Category: Economics

Find it here, starring Megan McArdle.  This promises to be a major economics and current events blog. 

Sadly the blog posters seem to have the "pseudonym" of anonymity, but I bet you all know Megan’s style by now and can guess which are her entries.  I don’t know who the other bloggers are, but I believe they are Economist staff.  This is also a good controlled experiment for how quickly smart people can learn the skill of blogging.

Stay tuned…

Addendum: Jane Galt explains more, and do tell them in our comments what you think of the new blog…

Second addendum: If you are looking for controversy, try their new Lancet post…

I just read that the external social cost of having another driver in California — due to accidents and not even citing congestion — ranges from $1,725 to $3,239 a year.

The number seems high to me (I couldn’t spot any problem in the paper), but I learned a new argument for market failure.

An externality arises from the difference between the average and marginal costs of accidents.  Each driver pays, on average, half the cost of an accident involving two people.  But in Coasean terms, the "marginal product" of either driver was to cause the full accident (this seems to ignore that on some days, certain drivers will crash with someone else, virtually no matter what, but of course this does not cover every case either).

So should you go drive in Idaho instead?  Or can the argument be flipped to create a comparable uninternalized benefit from driving?  When you drive to someone or somewhere else, you will bring some consumer surplus or producer surplus to the other person.  Or is the "complementarity of the match" more potent on the downside, with accidents?

That is all from Aaron Edlin and Pinar Karaca-Mandic, in the October 2006 Journal of Political Economy.  The authors also claim that an optimal Pigouvian tax on driving could raise $66 billion in the state of California, more than the other state taxes put together.

Here is an earlier version of the paper.  Guest blogger Eric Helland also covered the Edlin, Kraca-Mandic paper before it was published.  He suggested toll roads were the solution.

This paper is non-committal but essentially skeptical.  The authors make a few points:

1. Hedge fund customers are wealthy and sophisticated; there is no customer protection motive for regulating hedge funds.

2. Hedge funds serve some useful purposes, including private research, price discovery, and provision of liquidity.

3. Secrecy is the essence of hedge fund activity.  For that reason, the standard regulatory recipe of disclosure has limited applicability in this context.

4. There is not much evidence that hedge funds are destabilizing at the macro level, or involve significant levels of systematic financial risk.

I believe these views are likely correct.  The more important question is what is the best course of action — in terms of expected value – if they might be wrong.  Systematic risk is the real issue.

I was up in NYC for only a few hours, but it struck me once again.  Manhattanites smoke much more than the people in northern Virginia.  I can imagine a few hypotheses:

1. Social networkers head to Manhattan, and social networkers smoke.

2. In Manhattan it is more important to signal you are cool. 

3. Air pollution is higher, so the marginal health cost of smoking is less.

4. New York is colder, and that makes cigarettes more enjoyable.

5. The "artsy" variable is doing most of the work; of course this is related to #1 and #2.

6. NYC life is more stressful, and smoking calms some of these people down.

7. Many of them are poseurs, and these smokers don’t have such valuable human capital.

I’d bet first on #2, and also on #7, but I don’t have a good theory that will explain the rest of the cross-sectional evidence.

What are the options?  I don’t buy the Leeson-Sobel notion that cutting FEMA aid will improve long-term performance in disaster-stricken areas.  The real question is what we should do ex ante.

Howard Kunreuther and Mark Pauly promote a traditional idea:

This paper explores options for programs to be put in place prior to a
disaster to avoid large and often poorly-managed expenditures following
a catastrophe and to provide appropriate protection against the risk of
those large losses which do occur.  The lack of interest in insurance
protection and mitigation by property owners and by public sector
agencies prior to a disaster often creates major problems following a
catastrophic event for victims and the government.  Property owners who
suffer severe damage may not have the financial resources easily at
hand to rebuild their property and hence will demand relief.  The
government is then likely to respond with costly but poorly targeted
disaster assistance.  To avoid these large and often uneven ex post
expenditures, we consider the option of mandatory comprehensive private
disaster insurance with risk based rates.  It may be more efficient to
have an ex ante public program to ensure coverage of catastrophic
losses and to subsidize low income residents who cannot afford coverage
rather than the current largely ex post public disaster relief program.

