Go Mason!
U.S. News and World Report ranks George Mason the #1 up-and-coming National University. The economics department and the law school are doing very well but so are many other innovative departments. The report notes:
Established in 1972, Mason is a relatively young university. Not bound by tradition and old ways of thinking, the university and its
faculty embrace technology and new approaches to learning. Mason was
the first university in the country to offer doctoral programs in
conflict resolution, bioinformatics, computational social sciences, and
information technology; and the first to offer a graduate degree in
biodefense.
The Worst Idea I have Heard Today
One idea that might prevent a repeat of the turmoil: a commission that
would vet financial products before their release, akin [to] the Food and Drug Administration’s
evaluation of drugs before they’re released to the market. McFadden
suggested, “we may need a financial-instrument administration that
tests the robustness of financial instruments and approves only the
uses where they can do no harm.”
Nobel laureaute Daniel McFadden quoted at Real Time Economics. Do tell what will be left when we approve only things "that can do no harm."?
Might I also suggest that before calling for a financial FDA, Prof. McFadden should investigate what economists who have studied the matter have concluded about the safety and effectiveness of the real FDA.
Different Ways to Know the Mind of God
Stephen Hawking famously thought that physics would reveal the mind of God. In fact, Hawking gave physics a 50:50 shot by the end of the last century. Guess he lost that one. But fellow Nobelist Jim Heckman has beat Hawking to the punch using "powerful statistical methods to evaluate the effect of prayer on the attitude of God toward human beings."
Let Y be God’s attitude arrayed on a scale ranging from zero to one. This is an unobserved variable. Let X be the intensity of prayer in the population. It too is scaled between zero and one. The population density of prayer is summarized by a univariate density f(X) which has been estimated by Father Greeley (1972)….
The paper, which goes on like that for a while, is actually quite interesting but if you are looking for the bottom line it comes at the end:
The method presented here is applicable to a number of important problems….For example, one can extend current empirical work in a variety of areas of economics to estimate the effect of income on happiness or the effect of income inequality on democracy.
Thanks to David Glenn and Lee Spector for the link.
Milton Friedman is Responsible for Scarcity
Should we be surprised that the Milton Friedman Institute at the University of Chicago is opposed by the likes of Marshall Sahlins? I happily farm it out to Brad DeLong:
Sahlins’s claims that it was "the market-industrial system [which]
institutes scarcity"… seemed to indicate a total,
willful, and culpable ignorance of practically all of the non-market
settled agricultural societies of the past ten thousand years.
By the way, guess where these institutes are located?
I, Dirt
Potting mixes often contain sphagnum peat moss from bogs in Canada
or Ireland. Bark fines might come from a sawmill in the Deep South.
Coconut "coir," a peat moss substitute, gets shipped all the way from
Asia.
A common ingredient in potting mixes is perlite, which makes the
soils airier while also retaining moisture. In its final form, small
white pellets, it appears to be something synthesized in a factory. In
fact, it comes from a volcanic sand mined on the Greek island of Milos.
Shipped to the United States, the ore is heated to 1,400 degrees
Fahrenheit, at which point it pops into kernels.
The always-interesting Joel Achenbach writing in the Washington Post.
Nationalism versus Peace
Paul Krugman has good column today on the threat of nationalism to globalization.
Shortly
before World War I another British author, Norman Angell, published a
famous book titled “The Great Illusion,” in which he argued that war
had become obsolete, that in the modern industrial era even military
victors lose far more than they gain. He was right – but wars kept
happening anyway….…the belief that economic rationality always prevents war is an
equally great illusion. And today’s high degree of global economic
interdependence, which can be sustained only if all major governments
act sensibly, is more fragile than we imagine.
Designing Monopoly
In Alabama it is illegal to recommend shades of paint without a license. In Nevada it is illegal to move any large piece of furniture for purposes of design without a license. In fact, hundreds of people have been prosecuted in Alabama and Nevada for practicing "interior design" without a license. Getting a license is no easy task, typically requiring at least 4 years of education and 2 years of apprenticeship. Why do we need licenses laws for interior designers? According to the American Society of Interior Designers (ASID) because,
Every decision an interior designer makes in one way or another affects the health, safety, and welfare of the public.
This hardly passes the laugh test. Moreover as Carpenter and Ross point out in an excellent article in Regulation from which I have drawn:
In more than 30 years of advocating for regulation, the ASID and its ilk have yet to identify a single documented incident resulting in harm to anyone from the unlicensed practice of interior design…These laws simply have nothing to do with protecting the public.
