Category: Economics

It seems that Bildungsroman has sold her books in Costa Rica, after an agonizing Auseinandersetzung over the matter.

I know not the details of this case, but empirical economics suggests a lesson.  Endowment effects are significant, especially for people who are not professional traders  of the item in question.  That means we tend to value things more, simply because those things are ours.

With some probability, that tendency is just plain irrational.  It might make sense to treat our friends or our babies this way, or to act this way in a subsistence economy, but endowment effects should not rule the behavior of not-so-risk-averse well-off,  Americans.  So if you are even considering selling something, you probably should do so.   

Bye, bye books.  And don’t buy another commodity, invest in memorable experiences.

I might add that when it concerns equities, buy and hold is better than portfolio turnover.  For second best reasons, people would be better served by a stronger endowment effect; greater possessiveness would cancel out their mistaken belief that they can beat the market.

Addendum: I believe that endowment effects are stronger for items we have paid for or won through competitive effort.  This means that your kid should pay for some of his or her college education, read more here.

Here is Ed Prescott’s list.  Here is the thumbnail version:

Myth No. 1: Monetary policy causes booms and busts
Myth No. 2: GDP growth was extraordinary in the 1990s
Myth No. 3: Americans don’t save
Myth No. 4: The U.S. government debt is big
Myth No. 5: Government debt is a burden on our grandchildren

Where to start?

In my view #1 is 53 percent true, not a myth, #2 is a debate over semantics, #3 is indeed a myth though we should save a bit more, interpreted literally #4 is myth but let’s not forget the real problem is forthcoming demographics combined with Medicare, and #5 is mostly a myth although the illusory "government debt is net wealth so let’s spend more than we ought to, thereby reducing the capital stock" effect is not zero.

Serial Killer Busts.  More "deadly" items here.

Here are murder-related auctions, not allowed on ebay.

Here is a relevant article.

John DiNardo (of the University of Michigan) and I were troubled by the
fact that there are a lot of patterns and trends in the labor market
that don’t fit in very well with a skill-biased technical change
explanation. We were motivated to embark on a Don Quixote mission, a
noble cause that wasn’t going to go anywhere [laughs].

One thing we pointed out, for example, is that women are lower skilled
than men, if you take the fact that they have lower wages as evidence
of their skill. The SBTC theory says that people with lower skills
should have slower wage growth than people with higher skills. But over
the 1980s, women did much better than men. It’s also the case that over
the 1990s, women’s relative wages were fairly stable again. So there
was a long period of stability of women’s relative wages, then a period
of convergence of women relative to men that ended in 1991-92, and then
stability again. That’s an important set of trends that SBTC doesn’t
address. SBTC might be consistent with it; it might not be, but the
theory needs a lot of auxiliary hypotheses to work.

The same thing is true with respect to the black/white wage gaps.
Blacks earn less than whites, and many people believe that the reason
they do so is because they’re less skilled. Nevertheless, during the
1980s, the black/white wage differential was stable. It didn’t widen as
people had predicted it might.

Another trend that didn’t fit with the SBTC hypothesis concerns the
relative wages of people with different bachelor’s degrees. There are a
couple of different data sets that collect starting salaries for newly
minted B.A.s. What these data show is quite remarkable. Everyone knows
that the average wage of young college graduates went up over the
1980s. It wasn’t the case, however, that the gains were most pronounced
in engineering or science. They were actually greater for graduates in
the humanities, which doesn’t seem consistent with the idea that there
is increasing demand for technically proficient, computer-savvy people.

…A final puzzle concerned the age structure of the increases in the
relative wages of college versus high school graduates. Wages of young
college-educated workers rose relative to young high school workers,
but for people over age 40 or so, there really wasn’t any change in the
high school/college premium.

Hat tip to Greg Mankiw and Matt Yglesias.

Austan Goolsbee writes (no permalink yet) of Matthew Gentzkow and Jesse M. Shapiro, and their paper “What Drives Media Slant? Evidence From U.S. Daily Newspapers“.  The non-gated version is here.