The goal is to make people internalize the social costs of placing their assets in a vulnerable position.  If you own a home by a questionable levee, you have to buy insurance.  Maybe the price of that insurance will tell you not to keep the home.  I have two problems with this idea.  First, in distributional terms we will essentially end up confiscating the homes of many poor people.  Second, insurers can be notoriously reluctant to write policies for high-risk areas, or they will write policies with exorbitant non-expected-utility-based rates.  (Is any of this regulatory?  Why don’t the markets pool out the risk?  Is there a principal-agent issue within the insurance company?)  It might lead to far more confiscation or abandonment than is efficient.

The correct ex ante policies toward disasters remain an underexplored are of microeconomics.  And why private insurance doesn’t do a better job of insuring against long-run risks..well…that is perhaps the leading question of applied microeconomics today.

Here is my previous post on libertarian policy recommendations and Katrina.

Here is my essay over at CrookedTimber.  Here is the whole symposium, which is on Sheri Berman’s new book on social democracy.  Part II will be up tomorrow, with Matt Yglesias and Brad DeLong, among others.

The NYTimes has an excellent article on how foreign aid is often more about aiding local companies than aiding foreigners.  It’s a familiar story but told with a wry look at condom production in Alabama where for decades billions of condoms have been manufactured for USAID and other programs despite the fact that costs are much lower on the world market.

A central theme in the article is the contrast between the waste of foreign aid dollars and the plight of the poor, low-skilled workers who make the US condoms.  Here, however, is a way to square the circle.  The US plant typically produces about 450 million condoms a year at a cost of 5 cents each.  Condoms could be bought on the world market at 2 cents each so if the plant shuts down USAID can save $13.5 million dollars a year.   The US plant employs 260 people so every one of those employees could be paid a one-time quitting bonus of $51,923, equivalent to several years of salary of the lowest paid workers.  USAID would be indifferent in year one and would have more to spend on foreign aid in every subsequent year.  My bet is that the workers would jump at the chance to be bought out.  So there you have it, that’s how you use a condom optimally.

Ezra Klein writes:

So what makes us [the United States]

different.  In a word, power.  Or the distribution of it. Europe has strong unions
and active governments; countervailing powers that wrest a portion of
the pie for their constituencies.  We don’t.

Many intelligent Democrat bloggers are converging upon this meme.

A few years ago five separate German trade unions, drawing heavily from service industries, merged to form the very large Vereinigte Dienstleistungsgewerkschaft.

Here is a propagandistic article about Die Vereinigte Dienstleistungsgewerkschaft.

It is hard for me to believe that the American hi-tech sector would create more prosperity — and I mean for the middle class, never mind the rich — if it had a Vereinigte Dienstleistungsgewerkschaft.

Here is an article about the current and forthcoming death of German trade unions.  Germany is now moving toward a two-tier labor market; guess which tier the new jobs are being created in?  I have never known a Vereinigte Dienstleistungsgewerkschaft to support the "creative destruction" which is the lifeblood of capitalist innovation.  Unions are better suited for a relatively static set of manufacturing tasks, precisely the jobs which are disappearing from Germany and also from the United States.  Read this too; German unionization is down to about one out of every five jobs.  Unions are declining more generally throughout the OECD.

Here is how German unions have responded to the Airbus crisis; it is not pretty.  Here is a German complaining about German unions.

German unions were an instrumental part of postwar recovery and democratization.  And I do not doubt the standard evidence that, in partial equilibrium terms, there is a union wage premium of about ten to fifteen percent (though, interestingly, such a premium cannot be found for Sweden, France, or Germany; union defenders claim that the collective bargaining benefits spill over into all sectors.  Maybe.). 

But today?  I do not see the appeal of a Vereinigte Dienstleistungsgewerkschaft, most of all for the relatively dynamic United States.  It would bring a one-time boost in some wages and a long run decline in growth and job creation.  That is not a good deal.  And if I imagine the counterfactual world in which I am a Democrat, I would not feel any differently about this question.

