Category: Economics

Road to Serfdom, 60th anniversay

BBC informs us that this is the 60th anniversary of the publication of Hayek’s Road to Serfdom. In memoriam, here is a fact sheet about the book.

I have always seen huge pluses and minuses in the work. On the down side, mixed economies did not lead to fascism, communism, or totalitarianism, as Hayek had feared. On the plus side, Hayek offers his strongest and clearest case for liberty. Only rarely is political decision-making about trying to do the right thing. His analysis of the dynamics of political power remains a “public choice” classic to this day.

Thanks to Ray Squitieri for the pointer.

Markets in everything, yet again…

Now you can get paid to hear ads and take telemarketing calls:

Adnoodle has signed up 15,000 consumers who have agreed to listen to recorded telemarketing pitches, speak with telemarketers and respond to e-mail solicitations — for a price. He says 500 to 1,000 people are enrolling daily, and he is planning a promotion campaign on college campuses this month before he “hard-launches” the program this spring.

“It’s all about getting value for the consumer — because consumers have value, right?” says Shifrin, 35, whose other company, AutoWraps, pays consumers to put advertising on their cars.

To enroll, consumers go to adnoodle.com and decide the minimum per-minute payment they would accept — generally, the lower the payment, the more companies will contact the consumer. The recommended range is 10 cents to $1.20, but registrants are advised that “bids” of 10 to 50 cents are likely to draw more ad calls. Participants also have the option of being paid in entries to a $5,000 Adnoodle sweepstakes.

Registrants also choose the ad vehicles — telemarketing, e-mails, or both — and they can choose the window times they’ll receive the ads. They complete a survey that asks gender, age, number of children, interests and consumer behavior, so companies can target products and services.

The typical Adnoodle sales call is a recording and states upfront its cash offer for listening. Not enough coin? Too busy right now? You can accept or decline — no obligation. Each ad runs a minute or more. The consumer must correctly answer a multiple-choice question at the end to get paid. “Knowing that the person who heard that message understands the content is really a leap in advertising,” says Shifrin [emphasis added].

At the end of the call, consumers can opt to receive a coupon for the advertised product or talk to a live representative — or hang up. Payment is via PayPal, the online payment company.

“For 2 1/2 minutes a day, if your average price is $1 a minute, you make $80 to $100 a month,” says Shifrin. “Not bad, right?” Actually, it’s more like $75.

In other words, it pays better than blogging. Here is the full story. Here is the website, if you want to sign up.

My take: If you think the idea can work, you have a very cynical view of human nature. You must think that people, listening to ads only to earn some money, nonetheless cannot resist buying the product. On second thought, does that sound so wrong? On the plus side, pricing ads and customer time has long been a theoretical dream of economists. That being said, I’ll bet against this project lasting, especially once word gets round and the pool of applicants changes. A sufficiently hardened idiot or curmudgeon can’t be convinced by anything. Or how about outsourcing the receipt of the phone call? And you will recall that pay-to-surf web sites bombed in the 1990s.

Adam Smith’s grave

Take a look and think reverently on a great mind and scholar. Thanks to the Adam Smith Institute blog for pointing to the link.

Addendum: You needn’t feel sorry for the guy, yes he is dead, but Smith himself wrote the following:

