Category: Economics

1. The Ohlin model of international trade, put into a fifteen-minute computer game.  The pointer is from Tim Sullivan.

2. Natascha Kampusch update, fascinating on numerous counts and one of the best media pieces I have read this year.

3. The most popular classical music downloads on iTunes.

4. New betting markets: The Washington Stock Exchange.

About 64.2 million American households keep pets, at a yearly cost of about $34.4 billion, according to the American Pet Products Manufacturers Association.  That amounts to about $500 per family per year, and that figure is not counting pet-themed greeting cards and other ancillary pet-related products.

I suspect that the demand curve for pets is, per family, not smooth.  That is, the last pet yielded immense consumer surplus, yet the family doesn’t want to buy another pet, or even rent a pet for a week each year.

The number of pets has been rising, so by how much are market prices underreflecting the implied corresponding rise in living standards?

If people are investing more and more in "identity goods," perhaps those goods don’t have smooth demand curves either.  Endowment effects are becoming stronger, not weaker.  The very poor, for instance, can’t afford such extreme attachments to assets they might need to sell, or in the case of pets, convert to food.

How strong must this effect — the rising relative importance of endowment effects — be to generate an extra 1% a year boost in living standards?

I very much enjoyed the new book Pets in America, by Katherine C. Grier.

Brad Setser has a very good post on trade.  His conclusion:

I understand Mancur Olsen’s argument.  But to me, it seems a bit dated.  Trade now generates concentrated as well as diffuse winners and concentrated as well as diffuse losers.

CIA counterterrorism officers have signed up in growing numbers for a
government-reimbursed, private insurance plan that would pay their
civil judgments and legal expenses if they are sued or charged with
criminal wrongdoing, according to current and former intelligence
officials and others with knowledge of the program.

The new enrollments reflect heightened anxiety at the CIA that officers
may be vulnerable to accusations they were involved in abuse, torture,
human rights violations and other misconduct, including wrongdoing
related to the Sept. 11, 2001, attacks. They worry that they will not
have Justice Department representation in court or congressional
inquiries, the officials said.

Here is more.  Thanks to an anonymous reader for the pointer.

Economonitor.com.

Catch it here, edited by Daniel Klein.  It includes a discussion of freedom and economic growth, a critique of Robert Frank on positional goods, possible bias against The Economic Report of the President, economists in Sweden, and what economists believe on rail transit.

From the National Bureau of Economic Research, here is the latest on the J-curve:

The pattern of international trade adjustment is affected by the
continuing international role of the dollar and related evidence on
exchange rate pass-through into prices.  This paper argues that a
depreciation of the dollar would have asymmetric effects on flows
between the United States and its trading partners.  With low exchange
rate pass-through to U.S. import prices and high exchange rate
pass-through to the local prices of countries consuming U.S. exports,
the effect of dollar depreciation on real trade flows is dominated by
an adjustment in U.S. export quantities, which increase as U.S. goods
become cheaper in the rest of the world.  Real U.S. imports are affected
less because U.S. prices are more insulated from exchange rate
movements – pass-through is low and dollar invoicing is high.  In
relation to prices, the effects on the U.S. terms of trade are limited:
U.S. exporters earn the same amount of dollars for each unit shipped
abroad, and U.S. consumers do not encounter more expensive imports.
Movements in dollar exchange rates also affect the international trade
transactions of countries invoicing some of their trade in dollars,
even when these countries are not transacting directly with the United
States.

Here is the paper.  This asymmetry is no accident but rather stems, in large part, from the central role of the dollar as a reserve currency and a medium for invoice pricing.  When an Asian export is priced in terms of dollars in the first place, exchange rate movements lead to less pass-through.  In other words, to the extent we would see an improvement in our trade balance, from dollar depreciation, it would be vis-a-vis the countries with the highest propensity to consume more American exports.  It would not be with the countries whose exports we are most likely to consume.  This also means that we cannot in every way extrapolate European currency experience to the United States.