"Imagine that we live in the world of Malthus, where real wages hover at subsistence and boosts in living standards occasion population growth which then push wages back toward subsistence.  Furthermore if some of this population growth comes through improved sanitation and fewer deaths, it can happen in the short run, not just the long run.  How might this change real business cycle models?  What are the implication of a Malthusian model for interest rates."

MR readers are, of course, free to leave their answers in the comments.

Unless the world is in for a nasty spill, the richest people likely will become even richer over the generations.  Other than buying out or bribing African dictators, what else might the truly rich do with their money?

1. Build artificial islands, create jobs there, take in immigrants, and experiment.

2. Change their names to "Nemo," and hire mercenaries to intervene when Darfur-like situations get out of control.

3. Finance excellent movies just for the heck of it.

4. Send out self-replicating, solar powered von Neumann probes to explore the galaxy and look for life, or perhaps seed life (did anyone get a tax deduction for doing Earth?).

5. Create galactic spectacles which are obviously the work of intelligent beings, to advertise our presence to other civilizations, or future civilizations, throughout the galaxy.

What else?

Jeffrey Sachs has written a new paper on the Nordic model, extending his Scientific American article in praise of the welfare state.  It is listed as "not for quotation" so I won’t.  I agree with much of the paper, but I would emphasize a few propositions more:

1. Many ideas and innovations are international public goods.  This will make the Nordic model more sustainable over time.  Swedish society doesn’t have to be that innovative, although of course sometimes it is.

2. Societies differ a great deal in their innate level of cooperativeness.  This is a key to making the Nordic model work.  I wouldn’t try the Swedish model in France, much less in the United States.

3. The Nordic countries generally take a light hand in regulation, capital income taxation, and many of the public welfare programs pay people to work and not to sit at home on their behinds.  In fairness to Sachs, he does mention these points.  Furthermore given the extensive subsidies to child care, which encourage female labor force
participation, the high marginal tax rates do not discourage labor supply as we might at first think.

4. Government policy is often most usefully thought of as endogenous.  Higher levels of cooperativeness, and lower levels of corruption, mean that people will choose more government.  The government they get will work better than government works elsewhere.  The point is not that all choices are efficient, but rather there is a selection bias in the data we observe on government size and performance.  Nordic welfare states are large, in part, because they work relatively well.

5. The long-term consequences of a slightly lower growth rate are in any case troubling, no matter how well a society works at any moment in time.

Here is my previous post on the Nordic model.  Here is a post on Swedish stagnation.  Excerpt: "I’ve been to Stockholm several times and loved it.  That being said, how
attractive will this model remain when it offers only half of the per
capita income of the United States?"

Say Katrina comes along and knocks down some hotels, which are then rebuilt.

We all know the "broken window fallacy" — this sequence of events is not good for the economy.  But under what conditions will it increase measured gdp?

Under one view, the money spent rebuilding the hotels would otherwise have been spent buying shoes or something else.  Measured gdp should not go up.  See Alex’s comments below for more along these lines.  (But note that Alex’s fifth paragraph makes a mistake.  I am not just "buying a new CD," but rather a new CD is being produced, generating income, in the analogous example he sets out, just as a new hotel is being produced to replace the old one destroyed by the storm.  He doesn’t come squarely to terms with how new output ever increases measured gdp.  A second factual but not theoretical point is that most Katrina refugees are now earning more elsewhere.)

An alternative approach invokes the assumption of "gross substitutability," or more prosaically that new production attracts a greater expenditure than the relevant alternative.  (Addendum: We also can speak of the velocity of money rising.)  New production in general raises measured gdp.  If a new hotel is built, why should the "gdp consequences" of that production depend on whether the lot had always been vacant, or a previous hotel on that lot was destroyed by a storm?

A further complication is that the hurricane destroys wealth.  The loss of hotels induces negative income effects, which probably will lower measured gdp in other sectors of the economy.  Natural disasters are not a good way to build up gdp in the longer run.

Many factors are at play.  Will we consider Keynesian effects through a possible employment increase for rebuilding, or intertemporal substitution effects through a temporary boost in labor supply in repair industries?  If the repairs dig into future productive capacities, short-run gdp is more likely to rise than long-run gdp.

Will natural disasters increase measured gdp in the short run, once we consider expenditure switching effects?

Your thoughts?