Category: Economics

Sadly, the average economist is no Milton Friedman.

It beggars belief when economists at Princeton, Harvard and Berkeley claim that they are lone voices in the wilderness boldly striking heterodox positions against the hegemony of “free market economics.”

David Card, for example, says “You lose your ticket as a certified economist if you don’t say any kind of price regulation is bad and free trade is good.”  Really?  Card and Krueger’s famous paper on the minimum wage was a 1993 NBER working paper published in the AER in 1994.  What happened then in 1995?  Was Card decertified, drummed out of the profession, vilified by his peers?  Hardly, in 1995 David Card was honored (deservedly imho) by the American Economic Association with the John Bates Clark medal.

Dani Rodrik says “I fall into the methods of the mainstream, but not the faith,” which he defines as the belief that more markets and free trade are always good and government regulation is  always bad.  Give me a break.  Let’s go to the data.

Klein and Stern surveyed members of the AEA on a host of policy questions bearing on markets and government regulation.  The result, “Only a small percentage of AEA members ought to be called supporters of free-market principles.”

Even on the minimum wage, support for which Card says gets you decertified, the mean economist position is in between “support mildly” and “have mixed feelings.”  Indeed, even Card has mixed feelings about the minimum wage!   (See his book with Krueger in which he points out that the minimum wage is not a very effective way to help the poor).  On a host of other issues concerning government regulation, like support for OSHA, the FDA, and the EPA, the mean economist is somewhere between strongly and mildly support.

Only on free trade is there strong opposition to government regulation in the form of tariffs.  Thank goodness for small mercies.

Markets in Everything: Replacement Drivers

The NYTimes reports on Korean replacement drivers – they drive drunks home in the drunk’s own car.   

Their work has become such an essential part of life in Seoul and other
major cities of South Korea that the national statistical office last
year began monitoring the price of replacement driver services as an
element in calculating the benchmark consumer price index. An estimated
100,000 replacement drivers handle 700,000 customers a day across the
country, the number increasing by 30 percent on Fridays, according to
the Korea Service Driver Society, a lobby for replacement drivers.

This seems like a great idea and it’s obviously a huge success in Korea. Why not in the United States?

Testosterone economics

Remember the ultimatum game?

In this game, one player divides a pot of money between himself and another.  The other then chooses whether to accept the offer.  If he rejects it, neither player benefits.  And despite the instincts of classical economics, a stingy offer (one that is less than about a quarter of the total) is, indeed, usually rejected.

Here is the latest result:

…the responders who rejected a low final offer had an average testosterone level more than 50% higher than the average of those who accepted.  Five of the seven men with the highest testosterone levels in the study rejected a $5 ultimate offer but only one of the 19 others made the same decision.

In other words, irrationality isn’t just a deviation due to imperfection, we are programmed to be spiteful.  Here is information on how high testosterone levels are correlated with urges to compete and be dominant.  Here are some other correlations; should we make a few leaps and infer that women in "sheer" clothing are more likely to be spiteful?  Should you prefer to undertake joint projects with men of slight build and women in flat shoes?  Should you deliberately seek out non-hot mates, in the realization that long-run cooperativeness is of more value than short-run hotness?

The pointer is from Daniel Akst.

What happiness research means for optimal taxation

Not that much.  Here is some neglected wisdom from David Weisbach:

This simple intuition [about status] does not tell us anything about the likely effects of status on the tax rate schedule.  For example, increasing progressivity would move everyone closer together.  This might decrease status competition, because the gains from competition are smaller – it would be harder to separate yourself from the group.  On the other hand, it might increase status competition.  If you are closer to beating someone in a status race, you might try harder.  Thus, we can imagine status considerations leading to either a more progressive tax system or a less progressive tax system.

The paper basically combines the substitution effect and the threshold or portfolio effect to argue we should not be too quick to infer particular policy conclusions from considerations of relative status. 

Furthermore a consumption tax doesn’t necessarily limit status games through consumption (e.g., buying a bigger yacht), though it may postpone them.  A consumption tax encourages savings, which ends up converted into future consumption.  The status/consumption game will be all the more intense in the future.  The only way to lower the total amount of these status games is to…umm…lower real gdp.  Which is not a good idea.

Electronic tolls mean higher tolls

After an electronic system is put in place, tolls start rising
sharply. Take two tollbooths that charge the same fee and are in a
similar setting – both on highways leading into a big city, for
instance. A decade after one of them gets electronic tolls, it will be
about 30 percent more expensive on average than a similar tollbooth
without it. There are no shortage of examples: the Golden Gate Bridge,
the George Washington Bridge and the Tappan Zee Bridge, among them.

“You may be less aware you’re paying the toll,” said Ms. Finkelstein, now an associate professor at M.I.T., “but you’re paying a higher toll than you used to.”

Here is the full story.  One thought is the Brennan-Buchanan government rapaciousness angle, layered on top of behavioral imperfections.  This result is also why electronically extracted tolls might reduce congestion less than we would expect; they’re not sufficiently noticed.  Mark Thoma suggests some other interpretations of the data, namely that the electronic toll, by lowering traffic, inconvenience, and queuing to pay tolls, allows the highway authorities to raise the monetary fee to restore the previous net price.