In essence the authors measure how much newspapers use key partisan phrases like "personal accounts" for social security privatization and compare the vocabularies of those newspapers to the vocabularies of partisan politicians.  The political slant of newspapers is then matched to campaign contributions in the zip codes those newspapers serve.  Shapiro sums up the result:

The data suggest that newspapers are targeting their political slant
to their customers’ demand and choosing the amount of slant that will
maximize their sales. 

It also turns out that the political views of the paper’s owner have no effect on the slant of the paper.

Here is my previous post on wunderkind Jesse Shapiro.  He remains the best Youngling out there.  Here is an earlier piece I wrote on media bias.

If Christmas didn’t exist as a holiday what would happen to consumption and production?  I can think of several hypotheses.

1)  Consumption would remain the same but people would spend more on themselves and less on others.  Would deadweight loss be reduced enough to make such a move wealth-enhancing?

One also wonders how much Christmas spending within the family is actually spending on oneself?  Did that catalog on my chair just happen to fall open to the page with the black pearls?

2)  Consumption would decline and savings would increase.  Many people go into debt to buy Christmas presents.  Does Santa Clause reduce the rate of savings?  Scrooge says yes!

3)   Other holidays would become more important and total consumption and giving would remain the same.  Is there a Coase theorem for holiday gift-giving?

Increased giving at other holidays, such as birthdays, would help to smooth production and consumption.  Consumption smoothing is welfare enhancing in partial equilibrium but not necessarily in general equilibrium.  I want my consumption smoothed but I’d like to get all my gift giving done in one big batch thank you.

Production smoothing is also generally welfare enhancing in partial equilibrium but not necessarily in general equilibrium.  In general equilibrium, a big push may be necessary to cover fixed costs.  The seasonal cycle may be an implementation boom.

Comments are open.

You should be glad I think your hair is too short.  Given that hair grows, if it were not now too short, it would too soon be too long.  Think of it in terms of an S-S model.  About half of the time your hair should be too short.

Five points extra credit if you realize that same reasoning means wage and price stickiness may not be as big as problem as we used to think.

Martin Feldstein thinks not so much:

The ageing of the population presents a major fiscal challenge for the
countries of Europe.  The combination of increased longevity and a
reduced birth rate will directly reduce the growth rates of the
European economies by slowing the growth of the capital stock and by
weakening the productivity of the labor force.  This slower growth of
GDP means a smaller tax base and less tax revenue.  In addition, the
current tax-financed systems of social pensions and health care will
require substantial increases in the already high tax rates.  The
analysis in this paper shows that the common prescription of increased
immigration would do little to reduce the future fiscal burden.  The
increased revenue from a large rise in immigration would finance only a
small part of the coming rise in the cost of pension and health
benefits.  The only alternative to significantly higher tax rates or
substantially lower retirement income is to shift from a pure
tax-financed system to a mixed system that supplements the tax financed
benefits with benefits based on increased saving financial investment.

Here is the paper.  I can’t find a non-gated version, which might be because Feldstein runs the NBER…

Isaac Sorkin and Henry Swift give us some good reasons to procrastinate:

Though work-smoothing may sound appealing, we all know that it never happens to the ideal degree.  Part of this is certainly due to decision-making myopia.  But is it possible that there is also a rational component to our procrastination habits?  There are at least three reasons why this might be the case.  The first is that there are fixed costs to doing homework.  Suppose that in order to do homework you have to run to Kohlberg for a mocha latté…and check your favorite five media outlets as a preemptive distraction.  In that case, it makes sense to have longer homework sessions in order to reduce the total number of sessions (and number of fixed costs to pay).  Thus, putting things off in order to concentrate the work for a paper in one epic block means that you don’t have to waste time setting up to write again and again.

The second reason is that there may be decreasing marginal costs to doing homework.  Suppose that the second hour of doing homework is much easier than the first, and the third easier yet and so on.  You get in the homework zone.  Then it makes sense to make your homework sessions as long as possible in order to take advantage of these returns to scale in doing homework…

The third reason is that there might be “thick-market externalities” in doing homework.  The idea is that if everyone else is doing the same thing that you are, it gets easier and more enjoyable.  If all of your friends are procrastinating at the same time, then the opportunity cost of doing work is that you miss an excruciatingly funny episode of “Curb Your Enthusiasm”…  Similarly, when everyone is doing work, the opportunity cost of work is very low.  After all, “Curb” is far less excruciatingly funny when watched alone.  So it makes sense to do work when your friends do work, and avoid work when your friends avoid work.

