Category: Economics

The economics of carnival culture

Have you ever been to Trinidad? The steel bands (“pans”) start practicing sometime before Christmas, and the pan competitions peak at the time of Carnival, which we call Mardi Gras. Serious pan music is otherwise hard to find on the island, although we do see many smaller performances for tourists throughout the year.

We find a similar pattern in Brazil. The production of samba culture has an especially pronounced seasonal business cycle, again centered around carnival.

Carnival culture appears to have started for religious and cultural reasons, yet it persists more in some places rather than others. Why bunch your cultural production so tightly into one part of the year?

Carnival culture may prove efficient when a large number of the customers are tourists, who journey from other countries, or other regions, to an urban center. A high fixed cost of the journey implies it is better to bunch cultural production at one time of the year, to lower transport costs.

The significant presence of amateurs in production also encourages carnival culture. It is widely understood in Trinidad that many workers will take off extra time to practice the pans. The relevant time of year is an accepted social convention, plus everyone takes off at the same time, so the pan orchestras can practice together. After carnival, everyone is expected to go back to work at the regular pace.

The use of national competitions to market performers also increases the efficiency of carnival culture. When everyone competes at the same time, on a set of common stages, it is easier to declare a “winner,” and indeed carnival cultures usually emphasize such competitions and hand out national or regional prizes. The prospect of being a winner is then used to drum up local corporate support. If a company backs a carnival winner, it receives significant favorable publicity.

So enjoy your Mardi Gras today!

By the way, classical music has survived as a truly popular music only in Trinidad and Tobago, largely because it is played on the steel pans at Carnival competitions.

Outsourcing: an extreme scenario

Imagine a future where India has billions of people, they are all as productive as American workers, and they all will work for a penny a year (forget the possible contradiction between the last two assumptions).

Or imagine a nanotechnology machine that can produce the world’s output, and then some, for a nickel. If you wish, take this one step further. The machine produces robots, which compete with human labor, and cost only a penny a year to maintain.

The economics of outsourcing resemble the economics of technical change. Advanced robots would put many people out of work, just as computers have eliminated many jobs. Yet few people complain about this scenario, it is somehow emotionally more resonant to complain about “foreigners taking jobs” than to complain about “machines taking jobs.” Of course the empirical reality is that technology takes away (and also creates) many more jobs than do foreigners.

Now I am not going to give you the line “in the long run robots would create more jobs than they destroy.” For most plausible parameter values that is in fact true. But let us say that robots, or foreigners, could produce all of our current output for a mere nickel. Total wages, of course, could not exceed a nickel in such a scenario. Since this is below subsistence, no one would work for money (some wealthy capitalists might still work for fun).

If you are truly worried about outsourcing, you must have in mind something in this direction, albeit with less extreme parameter values. But as a perverse kind of reality check, consider the extreme case, how bad would it be?

National income would be enormous, the catch is that virtually all of it would go to capital. But capital is very very cheap. You need only save a nickel to command the equivalent of today’s global output. How many poor Americans today cannot save a nickel?

If you fear radical outsourcing you also should favor privatization of social security, with investment of the funds in the stock market. (Personally I am skeptical of the idea, but I don’t fear radical outsourcing either.) This would make us all very very wealthy.

Furthermore you should buy stocks immediately. If you are not devoting your portfolio to stocks, as rapidly as possible, and you fear radical outsourcing, you probably hold inconsistent views.

And of course you shouldn’t criticize the fiscal policies of the Bush administration, or call for a tax increase, if you think the stock market will skyrocket in this fashion.

Now I don’t ever expect to see parameter values so extreme. But neither do I expect that outsourcing will lead to a net destruction of jobs. The worrywarts wish to have it both ways. Outsourcing will be so significant as to take away American jobs, but not so significant to bring large benefits through the ownership of capital.

Link added: For this post I am indebted to conversations with Robin Hanson, and his paper on a robot economy.

Facts about economics Ph.d. students

1. The number of economics Ph.d degrees awarded in the U.S. fell from 1008 in 1996 to 930 in 2001.

2. The number of Ph.d degrees awarded to American citizens fell from 430 in 1996 to 350 in 2001. This number has not been so low since the Johnson administration.

3. 76 percent of newly minted Ph.d. students had undergraduate degrees in economics, 4 percent had undergraduate degrees in mathematics, 5 percent in engineering. No other undergraduate major accounts for more than four percent of the sample. (Those figures are taken from a representative but incomplete sample of respondents.)

4. Females account for 28 percent of graduating Ph.d. students. Female students are most strongly represented in labor economics, economic development, and health, education, and welfare economics.

5. The median “time to degree” is 5.4 years. The range is from 2.7 years to 29.7 (!) years.

6. 56 percent of graduating Ph.d. students wrote a “three essays” thesis rather than a single block work. This is estimated to save more than half a year’s time.

