It’s simple

by  Tyler Cowen in

Atrios writes:

I’m basically a “free trader,” but it’s time we stop pretending it’s that simple.

Try this highly complex story on for size:

The US Commerce Department has said it may impose tariffs of up to 123% on Chinese, Malaysian, and Thai plastic shopping bag producers.

The Commerce Department said it would continue its investigation and reach a final decision in June.

The US imported about 100 billion plastic bags in 2002, worth more than $127m, and China supplied about 30%.

The list of items causing trade tensions between the US and Asian countries already includes Vietnamese cat fish and Chinese-made bras and colour TVs.

The Commerce Department issued its preliminary ruling after complaints from US packaging firms, including Sonoco Products and Interplast Group.

They say unfairly cheap Asian plastic bags are losing them $300m in sales a year.

Strain your mind, can you figure this one out? And I am a free trader, not a “free trader.” Thanks to Don Boudreaux for the link.

How does high fashion turn a profit?

by  Tyler Cowen in

The most expensive dresses can sell from anywhere from $15,000 to $100,000. They are popular for weddings in the United States and the Middle East, but otherwise do not garner large numbers of orders. Note also that the sector is highly regulated and in typical French fashion:

The Chambre Syndicale de la Haute Couture, the governing body that oversees the couture business in France, enforces archaic and unyielding regulations–defending tradition and, in the process, driving most practitioners out of business. To receive official designation as haute couture from the Chambre Syndicale, a fashion house must employ 20 or more full-time skilled technicians in France and produce a minimum of 50 new designs for day and evening wear in each of the two fashion seasons, although the conditions are somewhat looser for new houses that wish to start producing couture.

How then do the designers make money?

…couture…serves two other purposes for the houses that produce it. One is that couture represents what the designer John Galliano called the “laboratory of ideas,” where the act of creation is given free rein. Many who watch the coverage of the couture shows marvel that anyone could be possibly expected to wear the extravagant and seemingly uncomfortable designs on display, but couture is not really designed to be worn; rather, it affords an opportunity to try out cuts and styles that can then be incorporated, in more modest form, into wearable prêt-à-porter.

Couture also serves to create a brand identity that rubs off on the perfume, cosmetics, and leather goods–few of them high-design products in themselves–where the profit margins are fat and the real money is to be made. Ironically, many people will buy a $150 bottle of perfume to participate in the lifestyle suggested by the $15,000 couture dress they cannot afford, while in reality the dress was produced in large part to seduce them into paying too much for the perfume.

Here is a list of papers on the economics of fashion, but the topic remains underexplored. So much of economic activity is about buying dreams, and we don’t yet have to analytical tools to analyze this kind of problem.

The forward march of culinary diversity

by  Tyler Cowen in

OK, this is interesting: Chicago may soon be home to the first haggis factory in the US:

“There are lots of Scots living in the States, and Scottish food is becoming increasingly popular, so I think the market is definitely big enough to make haggis a success in the U.S.,” Ken Stahly, owner of Stahly Quality Foods told the Evening Telegraph and Post in Scotland. “Chicago is an ideal base, because its geographical location is an ideal gateway to the U.S. and Canadian marketplace.”

Not to mention our extensive set of folkways that involve eating various and sundry pieces of meat and offal ground into bit and stuffed into organs, yum. Actually, I love bratwurst, don’t get me wrong, but … even on Burns Day and even in Scotland I can’t bring myself to eat haggis. I’ll stick with Lagavulin, thank you very much.

Interestingly, the company says that they will market a vegetarian haggis in the US market (!).

The material is from Lynne Kiesling, here is the original article. I’ll bet against the commercial success of the idea, in part because I suspect that high quality haggis is not made in a “factory.” Nonetheless American dining options continue to increase, the northern Virginia suburbs now have real Szechuan restaurants, fried duck’s blood and that sort of thing. As for the haggis I will pass.

