Black life expectancy is lower than white life expectancy.  On this basis, President Bush argues that social security is a worse deal for blacks than whites.  Paul Krugman says this is a lie but his primary counter-argument is shockingly weak:

Mr. Bush’s remarks on African-Americans perpetuate a crude misunderstanding about what life expectancy means. It’s true that the
current life expectancy for black males at birth is only 68.8 years –
but that doesn’t mean that a black man who has worked all his life can
expect to die after collecting only a few years’ worth of Social
Security benefits. Blacks’ low life expectancy is largely due to high
death rates in childhood and young adulthood. African-American men who
make it to age 65 can expect to live, and collect benefits, for an
additional 14.6 years – not that far short of the 16.6-year figure for
white men.

True, life expectancy at birth isn’t the right statistic but neither is life-expectancy at 65.  Consider the following simple example: suppose that 95 percent of blacks die before the age of 65 but that the 5% who survive to 65 have the same life expectancy as whites.  Krugman would then claim that social security isn’t discriminatory, but that would be absurd – 95 percent of blacks would be paying payroll taxes for all of their working lives and in return they would receive nothing.

As HedgeFundGuy points out a more relevant measure of life expectancy for social security is life expectancy at 20, when working-life begins, and at this age black life-expectancy is still a significant 6 years less than that of whites.

Life expectancy isn’t the only thing that affects social security redistribution, however, marriage rates, number of dependents, disability, income and even the time pattern of income matter also.  It may be that when all of these considerations are taken into account that on average social security is no worse a deal for blacks than for whites but this will be true only because social security is a hash of redistributionist tendencies few of which are well understood let alone well justified.

Addendum: See also Heritage’s rebuttal which makes a number of other good points especially the fact that lumping in the disability program with social security is not appropriate.  Although the programs are connected historically they can, are, and should be treated as independent for purposes of reform and analysis.

Robert Shiller has a new edition of Irrational Exuberance coming out, this one will feature a chapter on real estate.  Shiller, of course, predicted the stock market collapse and now believes that we are near the peak of housing prices. He is also involved in establishing a futures market that would allow people to hedge against movements in housing prices (see also my post on The New Financial Order). Here is a short interview with him on these subjects.

I too think that housing prices are inflated.  It is certain that prices cannot continue to rise as they have in recent years and when interest rates increase, as they surely will as budget deficits continue to balloon and Asian central banks grow weary of taking losses on their portfolios, prices will fall both because of the rise in interest rates per se and because the increase will prick the bubble.  Yes, Tyler has outed me as well as Brad De Long and Brad Setser.

Traditional game theory assumes that individuals choose strategies.  Evolutionary game theory assumes that individuals are strategies.

Our colleague, Dan Houser, has just published an important new paper (co-authored with Robert Kurzban) that supports the assumption of evolutionary game theory. (The paper is also featured in the Economist.)  In a public goods game, Kurzban and Houser are able to identify three systematic strategies; cooperate, free ride and reciprocate (cooperate more when others do so).  The first surprising result of their paper is that these strategies can be tied to specific individuals.  Some individuals cooperate, others free ride and others reciprocate and the strategies that these individuals "choose" are stable.  (This doesn’t mean that individuals play strategies robotically regardless of context a better analogy may be to think of strategies like personalities – even a quiet person can yell sometimes.)

Strategy choice is so stable that Kurzban and Houser can create very cooperative groups simply by weeding out the free riders.  What is even more surprising, however, is that when individuals are randomly assigned to groups each strategy type earns about the same payoff.  Even though the strategies are very different, no strategy dominates the others in a randomly assigned group – this is exactly what one would predict if individuals are strategies in an evolutionary game. 

Kurzban and Houser’s paper raises a number of interesting questions.  First, if they can pick out free riders why can’t the group members do so – in which case the baseline set of strategies won’t be an ESS.  How much does it take to push people away from their natural strategies?  Is the proportion of the population that plays each strategy the same in different cultures?  And what do the proportions (13% co-operators, 20% free-riders and 63% reciprocators) tell us about conditions in the evolutionary era when such strategies first solidified?  I will take these up with Dan.

