Category: Economics

Many people have been clamoring for this topic over at the secret blog.

My views are simple: we have too few cats in the world, relative to dogs.  Dogs, for reasons of temperament, can in essence precommit to being our slaves.  (As long as they are not Irish Setters.)  That makes us more willing to create or support an additional dog.  The quantity of dogs is nearly Pareto optimal, although their emotional slavery to us raises ethical questions about the distribution of power in the relationship.

A cat cannot "promise," genetically or otherwise, that her kittens will become your (or anyone’s) slaves, if only you don’t neuter her.  The kittens never come about, or they meet a cruel fate rather quickly.

If you must support the life of either a cat or a dog, choose the undervalued cat.  This argument requires only that the cat gets some value out of being
alive, and that value should carry some weight in our
all-things-considered moral calculations.

More generally, you should go around helping the (undervalued) people who insult you, or the people who otherwise signal their independence from you.  The craven are already being served quite a bit.

Tim Harford’s first radio documentary "Analysis: Repugnant Markets", will air on BBC at 8.30pm UK time (3.30pm EST) today – featuring Al Roth, Virginia Postrel, and Robin Hanson, among others.  The show will go on-line here, with a transcript, sometime later today.

When my editor and I were exchanging drafts of this piece, my spam blocker wouldn’t let them through.  There is too much talk of Nigeria and diamonds!  Here is one excerpt:

Paul Collier, an economics professor at Oxford University,
has a new and potentially powerful idea.  In his recently published
book, “The Bottom Billion: Why the Poorest Countries Are Failing and
What Can Be Done About It” (Oxford University Press), Professor Collier
favors an international charter – some widely publicized guidelines
that countries can voluntarily adopt – to give transparency in spending
wealth from natural resources.  A country would pledge to have formal
audits of its revenues and their disposition.  Imagine
PricewaterhouseCoopers auditing the copper revenues of Zambia and
issuing a public report.

It’s not as futile as it might sound:

Professor Collier’s proposal at first glance seems toothless; a
truly corrupt country probably wouldn’t follow the provisions of the
charter, which, after all, is voluntary.  Yet citizens could pressure
their government to follow such a charter, and the idea of the charter
would create a focus for political opposition and signify international
support for concrete reform.

Foreign corporations would bring
further pressures to heed the charter.  Multinational companies that are
active in corrupt countries might receive bad domestic publicity.
Eventually the companies might push for adherence to the charter, even
if the charter limited their ability to bribe.  In another context, De
Beers has been stung by bad publicity about “blood diamonds,” and the
company is now a force for positive change where it operates.

In
the optimistic case, a few poor countries start abiding by the charter.
Those countries prosper and attract more investment and status in the
international community.  The pressure to adopt the charter would then
spread.  Of course, promoting the charter costs relatively little and
the potential benefits are significant.  International pressures did
eventually force a change in South African apartheid.  So maybe they can
improve other countries as well.

Did you know that Tony Blair was already promoting such a charter?  And the Nigerian government (really) already commissioned a private sector audit and now has enacted a version of this idea into law?  We’ll see how that goes, but Nigerian flirtation with rule of law ideas is one of the underreported stories of this year.

Paul Collier’s The Bottom Billion is a very exciting and important book.  It is rare to read something on economic development that is true, non-trivial, and potentially useful.  I recommend this book highly, it is also short and easy to read.  Here is a good review of the book by Niall Ferguson.

Here is the whole column.

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.

China has given us a ton of stuff in exchange for t-bills.  If they
expropriate US or other rich country FDI, the US cancels their claim to
the t-bills and we get the stuff for free.  That is to say, China’s huge
reserve holding of dollars is just collateral against any appropriation
of the FDI being done there.

Here is more.

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.

Real estate prices, not whining, are the real barometer of overall quality of life.

More here.

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.

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.

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.

The price of machetes has halved in parts of Nigeria since the end of
general elections in April because demand from thugs sponsored by
politicians has subsided, the state-owned News Agency of Nigeria
reported.

Here is the link.  Thanks to Bulent Murtezaoglu for the pointer.

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).

1. Nick Szabo on how small price changes can become

2. Excerpt from Brink Lindsey

3. Why Facebook isn’t the future of the web

4. Follow the numbers: why U.S. health care won’t be cheap anytime soon

5. Medical self-defense

6. Austan Goolsbee on Sicko