Best non-fiction books of the twentieth century

by  Tyler Cowen in

Here is a left-wing list. Here is a National Review list, with Hayek and Robert Conquest near the top. Here are two Random House lists. The critics elevate Henry Adams, William James, and Booker T. Washington. The readers favor Ayn Rand, L. Ron Hubbard, and John Lott. The readers’ list has all kind of libertarian books, including David Boaz and Tibor Machan. Thanks to the ever-interesting www.politicaltheory.info for the link. All of the lists make for fun browsing, especially once you start thinking about the contrasts.

How free market is the Chilean miracle?

by  Tyler Cowen in

The major economic successes of Chile are commonly considered to be a free market miracle. To be sure, there is much truth to this characterization. The Pinochet regime engaged in extensive privatization and deregulation and moved to free trade. Agriculture, services, copper mining, and telecommunications all boomed. The Chilean economy has been the envy of Latin America for some time now. The country also has few problems with corruption.

The reality nonetheless is more complex than a simple market story may imply, read this thorough account. The Chilean state has grown stronger as the Chilean economy has prospered. In the 1990s, Chile has doubled corporate taxes, almost doubled its minimum wage, and more than doubled spending on health and education. Here is another account of how social spending has gone up during the 1990s. Chile also has maintained tight capital controls on foreign investment until 1999. The vaunted Chilean social security privatization in fact superimposed a system of private accounts on an already-existing governmental system, which did not disappear. Yet in the 1990s the country continued to prosper. Chile grew by an average of 5.9 percent a year.

The bottom line: The world has seen massive liberalizations over the last twenty-five years and all for the better. But with few exceptions these reforms have strengthened rather than overturned welfare states. New Zealand, for instance, also has not cut its welfare spending. Welfare states are, in part, the price we pay for public order, whether or not they always make economic sense. When it comes to economic development, the question is not state vs. market. Rather poorer countries need both stronger markets and stronger (as distinct from more tyrannical) states. Chile is generating strong institutions across the board, in both private and public realms. In contrast, look at Mexico, where government taxation takes only 12 percent of gdp. In Mexico the problem is not to cut the absolute size of government per se (although I can think of some obvious and good steps in this direction, such as introducing more electricity competition) as to reduce corruption and improve the quality of governance. Until market-oriented reformers understand this basic distinction, we will continue to give bad advice and generate only mixed results for market-oriented ideas.

Sleep on it

by  Tyler Cowen in

A good night’s sleep can help you think better and solve problems more effectively.

German scientists say they have demonstrated for the first time that our sleeping brains continue working on problems that baffle us during the day, and the right answer may come more easily after eight hours of rest.

The German study is considered to be the first hard evidence supporting the common sense notion that creativity and problem solving appear to be directly linked to adequate sleep, scientists say. Other researchers who did not contribute to the experiment say it provides a valuable reminder for overtired workers and students that sleep is often the best medicine…

Scientists at the University of Luebeck in Germany found that volunteers taking a simple math test were three times more likely than sleep-deprived participants to figure out a hidden rule for converting the numbers into the right answer if they had eight hours of sleep. The results appear in Thursday’s issue of the journal Nature.

Here is the full story. Here is another account, with a link to the original research. I will note that I typically review previously written MR postings after a night of good sleep.

Are athletes Bayesians?

by  Tyler Cowen in

Mark A. Walker and John C. Wooders, economists at the University of Arizona, recently studied old videotapes of tennis matches involving stars like Bjorn Borg, Ivan Lendl and Pete Sampras. The economists looked at the serves in each match to see how well players randomly altered playing the ball to an opponent’s forehand or backhand.

Many people do poorly on similar tests when they are conducted in a laboratory. Ask somebody to write down a list of hypothetical coin-flip outcomes, for example, and the result will probably contain too few streaks of heads or tails. Because people know that the overall odds are 50-50, they underestimate how often three straight tails or four straight heads turn up.