Perhaps they should have been taxed for having written this.  Fortunately I am a reverse procrastinator and I have no problems with these issues.  It is procrastination which I put off, not work.

Arnold Kling discusses Dasgupta, Stern, and de Long.  Here is his bottom line:

My concern is with Stern, Dasgupta, or DeLong playing social engineer and picking a social discount rate that deviates from market interest rates.  I think you get unreliable conclusions any time you do that.

I’ll recap my views as follows:

1. For resources which will be reinvested, use the rate of return on capital, adjusting for taxes, risk, and the like.

2. For resources which will otherwise be consumed within the current generation, use the market rate of interest, again with adjustments.  That rate reflects time preference within a life.

3. If we are comparing different consumption units across the generations, there is no time preference in the economically meaningful sense.  (Prior to 1962, I was not impatiently waiting to have been born.)  Use zero, noting this is an ethical rather than economic choice.

Depending on the configuration of the variables, the correct "net" discount rate usually will be above zero but below the current market rate.

Note that the future consumption/investment ratio is not a current fact about the world, but rather a matter of choice.  That means the correct discount rate is also not a "current fact about the world," but rather will depend on other choices we make.  This is a common confusion.

Arnold also writes:

Even if the Stern report had nothing to do with global warming, its assumption for the social discount rate has radical policy implications. Implicitly, it argues for an all-out effort to reduce private-sector and public-sector consumption and to increase investment instead.

I am less worried.  Not all or even most current consumption reductions will much benefit the next generation.  (Does anyone know what percentage of a marginal increment of savings ends up in bequests?)  The prospect of current consumption is also a (the?) driving force behind innovation and technological improvement, which most definitely  benefits future generations.  We should invest more in the future, but the intergenerational zero rate view, correctly interpreted, does not require that we should limit consumption as much as possible.

Addendum: Here is commentary from The Economist.

In Naftalan you can buy a bath in pure crude oil.

Tim Harford asks whether it is efficient to have the Christmas decorations go up earlier each year.  Partly for traditional and aesthetic reasons, he would prefer a shorter Christmas season. 

In my basic model, suppliers with P > MC put up decorations to stimulate more buying and gift-giving.  Bringing on Christmas early is a form of associative advertising.  A shorter Christmas season would mean less overtime work, less spending (more saving), and spending spread more smoothly throughout the year.

What’s the benefit of having all that consumer spending clumped together at Christmas season?  I can think of three hypotheses:

1. It yields "thick market" externalities, such as allowing people to do most of their shopping when inventories are highest.

2. It yields a "do or die" season, in which new products can be rapidly and ruthlessly evaluated.  Don’t we already have the verdict on Zune?

3. Suppliers are inefficiently "fishing" for early "capture" of consumers as part of a common pool problem.  If a given supplier doesn’t grab that consumer’s attention now, someone else will.  Of course there can be no property rights in "the attention of consumers," so that attention is consumed inefficiently early.

I believe in #1, #2, and #3, but I suspect #3 is the operative force, leading me to side with Tim.  Christmas is fun, but perhaps we have just a little too much of it.

For decades, the fiercely independent fruit and vegetable growers of
California, Florida and other states have been the only farmers in
America who shunned federal subsidies, delivering produce to the tables
of millions of Americans on their own.

But now, in the face of tough new competition primarily from China,
even these proud groups are buckling.  Produce farmers, their hands
newly outstretched, have joined forces for the first time, forming a
lobby group intended to pressure politicians over the farm bill to be
debated in Congress in January.

Most of the current $15 billion in direct subsidies goes to five commodities: corn, cotton, rice, wheat and soybeans.  Now Chinese garlic sells for about half the wholesale price of American garlic.  One garlic manager commented:

“The Chinese garlic totally caught us off-guard and knocked us down,”
Mr. Mantelli said recently as he checked on newly planted garlic bulbs.
“I think our industry has hit rock bottom.  Maybe now we can figure out
how to make it a level playing field.”

Here is the full story.

Bid for meals at your favorite restaurants.

That is in Scotland, here is an article about the service.

The pointer is from Mark Steckbeck.