We sympathize even with the dead, and overlooking what is of real importance in their situation, that awful futurity which awaits them, we are chiefly affected by those circumstances which strike our senses, but can have no influence upon their happiness. It is miserable, we think, to be deprived of the light of the sun; to be shut out from life and conversation; to be laid in the cold grave, a prey to corruption and the reptiles of the earth; to be no more thought of in this world, but to be obliterated, in a little time, from the affections, and almost from the memory, of their dearest friends and relations. Surely, we imagine, we can never feel too much for those who have suffered so dreadful a calamity. The tribute of our fellow-feeling seems doubly due to them now, when they are in danger of being forgot by every body; and, by the vain honours which we pay to their memory, we endeavour, for our own misery, artificially to keep alive our melancholy remembrance of their misfortune. That our sympathy can afford them no consolation seems to be an addition to their calamity; and to think that all we can do is unavailing, and that, what alleviates all other distress, the regret, the love, and the lamentations of their friends, can yield no comfort to them, serves only to exasperate our sense of their misery. The happiness of the dead, however, most assuredly, is affected by none of these circumstances; nor is it the thought of these things which can ever disturb the profound security of their repose. The idea of that dreary and endless melancholy, which the fancy naturally ascribes to their condition, arises altogether from our joining to the change which has been produced upon them, our own consciousness of that change, from our putting ourselves in their situation, and from our lodging, if I may be allowed to say so, our own living souls in their inanimated bodies, and thence conceiving what would be our emotions in this case. It is from this very illusion of the imagination, that the foresight of our own dissolution is so terrible to us, and that the idea of those circumstances, which undoubtedly can give us no pain when we are dead, makes us miserable while we are alive. And from thence arises one of the most important principles in human nature, the dread of death, the great poison to the happiness, but the great restraint upon the injustice of mankind, which, while it afflicts and mortifies the individual, guards and protects the society.

Teenage pregnancy

Since 1991 the teenage pregnancy rate has fallen by about 22 percent, reversing a 40 year trend. In a lengthy story, the NYTimes suggests that learning from the hard experience of others is the explanation for the drop without explaining why it should take 40 years for this learning to take effect. They do note “teenage pregnancy had already begun its decline in 1991, well before welfare changes and the economic boom, and well after the first round of sex education programs.” The Times, however, does not examine the most controversial but well-supported explanation, the introduction of legalized abortion in the 1970s.

If this explanation rings familiar it should. In a very controversial paper, Steve Levitt and John Donohue provided evidence that legalized abortion in the 1970s reduced crime some 18 years later. The theory is simple. Abortion rates are higher among the poor, the unmarried, teenagers, and African Americans than among other groups and children born to mothers with several of the preceeding characteristics are at increased risk for becoming involved in crime. Legalized abortion gave these mothers an option and thus reduced the number of at-risk children who might otherwise have grown up to become criminals (note that abortion doesn’t mean fewer children per-se, it may simply delay childbearing to when the mother is not poor, a teenager or unmarried which works just as well.)

In brief, the evidence for the Levitt-Donohue theory is a) the timing is consistent, b) states that legalized earlier had earlier drops in crimes, c) there is a dose-response effect i.e. states that had more abortions had bigger drops in crime, d) the drop in crime in the 1990s occured among those cohorts who were potentially affected by abortion policy in the 1970s (and not among say 40 years olds.)

Joined by co-author Jeff Grogger, Levitt and Donohue apply the same idea to teenage pregnancy and find very similar results – thus reinforcing their earlier story. They write:

Parents who are least able or willing to begin caring for a newborn are most likely to make use of abortion. The abortion rates for teens, the unmarried, and the poor are substantially higher than for the general population. Children who are born unwanted are subjected to poorer care both during pregnancy and the early years of life. With the legalization of abortion, mothers with unwanted pregnancies suddenly had a new recourse. Consequently, the number of children raised in adverse environments dropped substantially. Donohue and Levitt [2001] showed how this change reduced crime among the subsequent generation by 15-25 percent. As teen childbearing is a closely associate social pathogen, the magnitude of the drop should be similar.

Our empirical evidence suggests that birth rates as teens are strongly negatively associated with being born in a state and time period in which abortion rates were high. Our results suggest that teen birth rates today may be 20 percent lower as a consequence of legalized abortion in the 1970’s.

Why not property rights in folklore?

Recent UNESCO/WIPO proposals have called for the creation of copyright in folklore and oral culture. In other words, if a corporation drew from the native stories of a tribe, it would owe royalties or could face legal sanctions.

We all know that U.S. copyright typically protects the expression of an idea, and not the idea itself. But hey, native tales and folklore are expressions of sorts, just not durable ones in the way we are accustomed to protecting. I don’t see any principle in the pure theory of copyright itself that should rule out such an extension.