The lead article in the August 2006 Journal of Political Economy offers the following abstract:

We solve each household’s optimal saving decisions using a life cycle model that incorporates uncertain lifetimes, uninsurable earning and medical expenses, progressive taxation, government transfers, and pension and social security benefits.  With optimal decision rules, we compare, household by household, wealth predictions from the life cycle model using a nationally representative sample.  We find, making use of household-specific earnings histories, that the model accounts for more than 80 percent of the 1992 cross-sectional variation in wealth.  Fewer than 20 percent of households have less wealth than their optimal targets, and the wealth deficit of those who are undersaving is generally small.

In other words, most Americans are saving enough for their retirements.  The authors (John Karl Scholz, Ananth Seshardi, and Surachai Khiatrakun) stress that their data cover only the early 90s, although if anything they believe this biases their estimates downwards by missing out on later capital gains.  Here is the paper.

Notes: This result does not deny that America may face coming demographic problems for funding social programs, most of all Medicare.  But next time you read that "the U.S. savings rate is zero," think back on this blog post and on that paper.

That great sacred cow– Rent Control– is a textbook case of Economic stupidity.

Paul Krugman writing in the New York Times in 2000.

Georgia corporate pilot Bob Smith  has a soaring sideline:
helping couples join the infamous "mile-high club."  For $299, he’ll
take a frisky twosome past 5,280 feet in a Piper Cherokee 6 fitted with
a mattress.  The hour-long [TC: only?] flights out of Carrollton, Ga., (details at milehighatlanta.com) have lured couples from as far as New York.

Here is the full story.  3/4 of the flights are booked by women, and not by male partners.  Not all couples want their names on the certificate, and yes you get to keep the sheets.

Brad does offer some policy recommendations, but he leaves one out.  If one sees the need for a big sectoral shift at home, yuan revaluation is hardly the most direct policy instrument.  China is neither our leading trade partner nor the leading foreign investor in the United States.  It would have to be the case that the dollar is significantly overvalued and that market prices, not just the pegged Asian exchange rates, are all wrong.  There would be a more direct solution: boost taxes on foreign investment in the United States.  The demand for dollar-denominated assets would fall, the value of the U.S. dollar would fall, and the demand for U.S. exports would rise.  (If we are counting only American gdp, note that this tax brings revenue to the American government, unlike yuan revaluation, which raises borrowing costs and puts a burden on Wal-Mart and on the American consumer.)  Voila!

This would put both Alex and Brad in the odd position of believing that we have not enough foreign labor, but too much foreign capital.

I find it hard to accept that conclusion.  And if we had the requisite betting markets, I find it hard to believe that they would (should?) reflect U.S. economic performance as improving, contingent on such a tax hike.

I introduce a new series of posts, titled as above, just to keep you all on your toes.  And by the way, I’ve long wondered if ATM surcharges aren’t taking advantage of a consumer intransitivity of indifference…you don’t mind losing the first fifty cents but…

We estimate a structural model of the market for automatic teller machines (ATMs) in order to evaluate the implications of regulating ATM surcharges on ATM entry and consumer and producer surplus.  We estimate the model using data on firm and consumer locations, and identify the parameters of the model by exploiting a source of local quasi-experimental variation, that the state of Iowa banned ATM surcharges during our sample period while the state of Minnesota did not.  We develop new econometric methods that allow us to estimate the parameters of equilibrium models without computing equilibria.  Monte Carlo evidence shows that the estimator performs well. We find that a ban on ATM surcharges reduces ATM entry by about 12 percent, increases consumer welfare by about 35 percent and lowers producer profits by about 20 percent.  Total welfare remains about the same under regimes that permit or prohibit ATM surcharges and is about 17 percent lower than the surplus maximizing level.  This paper can help shed light on the theoretically ambiguous implications of free entry on consumer and producer welfare for differentiated products industries in general and ATMs in particular.

The core intuition is that a given ATM often has monopoly power ex post, once you are there and need the money.  Lower fees mean fewer machines but that still might be better than facing the mark-up.  Here is the paper, whack it down if you can.

Addendum: Don Boudreaux offers commentary and some whacks.