7. Only four percent of finishing Ph.d. students received no financial aid whatsoever.

8. The unemployment rate for graduating Ph.d. students is projected at 2.1 percent.

9. 23 percent found jobs outside the U.S., down from 31 percent five years earlier. The biggest foreign employers are, in order, Canada, South Korea, the U.K., and Brazil, Taiwan, and Turkey.

10. Only six percent of Ph.d. graduates in economics say they do not like their jobs. The median salary is $74,000, again noting that not everyone responded to the questionnaire.

The bottom line? It’s a great life. Sign up now.

Bryan Caplan suggests that economists’ wages are relatively high for the following reason. Few people, as a teenager, say to their parents: “I want to be an economist when I grow up.” Yet many people wish to be writers, astronauts, professional athletes, scientists, psychologists, and so on. I don’t know of any situation comedy where the lead star is an economist. So our relative lack of popularity keeps the supply low and our wages relatively high.

Here is the full report, it has many more interesting facts. Thanks to Newmark’s Door for the pointer.

Where are the new jobs?

Daniel Drezner ably summarizes the ongoing debate in the blogosphere, covering Virginia Postrel, a critical response from Brad DeLong, and others.

Virginia writes:

My interest was in the question, Where will new jobs come from? A lot of non-economists are genuinely afraid that in the future there will be no jobs, or that there will be no jobs for people without large amounts of education…From other research, I know of a number of aesthetic professions where jobs are growing rapidly. I found that in every such category the BLS counts were way under or, at best, obscured in categories dominated by losses in traditional manufacturing (e.g., paper mill workers vs. stone fabricators).

Outsourcing and dining?

White House Council on Economic Advisers chief Gregory Mankiw was scalded last week for saying that sending jobs overseas was a good thing for the economy. So on Tuesday, he tried to, as they say on the Hill, revise and extend his remarks at a luncheon with economists. The restaurant? Chinatown Garden on H Street NW.

The Bombay Club was booked?

Here is the link. I propose that all opponents of outsourcing be forced to eat American food for one month straight.

The Ricardo effect in Haiti

The civil war in Haiti is intensifying, to the detriment of virtually everyone. Many American observers do not understand how poor Haiti is, how few good institutions it has, and how much it is currently hovering on the brink of a true disaster. The new blog HaitiPundit.com offers regular updates.

One of the most memorable accounts I read of Haiti concerned the time when a ferry sank off the coast, leading to hundreds of deaths (this has happened more than once, I might add). Oddly enough, a large number of employees were on hand to help bring in the bodies. Normally when a boat comes to shore it stops at a dock. Haiti could not afford the dock, so a large number of people are hired to wade out into the water and carry the passengers back to shore on their shoulders.

No, flying around the island isn’t safe either, nor is driving. Here is a short explanation (scroll down a bit) of the Ricardo Effect, which notes that capital is substituted for labor at higher wage rates.

The rise of barter clubs

Here is an update on the current surge in barter clubs:

“I live my life on barter,” says [Dale] the spunky, 5-foot-3-inch consummate deal-maker, who is part of a growing network of people working and playing in a largely cashless universe.

Dale, 57, runs Barter Advantage, one of hundreds of exchanges around the country that have emerged in recent years that take the age-old concept of barter – neighbors swapping chickens for a hog, for instance -to new, sophisticated, IRS-approved heights.

Instead of simple swapping, the exchanges offer what’s called round-robin trading, allowing members to barter their products and services for credits that they can later spend on whatever they want – from travel to office supplies to dental work – as long as it’s offered within the network.

Here is a previous post on the benefits and limits of barter clubs. Here is a previous post on the enhanced liquidity of gift certificates.

Thanks to Paul Jeanne for the pointer.

Addendum: Here’s a way to barter your books and music, thanks for Daniel Akst for the tip.

Can’t these guys take a joke???

Remember this story?

A 23-year-old student with no knowledge of economics bluffed his way into a trip to China to teach a prestigious course on the subject at Beijing University.

Matthew Richardson, in his fourth year at Oxford University, only gave up after nine hours of lectures, when he ran out of material from pages ripped out of an A-level text book.

It now seems the economist imposter is getting in trouble. His teachers, his dean, and his hosts are upset, BBC uses the word “furious” to describe the Chinese. How much less angry would they be, had they caught the guy up front? Even the interpreter was no more than suspicious. His college might discipline him for being absent during term (huh?), in this age of corporate scandals perhaps they should award him an MBA instead.

Thanks again to Ken Hirsch for the original pointer and the follow-up.

Q&A with Matthew Rabin

Matt is a MacArthur fellow and one of America’s brightest economists. He is best known for exploring the idea that human choices are not fully rational. I also like his argument that if you exercise too much moral suasion against a person, rather than heeding your opinion the person will simply stop listening. Read an interview with Matt here. At the bottom of the interview you will find links to his working papers. Thanks to www.2blowhards.com for the pointer.