So why don’t we do protect folklore by copyright? First of all, whose courts do we trust to get it right? Presumably Ghanaian courts should decide when Disney has borrowed too much from native folklore, the incentive problems are obvious. The difficulties multiply if the “victimized” tribe crosses national boundaries.

And how does this sound, noting that the Hague Convention allows for the enforcement of “sui generis” copyright laws as well?

…if Cuba enacted a sui generis regime and declared that the Cuban “beat” was intellectual property, it could get a judgment in Cuba against US record companies that were engaged in cultural “piracy,” and demand for example, 5 percent of the revenues from global sales of music that use the Cuban beat. Other countries could do the same thing. These judgments would be enforceable globally, under the [Hague] Convention. So too would bio-piracy judgments against US and European biotechnology and pharmaceutical companies, for “stealing” traditional knowledge, or exploiting without benefit sharing a variety of biological and genetic resources. The motion picture industry could be hit with new sui generis IPR liabilities by countries that give rights in history. Countries like China, which is a member of the Hague Conference, could use this to limit who could actually make films about China. The Hague convention would instantly create a legal framework to legitimatize all of these new IPR claims, and it would not even matter if the “infringing” party did business in the country at all, since the judgments would be enforceable globally, in any Hague member country, and the claims could be based upon shares to global (rather than local) revenues of products.

By the way, three Maori tribes are threatening to sue Lego for using Maori and Polynesian words in a computer game. Some countries are already establishing copyright protection for folklore, though not always in a Hague-consistent fashion.

OK, OK, I’ve been talked out of the idea of copyright protection for folklore. But when you boil down the criticisms, what do they really amount to? Is it much more than “we don’t trust other peoples’ courts to enforce the decisions that we enforce on other countries all the time”?

Where to go from here: Copyright is enormously useful, but its boundaries are morally arbitrary to a considerable degree. Unfortunately a too-public recognition of this arbitrariness interferes with its usefulness. By asking for copyright protection for folklore, the poorer countries are pushing on this tension in copyright law.

If you can think of a good economic reason for not allowing copyright protection for folklore, let me know, I will offer your proposals in a future post. Don’t send in “we can’t trust their courts,” I’ve already cited that argument.

Thanks to Daljit Dhadwal for the pointer to the topic and the Cuba quotation.

Should consumers boycott gas stations?

Gas prices are higher than in recent memory, Californians are paying $2.18 a gallon for regular gas, some industry sources are predicting $3 a gallon by summer.

Why? Oil prices are high, and many refineries are switching over to summer fuels. Other refinery operators are passing on the costs of producing gasoline with ethanol, read this account.

On the brighter side, the all-time gas price high, in real terms, came in 1981. Gas then sold for a current-day equivalent of $2.80 a gallon.

Gregg Easterbrook adds some further perspective:

The average price of gasoline during the 1950s was about $1.80 in today’s money–meaning that during the period enshrined in our collective political nostalgia as Energy Heaven, gasoline cost slightly more in real dollars than the amount now being theatrically bemoaned as a “record” price. But wait; in the 1950s, per-capita real income was less than half what it is today. That means that for the typical American in the 1950s, gasoline cost twice as much, in terms of buying power, as today’s gasoline. Adjusted for inflation and for buying power, the purported “record”-priced gasoline at your pumps now is substantially cheaper than the gasoline your parents bought.

Some consumers are calling for a boycott of major suppliers, such as Exxon. Supposedly this will force prices to fall. But no, we cannot count on this action, even if massively coordinated, to improve consumer welfare. Why not?

A boycott of this kind, in essence, imposes a price control on the market. No one will buy unless the price falls to a certain level. In theory this can force the price back down to a more competitive level. But the reality is different. Even when monopoly power is present, the record of price controls in improving consumer welfare is a dismal one.

If we wanted to organize a truly effective boycott, one that would increase consumer welfare, what should we do? Here is one of my favorite counterintuitive economics results. Buyers should tax their own purchases of gasoline. You read me right, and here is a formal treatment, what is the intuition?