A libertarian approach to water policy

Presented in one long, excellent blog post (do read it), here is a partial response.  I’ll note that water policy has long been an area where libertarian insights are hardest to apply.  Property rights in water (to the molecules?  to a flow?  to water of a certain quality?  what is the natural unit?  …and don’t even get me started on water tables) are more of a fiction than, say, property rights to your toothbrush.  That makes administrative law more important, more valuable, and more of a balancing effect for water than for most other sectors of the economy.

If you wish to purge yourself of all libertarian tendencies, just study water law for a few months.

If you wish to increase your libertarian tendencies, study farm policy, corporate welfare, teachers’ unions, or anti-marijuana laws.  A stroll by the HUD building isn’t a bad refresher course either.

Compensating Variations

The British Parliament was debating how much slave owners should be compensated for their losses, 20 million pounds as it turned out, when a furious John Stuart Mill rose to his feet thundering, "I should have thought it was the slaves who should be compensated."

I am reminded of this story, which is probably apocryphal, whenever I hear about how we must compensate "the losers" from globalization.  Really?  Why should they get any compensation at all? 

Imagine that transportation costs fall so that Joe buys his shoes from China.  Why do lower transportation costs impose an obligation on Joe to compensate Mary, a U.S. shoe maker?  If transportation costs rise (say because the price of oil increases) does Mary have an obligation to compensate Joe?

Or imagine that tariffs have long protected the shoe industry and now the tariffs are lifted allowing Joe to save some money.   Why does this impose an obligation on Joe to compensate Mary?  Indeed, shouldn’t Mary have to compensate Joe?  After all because of the tariffs for many years Joe had to labor extra hours to buy shoes – shouldn’t Joe be compensated for this injustice?

Think about it this way: Suppose the mafia threatens to do you harm if you don’t buy at over-inflated prices from Guido’s Supplies.  For many years you buy but one day the mafia is forced out of business.  Now you are free to buy from any supplier.  Must you compensate Guido for his losses?

Of course, I understand that we might have to compensate the losers from globalization because without compensation they won’t allow us to trade.  My question is different.  It might be expedient to compensate slave owners but is this justice?

 

Addendum: It was Benjamin Pearson not Mill (see my comment below for citations).

Maximum wage laws

…the ambitious plan for the new free-trade zone — nicknamed Zip
Choluteca — rests on a controversial low-wage pact, made in the spring
among the project’s developers, the Honduran government and national
labor unions. In return for luring investors to an untested and
undeveloped region, the agreement guarantees them a minimum profit by
keeping wages below the legal daily minimum for five to 10 years.

Here is the full story, which is about recent attempts to make Honduras a regional economic powerhouse. 

Do maximum wage laws make more or less sense than minimum wage laws?

Virtual Economy Hires Real Economist

The massively multiplayer online game, EVE Online, has hired a PhD economist.  Dr. Eyolfur Guomundsson writes:

In the real world, economic information is the cornerstone for our
daily business; everyone takes note when news on inflation, production
and interest rates are announced and traders try to predict beforehand
what the news will be. There is a constant game between the market and
authorities on predicting each other’s move and for that everyone needs
information. Though EVE is a virtual world, the basic needs are the
same. Players, designers and the company leaders at CCP will all
benefit from having a central figure to monitor inflation and trends
and provide a focused insight into what is happening within that
virtual world so that everyone can make better decisions.

As the lead economist for EVE, my duties will include
publishing economic information to the EVE-Online community. My duties
will also be to coordinate research cooperation with academic
institutions as the academic world has expressed quite an interest in
doing research on this phenomenon (which shows how important MMOGs
might become in future research into economic and human behavior).

Thanks to Derek Guder for the link.

“One line to rule them all”?

Jane Galt writes:

Everyone knows the unified queue is the best way to move checkout traffic. So how come every time customers in a crowded drugstore try to form a single queue, the cashiers force us to line up at the registers? Do they get some kind of psychic job from knowing in advance which customer they’ll check out?

You might try to argue that the indirect utility function is convex (risk-loving) in prices, and that people, when they realize that their personal line-choice algorithms result in shorter (longer) waits, make more (fewer) trips to the store.  Samuelson once proved a theorem about that in the QJE.  The intuition is that consumers can take advantage of price variability, in this case "time price" variability, and come out ahead.  Admittedly the notion of "going to the store more often when your innate line-choosing algorithm turns out to be good" requires a mental stretch.

People also might like knowing that the end to waiting is in sight.  On the phone they put you on hold and tell you the expected wait time, or they should.  At least five times in my life I’ve bolted a supermarket and abandoned the groceries, simply because the lines appeared too long.  It is harder to estimate how long a single line will take, and it is harder to compare single lines across supermarkets.

And might there be "line price discrimination"?  Hurried people like me can scout out the best lines (don’t you have visual algorithms for speedy cashiers?…young girls are best), whereas the conversation-starved, check-writing old ladies might even prefer a slower line.

There are thousands of papers on queuing theory, but I’ve never seen a good study of when single lines are to be preferred.  How sad indeed is my profession…