The Economics of the HDMI Cable Ripoff

by  Alex Tabarrok in

I just bought a blu-ray player.  (Actually my 10 and 7-year old bought it as a birthday gift for my wife; alas, neither they nor she were fooled for long, but I digress.)  To get the best performance you need an HDMI cable which must be purchased separately (itself a bit of a mystery since almost every blu-ray is going to be attached to a digital tv).  The price difference among brands of HDMI cable are bizarrely large – you can easily spend as much on Monster cable, the brand leader, as on the player itself yet at the same time you can buy decent HDMI cable for virtually nothing at Amazon.  The experts are clear that expensive HDMI cable is a ripoff. 

There are two puzzles.  First, we have a clear case of consumers wasting a reasonable amount of their own money in an area that involves neither politics nor medical care, the irrationalities of which my colleagues have devoted considerable effort to explaining.  I will have to go for the P.T. Barnum theory on this one.

The second puzzle is, Why don't any stores stock cheap HDMI cable?  I knew cables were a ripoff yet I could not find reasonably priced cables at Best Buy, Radio Shack, Target or even Wal-Mart.  Ordinarily, we would expect competition to push prices down but in this case it seem as if the mere existence of Monster is anchoring high prices everywhere but online.

My best guess is that this is an unusually strong version of the hidden fee model of Laibson and Gabaix.  In that model, firms overprice one aspect of service–such as a hotel charging exorbitant rates for telephone service–as an idiot tax.  Crucially, the idiot tax is matched by an IQ-subsidy; the price of the hotel room is lower than it would be without the idiot tax–so the idiots don't know to shop elsewhere and the high-IQ types are, in fact, drawn to stores with an idiot tax.  Thus, buy your blu-ray player at places such as Best Buy which sell a lot of expensive cable as well as massively overpriced extended warranties.

Apportioning Blame for the Deficit

by  Alex Tabarrok in

David Leonhardt's column breaking down the "causes" of the budget deficit has been widely reported and the bottom line repeated many times: 

President Obama’s agenda, ambitious as it may be, is responsible for only a sliver of the deficits, despite what many of his Republican critics are saying.

I have two problems with the analysis.  First, the NYTimes' excellent graphics department this time goes overboard with a big and difficult to read chart.  Matt Yglesias does much better summarizing the point with that old standby, the pie chart:
Deficit
Second, although not "wrong" the Leonhardt's analysis doesn't reveal the arbitrariness of this way of apportioning deficit blame.  

The reason why the hundreds of billions of dollars of spending in Obama's agenda is said to be responsible for only a "sliver" of the deficit is that the agenda also includes taxes, thus the net effect is low.

Now Obama deserves kudos for a more honest budget process.  Indeed, if the only choices are the tax and spend party and the no-tax and spend party then I prefer the former for both economic and political reasons.  Thus as political accounting Leonhardt's conclusion is reasonable.

I suspect, however, that many people will not see that the economic accounting is arbitrary and potentially misleading.  To see why, imagine that President Bush increased taxes in the last days of his administration and Obama increased spending in the first days of his administration.  We would then be in exactly the same economic position as we are now but everyone would be writing about how "Obama's ambitious agenda is responsible for a large portion of the deficit."  In other words, if it were not for Obama's spending, the deficit would be hundreds of billions of dollars lower. 

Washington is all about political accounting but we should not be misled into thinking that because Obama's agenda accounts for only a "sliver" of the deficit that this makes it a modest or cheap agenda.  The agenda is big and expensive and every dollar of spending is a dollar that adds to the deficit.  

The Black Swine

by  Alex Tabarrok in

High-tech models developed by quants have, once again, greatly underestimated risk.  What will be the consequences?

In the waning days of April, as federal officials were declaring a public health emergency and the world seemed gripped by swine flu panic, two rival supercomputer teams made projections about the epidemic that were surprisingly similar – and surprisingly reassuring. By the end of May, they said, there would be only 2,000 to 2,500 cases in the United States.

May’s over. They were a bit off.

On May 15, the Centers for Disease Control and Prevention estimated that there were “upwards of 100,000” cases in the country,..

Auctions and Politicians

by  Alex Tabarrok in

David Warsh has an excellent column on economists, auctions and the politicians who oppose them: 

…the US Department of Transportation earlier this month canceled plans to auction landing slots for New York’s three busiest airports. The Bush administration had sought the measure, hoping to cut delays at the chronically congested airports (and, of course, raise some much-needed cash). The airline industry lined up against the proposal, so did Democratic congressmen. Incumbent airlines will continue to profit; frequent travelers will continue to suffer delays.

Similarly, the banking lobby, among the nation’s strongest interest groups, has so far successfully opposed Treasury Department attempts to put up for bid banks’ questionable (now “legacy”) assets. The reason is simple: when the asking price is, say, 90 cents on the dollar and the bid is closer to 40 cents, no manager will willingly take part in an auction that seems certain to lower book values.