Most states do not have license laws for interior designers but the unceasing lobbying efforts of the ASID have expanded such licenses. Fortunately, unlicensed interior designers are fighting back! I love that unlicensed designers in New Hampshire have formed a anti-license league, Live Free and Design. Tuttle Lives!
Against Intellectual Monopoly
Against Intellectual Monopoly is a relentless, pounding, take no prisoners attack on patent and copyright law. It joins Lessig’s Free Culture and Heller’s The Gridlock Economy as an instant classic and a must-read on these issues.
Many people argue that the patent system has gone wrong in recent years, Boldrin and Levine argue that the patent system was rotten from the start. James Watt they say was a "scoundrel" who with his politically-connected partner Matthew Boulton used the patent system to crush their innovative opposition and delay the industrial revolution.
During the period of Watt’s patents, the United Kingdom added about 750 horsepower of steam engines per year. In the thirty years following Watt’s patents, additional horsepower was added at a rate of more than 4,000 per year. Moreover, the fuel efficiency of steam engines changed little during the period of Watt’s patent; however between 1810 and 1835 it is estimated to have increased by a factor of five.
Will books be published without copyright? Boldrin and Levine point out that the 9-11 Commission Report was profitably published by Norton despite being available free for download. Not to mention the fact that most of the great works of literature were published without copyright. Boldrin and Levine are top-notch theorists but AIM is widely accessible and it succeeds best with its many historical discussions and contemporary anecdotes.
AIM does suffer in places from a lack of a lack of nuance and a surprising ability to ignore trade-offs. Boldrin and Levine argue, for example, that among the reasons we don’t need patents are a) because ideas aren’t copied immediately, they take time to diffuse, b) first movers have significant advantages and c) trade secrecy is often a more effective "means of appropriating returns" than patents.
Quite right on all three counts but each of these reasons also explains why patents are less costly than one might at first imagine. After all, what Boldrin and Levine are really saying is that intellectual monopoly would exist even without intellectual property law.
A standard model used to explain why patents might be useful implicitly
assumes that ideas are transmitted instantly at zero cost. Boldrin
and Levine smash the premise of this argument but the premise is sufficient for the conclusion not
necessary. Indeed, once you acknowledge that the slow diffusion of ideas helps entrepreneurs to appropriate the returns to their innovations it becomes an open question of how slow is best? When is the appropriability of returns strong and when is it weak? Doesn’t it differ for different goods? Shouldn’t intellectual property law recognize these differences? It’s clear, for example, that ideas are diffusing more quickly than ever before. On Boldrin and Levine’s argument, faster diffusion of ideas implies lower appropriability and thus a stronger argument for intellectual property law. Needless to say Boldrin and Levine are too busy using
a "mallet to smash shiny myths" to make this argument. (To be fair, they are more nuanced in
the conclusion.).
Similarly, Boldrin and Levine argue that the larger the market the less patent protection is needed, hence globalization implies less patent protection. Again, quite right (see also my paper, Patent Theory versus Patent Law, on this point). But you won’t see Boldrin and Levine drawing the corollary conclusion that more intellectual property rights are optimal the smaller the market, despite the fact that we have a very successful example where increased patent rights for smaller markets generated considerably more innovation, namely the Orphan Drug Act.
For economists, it’s also surprising how little marginal analysis you find in AIM. For example, Boldrin and Levine ask, Did Rowling really need a billion dollars to write Harry Potter? Surely, a few million would have been enough. But that’s like saying that taxing lottery winnings won’t reduce the number of buyers because the winner will still get a huge return on her dollar of investment.
The bottom line is that that there is a Laffer curve for innovation – more appropriability increases innovation at first but innovation declines when appropriability extends too far. I agree with Boldrin and Levine that rent-seeking has put us on the wrong side of the Laffer curve for innovation. We need to reduce intellectual monopoly with patent reform, less copyright protection, and a greater use of patent substitutes like prizes. But unfortunately, when it comes to innovation there is no invisible hand theorem which moves us automatically to the top of the curve.
Auto buybacks backfire
In my post, Gun Buyback Misfires, I pointed out that a) gun buybacks encourage people to turn in old, low-quality guns that are unlikely to be used in any case and b) gun buybacks can encourage people to buy and hold more guns because the buyback is a form of insurance, if the gun gets old or stops working you can sell it to the police.
In an excellent post Steve Levitt points out that Alan Blinder’s proposal for auto buybacks suffers from exactly the same problems.