Let us work backwards to the result, starting with another case, namely a country exporting oil on a perfectly competitive basis using many separate suppliers, but where the country as a whole is a major supplier with market power. That country would benefit by taxing its exports of oil, in essence forcing firms to raise their prices, thereby mimicking a collusive outcome and capturing some rents from the tax-created market power. (Of course this result assumes that the revenue from the tax isn’t wasted. And the smart aleck in the back row will observe that many countries subsidize their exports, rather than taxing them, this may simply be a policy mistake!)

OK, now say you are a dominant buyer in the world market. You want to apply the same logic in reverse. You can move the price in your direction by taxing your own transactors. By taxing your own buyers, you force them to “collude” and restrict their purchases, thereby forcing the price down from abroad (again, it is assumed that the tax revenue is not wasted but rather benefits the citizenry). The large buying country reaps a greater share of the surplus from trade, if the tax is set at the right level.

Yes, this does mean that exorbitant EU gas taxes are not as stupid as they might seem at first.

Going back to the boycott idea, every boycotter should agree to rip up, say, $3 for every $10 worth of gas she buys. If there is no coordination, this is a mere transfer and there is no loss. If there is coordination, the U.S. gains from exercising monopsony (major buyer) power and forcing the price down. Tearing up the money is like a self-imposed tax. Even better, we don’t have to worry about the government wasting the tax revenue. As people destroy their money, the money of others is worth more, thereby ensuring that no real resources are wasted.

Thanks to Erte Xiao for the original query and pointer, and to Bryan Caplan for some useful discussion.

Addendum: Air genius Gary Leff is also a gas genius, he forwarded me this link.

Social security options

Brad DeLong writes about “The Biggest Risk-Arb Transaction Ever,” namely the investment of social security funds in private stocks:

The plan, you remember, was for the federal government to sell a huge number of Treasury bonds, invest the proceeds in stocks, distribute the stocks to individuals as their Social Security Private Accounts, and use the equity premium–the average spread on the return on stocks over the return on Treasury bonds–to reap immense profits and save Social Security.

Brad offers a few options as to what would happen, I find the following two hypotheses most plausible:

…even though there is compelling evidence that the equity premium is too high and that there is lots of profit to be earned by long-run bets that go short Treasuries and long stocks, enactment of the Lindsey-Feldstein-Samwick plan will cause an immediate jump in the stock market. Current owners of stock will profit massively as people’s expectations of the massive future demand from Social Security Private Accounts. The equity premium will shrink quickly. And there will be little profit captured by beneficiaries and little money to save Social Security. (However, the falling equity premium will boost corporate investment, real profits, and real wages by eliminating the Harberger triangle currently created by the market inefficiency underlying the excessive equity premium.)

One [option] says that you might make $2.4 trillion in present value–that price pressure from the demand for stocks for Social Security Private Accounts will eventually shrink the excess equity premium to close to zero, but that will take a generation. And in the meantime, as the excess equity premium is still there (but shrinking), you do profit from the wedge caused by the fact that the private stock market grossly overprices systematic risk.

In other words, even if the stock market currently earns (an expected) seven percent a year, you can’t count on replicating that same seven percent on the money you pull from the social security trust fund. “Private investing” of the funds does not change this basic reality.

Let’s not forget another of Brad’s points: “this [plan] is no bargain if the risk the stock market will tank is borne by beneficiaries”

Brad’s earlier post offers some options on the politics of social security, I go with a view that he holds only on alternate Tuesdays, namely the following:

The fourth argument is: “You want the SSTF invested in private bonds and stocks? Are you crazy!? Do you want some government bureaucrat voting stocks and so electing corporate managers? That’s just insane!”

The bottom line: Reforming social security is not going to be easy.

Markets in everything, continued…

Did you ever wish you could hide your location when talking on the phone? Ever wanted to give the impression you were somewhere else?

SounderCover gives you the ability to add a background sound to any incoming or outgoing call, giving the impression that you really are in the environment where the background sound is normally heard.