The ever-well-informed Brad Setser, who knows more about this topic than just about anyone, has a lengthy critique of my China column over at his blog.  I’m on a Manhattan street corner, just coming from the superb Grand Sichuan International (9th St., between 49th and 50th, get the potatoes with vinegar), and headed to an appointment, so this will be quick rather than detailed. 

Mostly Brad has mischaracterized my argument.  He writes that I [Tyler] believe that: "the value of the RMB has no impact on trade."  I wrote: "But even if the numbers work out so that the flow of dollars to China diminishes [TC: of course this depends on the time frame], American consumers will pay higher prices and see fewer goods from China.  Yuan revaluation is unlikely to benefit the United States, even if it does lower its trade deficit."

Brad has a great deal of useful information on the European experience.  My view is not that China should stay put on all matters of economic policy (see today’s FT for an excellent article on the internal Chinese debate); rather my argument is that the U.S. won’t do a good job micro-managing Chinese reforms.  He has said nothing to convince me, or even try to convince me, I am wrong on that fundamental point.

On most of the other points, we are not so far apart.  Brad is a great writer and international economist, and I don’t think he needs to "see red," although I am aware there remain important residual differences between us.

In gross terms, I would put the broader point this way.  The fundamental problem in the U.S., to the extent we have one, is our propensity to spend, especially given our long-run demographic position and our government’s fiscal irresponsibility.  I don’t see how pressuring a more rapid change in one set of relative prices (namely U.S. vs. China), which are likely to change anyway, will cure that ailment in a significant way.  And while the world economy is obviously vulnerable right now, if there is an explosion I expect it to come from a hitherto-unpredicted direction, rather than from a phenomenon — the possibility of a rapid plunge in the US dollar — which has been the topic of unrequited doomsaying for quite a few years now.  Keep in mind that the same models which tell us revaluation is the way to go also predicted we would be in the toilet two or three years ago.

Addendum: Here is commentary from Brad DeLong.  Here is Greg Mankiw.

A few more random thoughts after digestion of my meal: A key reason to be skeptical of yuan revaluation is that it tries to address a relative prices problem by shrinking the opportunity set facing the U.S.  That is not obviously the right way to go.  The point is not to claim that all elasticities are zero, but rather that a trade balance shift, through revaluation, really does require a loss of resources.  What fact about the world would make that the best way to go? 

Unlike Setser, I haven’t much been worried about "the short run" over the last three to five years.  But those worried about the short run, and surely Brad S. falls into this category, should be especially fearful of the short-run J curve whammy on the trade balance.  It is also the case that exchange rate pass-through is poorly understood, J curves have thwarted many a currency plan, and I have heard credible arguments that the nature of exchange rate pass-through is shifting as we debate.  Make of those what you will, but a plan to set everything right by inferring a U.S. adjustment from European data is not, in my view, a convincing policy proposal, especially when it involves shrinking the U.S. choice set, not to mention U.S. politicians who are not especially strong on either diplomacy or execution.

There is more to talk about than just food:

The trade effects of a revaluation of the yuan are unlikely to be
large, in part because many Chinese exporters specialize in assembly. 
China sends out money buying components like semiconductors and turns
them into finished goods, thereby running a trade deficit with East
Asia.  A new and higher value for the yuan would largely be a wash for
these activities.  With a stronger currency, China would have a harder
time selling its electronic goods, but this would be offset by its
greater purchasing power over the semiconductors.  It would not do much
damage to the Chinese competitive position.

The Chinese keep the yuan low, relative to the dollar, by buying up United States Treasury
securities; as of early 2006, the Chinese central bank held up to $470
billion in Treasury securities.  This huge accumulation of relatively
low-yielding assets is the investment strategy of risk-averse
bureaucrats, but it may bring longer-term benefits.  Those assets can
someday be sold or otherwise transferred to underdiversified Chinese
financial institutions.  The accumulation gives the Chinese a stake in
American prosperity and signals that the Chinese are committed to
long-term participation in the global economy.  On the American side,
the Treasury market is more liquid and the budget deficit can be
financed at lower cost.

Here is the full argument.