[Similarly]…President Obama campaigned on a promise to auction the [carbon] permits. But a coalition of Midwestern and Southern Democrats teamed up to alter the bill, and when its language was released last week it turned out that fully 80 percent of the permits would be given away at first to electricity utilities and their big industrial customers…

Nevertheless, Warsh is optimistic about the ability of economic engineers to create value with more sophisticated and widespread auctions.  Read the whole thing for developments on the academic front.

Divorce and Crime Victimization

by  Alex Tabarrok in

While paging through the statistical tables of Criminal Victimization in the United States I found some interesting data on victimization, marriage and divorce.  The rate of victimization for violent crimes (per 1,000 persons aged 12 and over) for never married and married males is as follows:

  • Never Married Males: 45.0
  • Married Males: 12.3
Clearly, married males are older and they have settled down, usually in places away from crime hot spots.  Thus the fact that the rate of victimization for married males is much lower than for never married males is no surprise.  What did surprise me is that divorced males have rates of victimization about as high as for never married males:
  • Divorced or Separated Males: 44.2
The same pattern is even stronger for females:
  • Never Married Females: 38.4
  • Married Females: 10.3
  • Divorced or Separated Females: 49.4

The patterns are suggestive of how large a difference one’s choices can make for criminal victimization.  That is, one hypothesis to explain the data is that singles congregate in urban, high crime areas and they go out at night to bars and other high crime locations.  Married individuals move to low crime suburbs and stay home with popcorn and Netflix.  The divorced, however, move back to the cities where the singles are and they head out at night to try to mate again.

An alternative hypothesis is that the individuals who tend to get divorced have personalities or behaviors which make them more likely to get divorced and more likely to be victims of crime: a drug user, for example, is likely to have a higher probability of divorce and a higher probability of being a victim of crime than a non drug-user.

How many other hypotheses can you think of to explain the data?  What tests would you suggest to distinguish hypotheses?

Measuring Criminal Spillovers: Evidence from Three Strikes

by  Alex Tabarrok in

California’s Attorney General was pleased to announce that “An unintended but positive consequence of ‘Three-Strikes’ has been the impact on parolees leaving the state….The growth in the number of parolees leaving California is staggering.” Law enforcement officers in other states were presumably less pleased. A displaced criminal is a benefit to California but a cost to other states. If such criminal spillovers are important, law enforcement will over-invest in policies that encourage displacement. We test whether California’s three-strikes law led to significant criminal spillovers.

That's the abstract from my latest paper, Measuring Criminal Spillovers: Evidence from Three Strikes (with Eric Helland). In an earlier paper, Helland and found–by comparing statistical doppelgangers some subject to the law some not–that three strikes does deter (whether it deters eneough to be good public policy in less clear).  In this paper, however, we found that three strikes does not cause appreciable exit of criminals from California (or appreciable reduction in entry), i.e deterrence does not occur on the relocation margin.  During the time that California's AG spoke, everyone was leaving CA not just criminals.  One conclusion of our research is that a federalist approach to crime remains viable. 

Gambling on the Future

by  Alex Tabarrok in

A conversation with the ten year-old.

"For the third time.  Do your homework."

"I HATE homework.  Why should I do it!"

"You need to do your homework so you can get into college and get a good job."

"Oh, Dad," (exasperated), "by the time I'm ready to go to college I'll be able to download the answers directly into my brain in twenty seconds!"

Now here is Gary Becker on fat ten-year olds.

…the negative health consequences of being overweight and even obese will generally be significantly lower for children than for adults. The reason is that aside from very extreme obesity, the really harmful effects to overweight children will not usually kick in for another 25 or more years when they are in their forties or older. However, one can reasonably expect sizable progress during the coming decades in the development of drugs, such as lipitor, that will reduce the health consequences of high cholesterol and excess weight for heart conditions, diabetes, and some cancers. From that perspective, perhaps even ignorant and impulsive children are not acting so stupidly by indulging themselves in their eating since the future will likely see the development of drugs that will alleviate many serious medical conditions.

So who is most (ir)rational, my ten-year old, the fat-ten year old or the great Gary Becker?

Textbook Contest – Results

by  Alex Tabarrok in

Many thanks for all the excellent suggestions for an epigraph for Modern Principles.  Here were some of our favorites:

"He tried to read an elementary economics text; it bored him past
endurance, it was like listening to someone interminably recounting a
long and stupid dream."

Ursula K. Le Guin, "The Dispossessed"

We liked that this has an exoteric and esoteric meaning but we suspect that it would be hard to get past "the Corporation."  (The esoteric meaning?  The novel is about a communist utopia so it's really no surprise that the characters (and the author) think that elementary economics texts are boring!). Suggested by Dave C.

"Competition is good for consumers."
N. Gregory Mankiw

Suggested by Eli Dourado.

"Economics is really about understanding the world — and changing it
— and not in a messianic fashion but in an honest fashion."
James J. Heckman

A close one.  Suggested by Jared.

Advertise Here.
Suggested by Alex Tabarrok.

I liked it!

And the winner is:

Economics is the study of how to get the most out of life.