Buy here. Here is a story, the service can mimic a circus or the drill of a dentist. How about clattering keyboards?

Thanks to this primate for the pointer.

Lending American capital to Mexicans

Seeking to tap into the billions of dollars that Mexicans working in the United States send home each year, a Mexican mortgage finance company is opening a New York branch on Thursday to offer loans to Mexicans who want to buy a house in their country.

Last year, Mexicans sent home $13.27 billion, more than the country earned from foreign tourism. The money lifts many families out of poverty and in some regions is the only source of income.

Many Mexicans working in the United States hope to save enough to buy a house in Mexico and return. But the money they send home is often consumed by daily needs.

Under the lending plan created by Hipotecaria Nacional, Mexico’s largest mortgage finance company, a Mexican working in the United States – legally or illegally – will be able to apply for a loan and pay the monthly installment in dollars through an American bank.

Relatives in Mexico must also sign the loan, which is issued in Mexico in pesos and backed by Mexico’s national mortgage bank, Sociedad Hipotecaria Federal.

And what do the stats look like?

…a worker would need to pay $400 a month for a 15-year mortgage at 15 percent interest on a house valued at about $36,000 with a 20 percent down payment. That interest rate, which would be quite high in the United States, is reasonable by Mexican standards, given higher base interest rates, inflation and the greater risk of default.

I’ll add that a house in rural Mexico costs only a few thousand dollars to buy or construct.

Nor are real estate-based capital movements restricted to mortgages proper:

…it has been Mexican companies that have come up with the most innovative ideas. Since 2001, Cemex, the cement giant, has allowed Mexicans to pay for bags of cement in the United States that relatives pick up in Mexico to build houses. The company, which has five offices in California and one in Chicago, even offers free engineering advice.

Here is the full story.

Switching conventions

Economists commonly cite driving on the right (left) hand side of the road as an example of a beneficial social convention. The equilibrium is arbitrary, provided that everyone agrees to drive on the proper side.

I was surprised to learn how recently some of these road conventions have solidified. Consider the following:

1. Seventeen percent of the world’s area drives on the left. This amounts to about thirty-two percent of the population, it includes India, Indonesia, Pakistan, Japan and Bangladesh.

2. Originally Quebec and Ontario drove on the right and the rest of Canada on the left. The prairie provinces, when settled, drove on the right but British Columbia did not. Canada started a move toward universal right-side driving in the 1920s. Newfoundland and Labrador were the laggards, not switching until 1947, shortly before they joined the confederation.

3. A 1903 Baedeker Guide wrote the following:”The rule of the road varies in different parts of Italy. In Rome and its vicinity the rule is the same as in England i.e. keep to the left in meeting, to the right in overtaking vehicles. In most other districts, however, this rule is reversed.”

4. Most of Austria drove on the left until the Anschluss of 1938. Hitler also made Czechslovakia and Hungary drive on the right.

5. The Falkland Islands drove on the right during the brief Argentinian occupation of 1982.

6. Myanmar (Burma) switched to right-side driving as part of a move to consciously repudiate its British colonial heritage. Panama changed in 1943, largely because the Pan American Highway opened up.

7. Recent switches to the right include China, Taiwan, and the Koreas (1946), Belize (1961), Ethiopia (1964), Iceland (1968), Nigeria (1972), Ghana (1974), and South Yemen (1977).

8. Island nations are less likely to switch to right-side driving, or more likely to switch later.

From Right Hand, Left Hand: The Origins of Asymmetry in Brains, Bodies, Atoms, and Cultures, by Chris McManus.

My take: Switching is easier and more common than you might have thought. In the meantime, I’m still waiting for England, New Zealand, and Australia to adopt consistent rules as to who has the right-of-way when entering a roundabout.

Punctuality

In the U.S. being on time is the rule. In other places, such as Latin America punctuality is rare. Why? Social psychologists have ascribed the differences to deep cultural facts, religion, and “national personalities.” One theory, for example, has it that the changing of the seasons in more northern latitudes induces a greater respect for time – plant a little late or early and frost will wipe out your crop.