Here are some nice examples from the Wall Street Journal of how firms alter products, sometimes making them worse at some expense, in order to increase the potential for price discrimination.

To save money, Chris Caine, a resident of Fiji, always orders
computers made by Apple
Computer Inc. from the U.S., where they are significantly cheaper. Recently,
he purchased Apple’s newest desktop, the iMac G5.

Soon after the computer arrived from the U.S. he plugged it in.
There was "a big bang, like an explosion, and white smoke out of the speaker
grilles," he says. The machine then died.

Mr. Caine didn’t have a defective unit. It turns out that, unlike
the 17 other Apple computers that he had purchased in recent years for his
DVD-rental business, the new iMac G5s sold in the U.S. are designed to work only
with the electric power systems in the U.S. and Japan…The iMac G5s Apple sells everywhere except the U.S. and Japan are dual voltage,
meaning they can cope with the electrical systems in Fiji, Europe and most of
Asia, as well as those in Japan and the U.S….

H-P has quietly begun implementing "region coding" for its highly lucrative
print cartridges for some of its newest printers sold in Europe. Try putting a
printer cartridge bought in the U.S. into a new H-P printer configured to use
cartridges purchased in Europe and it won’t work. Software in the printer
determines the origin of the ink cartridge and whether it will accept it.

At the AEAs Tyler and I would ask our job candidates what countries do you think are currently overvalued and what countries do you think are currently undervalued (in terms of growth prospects, reasons for investment optimism etc.)  Many candidates were surprised by this question.

Of those able to give an answer, China was repeatedly picked as overvalued as to a lesser extent was Argentina.  Good reasons were given for both cases.  Fewer people were able to articulate a case for undervalued nations.  My own pick for undervalued nation was Germany while Tyler chose Mexico.  No one thought that Iran, Iraq or Saudia Arabia was undervalued but these are the surprising picks of
Glenn Yago and Don McCarthy writing in today’s Wall Street Journal (and available online here).  Yago and McCarthy point primarily to rising stock markets but also increased FDI:

Regionally,
stock markets rose over 30% in 2004 and represent a market
capitalization of $470 billion. This has been accompanied by a surge in
regional property values and a higher number of tourists. The main
Egyptian equity index has increased 165%, while that of Saudi Arabia
has gone up by 158%. The Saudi market’s stellar performance is
especially striking given the great amount of attention paid at the
moment to that country’s security problems. Israel’s leading index has
risen by 32%, the benchmark index of Kuwait’s exchange by 73%, Jordan’s
by almost 60%, and that of the United Arab Emirates by 110%.

What countries do you think are overvalued or undervalued and why?  I have opened the comments section up for this post.

Brad DeLong, Irwin Stelzer and many others complain that the payroll tax is unfair because it is regressive.  True, but twice misleading. 

The payroll tax is regressive but benefits are progressive and on net
the social security system is progressive – a 45 year old male with an income twice the
national average, for example, will in present value pay into the
system $243,700 more than he will receive in benefits (Murphy and Welch, 1998, Table 2 (JSTOR)).   (Part of this net loss comes from progressivity and a larger part from the fact that all currently young workers will pay more in present value taxes than they will receive in benefits).

More fundamentally, if you want to complain about the regressivity of the payroll tax, go ahead, but then you ought to admit that the social security system is a welfare program and defend it, and reform it, on those grounds (as usual, Tyler has the right idea).

It makes sense to complain about a regressive welfare system but it makes no sense to complain about a regressive social insurance or forced savings program.  Is the unemployment insurance system unfairly regressive because construction firms, and thus construction workers, pay higher UI tax rates than professors?  Are IRAs unfair because people who put more in get proportionately more out?