The Office of Civil Rights is even asking whether LYFT might violate age discrimination laws.
But consider, would the older patients have objected to LYFT when they were younger? If not, shouldn't their objections be discounted? More formally, consider how people would vote behind a veil of ignorance. By definition a LYFT approach maximizes total life expectancy, so without knowing the specifics of who you are or when you might need a transplant it's likely that behind a veil of ignorance just about everyone would favor LYFT. Thus, in my view LYFT is a fair and ethical system.
Here are previous MR posts on kidney transplant policy.
The Dunning-Kruger Effect
If Wheeler was too stupid to be a bank robber, perhaps he was also too stupid to
know that he was too stupid to be a bank robber – that is, his stupidity
protected him from an awareness of his own stupidity.
And thus begins a productive research program. Errol Morris investigates.
A Debate on Nuclear Power
Obama’s Oil Speech: Old not Bold
Here is my reaction at the NYTimes:
President Obama lost his cool last week when – sounding like the old president – he said he was looking for some “ass to kick.” He didn’t regain any lost cool in Tuesday’s oil speech, which also made him sound like his predecessor: “Make no mistake: we will fight this spill with everything we’ve got for as long it takes,” he said, emphasizing “We will make BP pay….” Call it President’s Obama’s war on error.
Turning to energy, the president called for innovation and hard choices but offered little new or courageous thinking of his own. Instead, he went back to the same well he has drawn from repeatedly; blame the previous administration and their “failed philosophy.”
Whether justified or not, this refrain is getting old. Even the president’s appeals to America’s greatness sounded old. Can his speechwriters really do no better than 'remember when we won World War II and put a man on the moon?'
Most important, nowhere did the president mention two hard ideas that the public must accept if we are to move to a cleaner energy future: nuclear power and carbon taxes.
More here.
Bounty Hunting in Pakistan
Gary Brooks Faulkner, an American citizen who told police he was
searching for Osama Bin Laden, has been arrested in northwest Pakistan
armed with a gun, a sword, and Christian literature.
More here. Clearly, this guy is a bit of a nut. Nevertheless, bounties have been quite successful at capturing terrorists. I'd like to see the $25 million bounty on Bin Laden raised to say $500 million. We could have avoided several wars at that price.
Previous MR posts on bounty hunting here.
FDA Overreach
From the Washington Post:
The Food and Drug Administration on Friday ordered five companies that offer genome-sequencing tests to consumers, or that provide the scientific services for them, to prove the validity of such products.
The FDA said the tests, which scan a person's DNA for gene variants associated with specific diseases, are medical devices requiring the agency's approval.
The ability of genetic tests to predict diseases is currently limited; if the FDA were simply to require firms to acknowledge this point, say with a clear statement of probabilities, that would be one thing (although this task is better met by the FTC under advertising regulation). But the FDA is brazenly overreaching in trying to regulate genetic tests as medical devices. First, there is no question that these tests are safe–safer than brushing your teeth!–and also effective in identifying genetic markers. Thus, there is no medical reason whatsoever for regulation.
Moreover, genetic tests provide information, personal information about our bodies and our selves. The FDA has no standing to interfere with the provision of such information.
Consider, I swab the inside of my cheek and send the sample to a firm. The idea that the FDA can rule on what the firm can and cannot tell me about my own genes is absurd–it's no different than the FDA trying to regulate what my doctor can tell me after a physical examination or what my optometrist can tell me after an eye examination (Please read the first line. "G T A C C A…").
The idea that the FDA can regulate and control what individuals may learn about their own bodies is deeply offensive and, in my view, plainly unconstitutional.
The Opaque Society
In response to a flood of Facebook and YouTube videos that depict police abuse, a new trend in law enforcement is gaining popularity. In at least three states, it is now illegal to record any on-duty police officer.
More here.
Hat tip: Robin Hanson.
Addendum: Tom Bell offers legal commentary and an interesting idea, a bumper sticker which serves as legal warning.
Who Doesn’t Want You to be a Millionaire?
In Russia, the ‘Ask the Audience’ lifeline isn’t one that the contestant would often use because the audience often gives wrong answers intentionally to trick the contestants.
From Fact-Index.
Kidnap Radio
The first rule of kidnapping insurance is that you don't talk about kidnapping insurance.
That's Seth Gitter summarizing some of the economics of kidnapping insurance over at the Blog of Diminishing Returns. Seth also points us towards a story about Caracol Radio, a radio station in Colombia that broadcasts messages from families to hostages every Saturday night:
The show is called Voces del
Secuestro, or Voices of Kidnapping. (There are several other stations
in Colombia that send messages out on other days of the week). The
host, Herbin Hoyos, is a journalist who started this program in 1994,
after he was briefly kidnapped…
For more, see Tyler's excellent analysis of the economics of kidnapping insurance.
Reversing the Decline in Fish Stocks
The stock of fish is declining worldwide at a rapid and accelerating pace. In Can Catch Shares Prevent Fisheries Collapse? the authors survey fish stocks and find that individual transferable quotas (ITQs) do appear to work in stabilizing and even increasing stocks:
Although bioeconomic theory suggests that assigning secure
rights to fishermen may align incentives and lead to significantly
enhanced biological and economic performance, evidence to date has been
only case- or region-specific. By examining 11,135 global fisheries, we
found a strong link: By 2003, the fraction of ITQ-managed fisheries
that were collapsed was about half that of non-ITQ fisheries. This
result probably underestimates ITQ benefits, because most ITQ fisheries
are young.The results of this analysis suggest that well designed catch shares
may prevent fishery collapse across diverse taxa and ecosystems.
One of the authors of the paper, Christopher Costello, is featured in the video below from Reason TV which covers the world wide decline in fish stocks, "capital stuffing," and the use of ITQs to solve the tragedy of the commons (FYI, all these concepts are discussed in Modern Principles).
The video mentions but does not investigate further the problem of fish and whales that travel long distances, making property rights more difficult to enforce–a good subject for classroom discussion. See also this 60 Minutes video on tuna.
Addendum: Catch-shares have recently (2009) been introduced in Cape Cod. Here's a good primer on the costs, benefits and difficulties of implementation. One interesting observation:
Doing away with season restrictions reduces 'derby' conditions, in which fishermen race out, even in dangerous weather, to catch as much as possible. It also eliminates seasonal market gluts, potentially increasing the prices fishermen can command for their catch.