In Punctuality: A Cultural Trait as Equilibrium game theorists Kaushik Basu and Jorgen Weibull make a simple but important point. If I think you are going to be late then it’s costly for me to be on time so I will choose to be late. But if I choose to be late then it makes sense for you to choose to be late also. Indeed, if I think that you think that I might be late then I will be late! In other words, lateness is a Nash equilibrium of a game. Punctuality is also an equilibrium. If you are going to be on time it make sense for me to be on time also (especially if you can punish me for not being on time.) Which equilibrium is played can be as arbitrary as the forces that determine which side of the road we drive on. Basu and Weibull write:

A social scientist who neglects the strategic aspect may be tempted to believe that if two societies exhibit sharply different behaviors, then they must have innate differences, such as different preferences or different religious outlooks on life or different genes. What we have just seen is that none of this is necessary. Some of the ‘cultural’ differences that we observe across societies could simply be manifestations of different equilibria in otherwise identical societies.

If the theory is correct then it should be possible, with a one-time push, to change an entire people from tardy to punctual virtually overnight in much the same way that Sweden switched to driving on the right-hand side of the road (precisely at 5am, by the way, on Sunday morning, September 3, 1967).

The theory is currently being tested in Ecuador, a country where, according to some estimates, habitual lateness costs 4.3 percent of GDP! Thus a national campaign is aiming to change the equilibrium.

Hundreds of institutions ranging from local councils to airlines have signed up to a promise to keep to time. Stragglers are barred from entering meetings. Hotel-style door signs have appeared in offices and schools. On one side, they say “Come in: You’re on time” and on the other “Do not enter: the meeting began on time.” A local newspaper is publishing a daily list of public officials who turn up late to events.

In related news, physicists are now measuring time in attoseconds, one quintillionth (10E-18) of a second.

Measuring globalization

Foreign Policy magazine has just published its globalization index. The top five?

1. Ireland
2. Switzerland
3. Netherlands
4. Finland
5. Canada

The losers include Indonesia, Egypt, India (outsourcing has not taken over the country), and Iran. The index includes factors of economic integration, personal contact, technology, and political engagement. The link includes the full data plus a detailed discussion of how the index was constructed.

Check out this graph, levels of globalization vs. life expectancy. Globalization vs. religious participation is harder to read but interesting nonetheless.

My favorite is levels of globalization vs. women’s well-being, take a guess which way it goes. This graph should be enshrined in the undergraduate curriculum of every major university.

Let’s spend more on health care?

That’s what David Cutler argues in his recent book Your Money or Your Life.

Cutler believes that our expenditures on health care have more than justified their cost. He therefore opposes the traditional recipe of “cut costs and use the savings to finance greater access.” His attitude is closer to “expand care now and improve the quality of outcomes.” If you think that more discretionary spending doesn’t make many people much happier, why not make them healthier and longer-lived instead?

As I read the book, Cutler is pushing two major ideas:

1. Subsidize insurance to ease the problems of the forty million uninsured. But he repeats the usual numbers, without convincing me that the problem is as bad as it sounds.

2. Pay for health care results, rather than rewarding expenditures per se. In other words, give doctors and hospitals bonuses for actually making patients better.

A loyal reader of MR should not be surprised to read that Robin Hanson had the idea first. Read his intriguing essay at the link. In Robin’s vision you buy your medical care from an institution that contracts with a third party to pay penalties, or receive bonuses, depending on your longevity, disability, et.c — whatever can be measured. I can imagine such incentive schemes working in the decentralized private sector, especially after much trial and error experimentation. (Note the potential adverse selection problem: you don’t want providers to have an incentive to shun hard-to-improve cases.) It is much harder to see federal or even state governments getting the incentives right, and having the political capital to see the correct decisions through.

The bottom line? Cutler is obviously a smart guy but overall I found the book underargued. I like his optimistic, can-do attitude, but I don’t trust it in the hands of politicians.