I thought this phrase, which was suggested by Scott Gustafson, captured the joie de vivre and the love of economics that Tyler and I have tried to bring to Modern Principles.  It's unclear who said this first, although nicely for us Russ Roberts used this phrase to describe Tyler's book Discover Your Inner Economist, thus there is some history.

Thanks everyone for your many helpful and excellent suggestions!

Hennessey on CAFE

by  Alex Tabarrok in

Excellent post, filled with detail, by Keith Hennessey on CAFE.  Some highlights:

The NHTSA analyses look at a range of benefits to society, including economic and national security benefits from using less oil, health and environmental benefits from less pollution, and environmental benefits from fewer greeenhouse gas emissions (this is new).  They also consider the costs, primarily from requiring more fuel-saving technologies to be included by manufacturers….

Rather than maximizing net societal benefits, [the Obama] proposal raises the standard until (total societal benefits = total societal costs), meaning the net benefits to society are roughly zero…

The Obama plan will increase costs enough to further suppress demand for new cars and trucks. This will cause significant job loss, and probably in the 150K 50K range over 5-ish years, with a fairly wide error band….[updated to reflect an error in calculation, AT]

The Obama option would reduce the global temperature by seven thousandths of a degree Celsius by the end of this century….[and] would reduce the sea-level rise by six hundredths of a centimeter.  That’s 0.6 millimeters.

Note that these points are all drawn from NHTSA work (see Hennessey's post for details) not from a "think tank" study.  Finally, Hennessey is concerned about the future:

…As early as this fall, greenhouse gases could become “regulated pollutants” under the Clean Air Act. Once something becomes a “regulated pollutant,” a whole bunch of other parts of the Clean Air Act kick in, and EPA is off to the races in regulating greenhouse gases from a much (much) wider range of sources, including power plants, hospitals, schools, manufacturers, and big stores.

One of the scariest elements of this is called the “Prevention of Significant Deterioration” permitting system. In effect, EPA could insert itself (or your State environmental agency) into most local planning and zoning processes. I will write more about this in the future. It terrifies me.

The Politics of Cap and Trade

by  Alex Tabarrok in

Good overview in the NYTimes on the politics of cap and trade.  The bottom line:

How did cap and trade, hatched as an academic theory in obscure
economic journals half a century ago, become the policy of choice in
the debate over how to slow the heating of the planet? And how did it
come to eclipse the idea of simply slapping a tax on energy consumption…

The answer is not to be found in the study of
economics or environmental science, but in the realm where most policy
debates are ultimately settled: politics…Cap and trade…is almost perfectly designed for the buying
and selling of political support through the granting of valuable
emissions permits to favor specific industries and even specific
Congressional districts.That is precisely what is taking place now in the House Energy and Commerce Committee…

Here is how Tyler and I put it in Modern Principles: Microeconomics

With a tax, firms
must pay the government for each ton
of pollutant that they emit. With pollution
allowances, firms must either use
the pollution allowances that they are
given or if they want to emit more they
must buy allowances from other firms.
Either way, firms that are given allowances
in the initial allocation get a
big benefit compared to having to pay
taxes. Thus, some people say that pollution
allowances equal corrective taxes
plus corporate welfare.
That’s not necessarily the best way of
looking at the issue…

…To make progress against global warming, may require building
a political coalition. A carbon tax pushes one very powerful and interested
group, the large energy firms, into the opposition. If tradable allowances are
instead given to firms initially, there is a better chance of bringing the large energy
firms into the coalition. Perhaps it’s not fair that politically powerful
groups must be bought off but as Otto von Bismarck, Germany’s first chancellor,
once said,”Laws are like sausages, it is better not to see them being made.”
We can only add that producing both laws and sausages requires some pork.

Careful readers may recognize a friendly jab at a competitor. 

Ferguson on Regulation and Deregulation

by  Alex Tabarrok

Human beings are as good at devising ex post facto explanations for big disasters as they are bad at anticipating those disasters. It is indeed impressive how rapidly the economists who failed to predict this crisis – or predicted the wrong crisis (a dollar crash) – have been able to produce such a satisfying story about its origins. Yes, it was all the fault of deregulation.

There are just three problems with this story. First, deregulation began quite a while ago (the Depository Institutions Deregulation and Monetary Control Act was passed in 1980). If deregulation is to blame for the recession that began in December 2007, presumably it should also get some of the credit for the intervening growth. Second, the much greater financial regulation of the 1970s failed to prevent the United States from suffering not only double-digit inflation in that decade but also a recession (between 1973 and 1975) every bit as severe and protracted as the one we’re in now. Third, the continental Europeans – who supposedly have much better-regulated financial sectors than the United States – have even worse problems in their banking sector than we do. The German government likes to wag its finger disapprovingly at the “Anglo Saxon” financial model, but last year average bank leverage was four times higher in Germany than in the United States. Schadenfreude will be in order when the German banking crisis strikes.

Niall Ferguson writing in the NYTimes.  Recommended.