But professional tennis players realize, on some level, that their opponent will have an advantage if he knows that a serve to the forehand is likely to be followed by one to the backhand. They do a relatively good job of mixing serves, though still not as randomly as a computer program would, Professors Walker and Wooders reported in a 2001 paper.

Controlled experiments yield similar results, read this account from The New York Times.

Here is the bottom line:

The more uncertainty that people face – be it caused by wind on a tennis court, snow on a football field or darkness on a country highway – the more they make decisions based on their subconscious memory and the less they depend on what they see.

Related research by Doru Cojoc of Clemson shows that chess players play mixed strategies to keep their opponents off balance. Furthermore they are more likely to play such sophisticated strategies, the higher the rewards on the line.

By the way, even plants seem to perform implicit calculations when they breathe, read this recent account. Armen Alchian, of course, once postulated a similar conjecture, namely that plants maximize sunlight without any conscious awareness of such a process.

Smoking less doesn’t always help

by  Tyler Cowen in

Many smokers manage to smoke fewer cigarettes. The problem is that they often puff all that much harder. In the long run they may not end up much healthier, read this account. By the way, Sam Peltzman has studied this phenomenon more generally. We can do things to make people safer, but they respond by taking more risks. Thanks to Jon Klick for this latter link.

The case for lifetime savings accounts

by  Tyler Cowen in

Glenn Hubbard, former chair of the CEA, argues that we should not tax savings:

While the Lifetime Saving Account (LSA) offers substantial simplification benefits, it also offers a vehicle to save more easily for a downpayment on a home, children’s education, or for medical expenses. With no withdrawal penalties, the account’s greater liquidity will encourage individuals to save, particularly moderate-income households worried about tying up funds for a long period of time. Like the president’s proposal to eliminate investor-level taxes on dividends, the LSA lays claim to the idea that income should be taxed only once. Indeed, given the generous contribution limits, most households could avail themselves of a consumption tax akin to the Flat Tax. They would pay taxes once when they earned wages or business income, but not again on returns to saving. This is an important step toward fundamental tax reform, particularly if the administration continues its recognition of the costs of double taxation of corporate income.

How much would capital accumulation go up?

To assess the impact on capital formation, one should compare the present value of additional private capital formation to the present value of lost tax revenue. Jonathan Skinner of Dartmouth College and I estimated that with even 25 cents of each dollar contribution as new saving, IRA contributions generate $2.21 of new capital per dollar of net revenue cost. If, as suggested by Harvard economist Martin Feldstein, one includes corporate income tax revenue from the higher capital stock made possible by the saving incentives, the ratio rises to $4.84 of net capital per dollar of new revenue cost. If each dollar of contributions contains 40 cents of new saving and one incorporates higher corporate income tax receipts, the savings incentives are actually self-financing.

My take: I’m totally on board kind of sort of. Until we address runaway government spending, tax changes will only bust the budget in the shorter run. Even with elasticity optimism, we won’t ever arrive at the self-financing equilibrium. Furthermore I will never have that much faith in any particular numerical projection. My main worry is stopping the current drain of resources from the private sector. And no, a trip to Mars is not just what the doctor ordered. Right now U.S. fiscal policy needs credibility and needs it badly. Won’t markets just think that any revenue boost will fly out the window as quickly as it comes in? Isn’t politics, and thus economics, first and foremost about subjective perceptions? Hubbard’s proposal, for all its merits, doesn’t address the core problems.

Addendum: Here is Brad DeLong’s recent post on the fiscal costs of social security privatization plans.

Fact of the day

by  Tyler Cowen in

The States and Puerto Rico, combined, spent $24,875,170 on lobbying the federal government, in the 1998-2002 period. About four-fifths of this money – $19,804,609, was spent by Puerto Rico. Much of the lobbying is directed at either statehood or greater federal benefits. One (partisan) source estimates that Puerto Rican statehood would involve a $3 billion welfare tab, in addition to food stamps for half of the island’s population. Here is the full story.