…the majority of vehicles that are turned in will not have been driven much, if
at all. Indeed, I suspect one of the most visible responses to this program will
be a new market for mechanics fixing up cars that don’t run at all just enough
so that they can be driven to the government’s lot to collect the cash.The biggest problem with this policy, however, is the way it distorts long
run incentives. Let’s say the rules of the program say that a car must be at
least fifteen years old to qualify for a big government subsidy to scrap it.
This gives powerful incentives to people with twelve-year-old cars they were
planning on scrapping to keep driving them for three more years to collect the
government bounty. Instead of reducing the number of clunkers on the road, this
program could actually lead to an increase!
Topsy-Turvy
Economists who secretly want to be rock stars and rock stars who secretly want to be economists.
The Pledge of Allegiance
Barack Obama was heckled by a crazy bystander for not beginning a speech with the pledge of allegiance. He handled the event gracefully (video here along with cogent commentary by Matt Welch.) As I’ve written before, I think the pledge is creepy.
Cato’s Gene Healy says it well:
From its inception, in 1892, the Pledge has been a slavish
ritual of devotion to the state, wholly inappropriate for a free
people. It was written by Francis Bellamy, a Christian Socialist pushed
out of his post as a Baptist minister for delivering pulpit-pounding
sermons on such topics as "Jesus the Socialist." Bellamy was devoted to
the ideas of his more-famous cousin Edward Bellamy, author of the 1888
utopian novel Looking Backward. Looking Backward describes the future
United States as a regimented worker’s paradise where everyone has
equal incomes, and men are drafted into the country’s "industrial army"
at the age of 21, serving in the jobs assigned them by the
state…Bellamy’s book inspired a movement of "Nationalist Clubs,"
whose members campaigned for a government takeover of the economy. A
few years before he wrote the Pledge of Allegiance, Francis Bellamy
became a founding member of Boston’s first Nationalist Club….
Bellamy’s ritual for honoring the flag was right in step with those other National Socialists. Here’s a picture illustrating the recommended salute (which later was to became politically incorrect).
The salute may be gone but the message remains.
Feldstein on Fiscal Policy
Martin Feldstein, a proponent of the recent fiscal stimulus, said it didn’t work.
Here are the facts. Tax rebates of $78 billion arrived in the second
quarter of the year. The government’s recent GDP figures show that the
level of consumer outlays only rose by an extra $12 billion, or 15% of
the lost revenue. The rest went into savings, including the paydown of
debt….Although press stories emphasizing that the rebates induced additional
consumer spending were technically correct, they missed the important
point that the spending rise was very small in comparison to the size
of the tax rebates.
It’s a peculiar op-ed, however, as he then goes on to say:
The small rise in spending in response to these tax rebates is similar
to what previous studies of one-time tax cuts found. It also
corresponds to what both basic economic theory and common experience
imply. Although someone who receives a permanent annual salary increase
of $1,000 typically would increase his annual spending by an almost
equally large amount, a $1,000 rise in wealth caused by a share price
increase or a tax rebate would raise spending only gradually over a
number of years.
Right. But a short-term tax cut is exactly what Feldstein called for in an earlier op-ed.
The poor effects of the Bush tax rebate as fiscal stimulus, however, let Feldstein now attack the Obama plan for a $1000 tax rebate. Nothing wrong with that – McCain has nothing better however – but what Feldstein doesn’t say is that if you follow the logic of his two op-eds (and this is not something I would necessarily buy into) the conclusion should actually be that fiscal stimulus would work better if it ran through government spending.
How an Economist Thinks
Over the weekend a crew came round my neighborhood offering to paint house numbers on the curb. Large bold curb numbers, they pointed out, make it easier for emergency service workers to find houses in the dark. Good argument. The price was good too. Then I noticed my neighbors were having their numbers painted. So of course, I declined.
Sentence of the Day
Freedom Fries Under Attack
The Los Angeles council has just passed on ordinance banning new fast food restaurants in a poor section of South/Central LA. William Saletan calls it Food Apartheid and writes:
We’re not talking anymore about preaching diet and exercise, disclosing
calorie counts, or restricting sodas in schools. We’re talking about
banning the sale of food to adults….It’s true that food options in low-income neighborhoods are, on
average, worse than the options in wealthier neighborhoods. But
restricting options in low-income neighborhoods is a disturbingly
paternalistic way of solving the problem.
Milton Friedman once said:
I don’t think the state has any more right to tell me what what to put in my mouth than it has to tell me what can come out of my mouth.
Friedman was talking about drug prohibition but today the target could just as easily be food prohibition.
Hat tip on the Friedman quote to Don Boudreaux at Cafe Hayek.