Medicaid and the High Price of Pharmaceuticals

The price that Medicaid pays for pharmaceuticals is based upon the price in the private market. When Medicaid prescriptions are only a small portion of the total market this works reasonably well at avoiding the twin problems of monopsony (Medicaid pushing prices so low that R&D incentives are curtailed, as has happened in the vaccine market) and monopoly (pharmaceutical firms jacking prices up above fair market value).

But in some areas, Medicaid accounts for a large fraction of the market. The Medicaid share for HIV drugs, for example, is more than 50% and in antipsychotics the Medicaid share is more than 75%! (I have cribbed from this paper by Mark Duggan.) In this situation it makes sense for pharmaceutical companies to raise prices – they lose customers in the private market but this is more than made up for by the increase in prices that they can charge to Medicaid. As a result, average prices for HIV and antipsychotic drugs are higher than for any other drug categories.

The Medicaid pricing formula can create a vicious spiral. Medicaid pricing causes prices to rise which pushes more people into Medicaid thereby shrinking the private market and increasing the incentive to raise prices yet further. To add insult to injury, high pharmaceutical prices are then said to demonstrate why we need more government involvement.

Why have so many Americans left the work force?

Since 2001 nearly two million Americans, between the ages of 25 and 54, have left the workforce. This is why the unemployment rate has been falling, but the number of people with jobs is not showing comparable improvement.

Why leave the work force? A recent (Tuesday, February 17, “More Americans are Leaving the Work Force”) Wall Street Journal article suggests several answers:

1. More people are taking early retirement. Interestingly, workers over 55 are reentering the work force, the only group to show significant net increase. So these early retirements must be early indeed, or could involve a temporary willingness to live off severance pay.

2. Educated black women are leaving the work force in greater numbers. Some are losing their jobs. Others are returning to school for an advanced degree. In any case this group shows one of the largest participation declines, from 82.3% in 1998 to 76.3% in 2003.

3. Many people, especially women, are leaving for labor force for reasons of disability. Between 1999 and 2003 applicatons for federal disability insurance benefits rose from 1.2 million to 1.9 million. It is unlikely that more people are being injured. Employers are less willing to offer flex-time or part-time work during hard times, which causee disability claims to increase. See Alex’s post Paying for Disability for more.

4. White collar employees, hit by downsizing, are returning for additional education. The new trend is for college graduates to return to community colleges for retraining.

The bottom line: I don’t doubt any of these hypotheses or estimates. But I still don’t understand why the number of employed Americans is recovering so slowly. On the bright side, parts of #1, #2, and #4 will later kick in as productivity benefits, or reflect a lesser need to work.

Markets in everything, continued

How about this?

ParkingTicket.com [is] the first Internet company to help drivers contest parking tickets online…”It’s such a unique concept — fighting tickets for you,” says Austin, for whom the service was a godsend, given that she averages 5 to 10 parking tickets a year. “Some of these tickets are unfounded and you start getting a little mad every time you write a check to the city.”

On the ParkingTicket.com Web site, clients who get tickets in the District, New York or San Francisco are guided through 30 to 50 questions about the circumstances of their tickets — whether the meter was broken, what the parking sign said, did they have a medical emergency, etc. They transfer details from the ticket to a look-alike online version. Then they key in their credit-card data to pay for the service — if the ticket is dismissed. No dismissal, no charge.

ParkingTicket.com’s computers analyze the data in search of grounds for dismissal. If there are none, clients get an e-mail recommending that they pay the ticket promptly. It’s free advice. But if the computer finds a loophole, technicality or error, or a compelling reason to contest, the client is e-mailed a customized dismissal-request letter, with instructions on what proof to attach and where to mail it.

Because her car was disabled, Austin’s ticket was dismissed. ParkingTicket.com charged her half of what the ticket would’ve cost her — $25. Case closed.

The District of Columbia takes in more than $100 million in parking tickets each year, a major source of city revenue. The head of ParkingTicket.com claims that seventy to eighty percent of those tickets should be dismissed for technical or legal reasons.

Here is a previous installment of Markets in Everything, try this one too.

Outsourcing medical experimentation

India is emerging as a new proving ground for pharmaceutical trials. Clinical trials in India typically cost 50% to 60% less than in the United States. The Indian population is genetically diverse, labor costs are much lower, the number of people is large, many Indian hospitals keep good records, and many diseases are prevalent in India. Furthermore many Indians are “drug naive,” meaning that they are not taking other drugs that could influence trial results. The Indian government, however, will not allow testing for basic drug safety, out of fear that Indian nationals would be viewed as “guinea pigs” for the West.

The bottom line: Medical outsourcing will lower drug development costs and save lives.

The full story is from Thursday’s Wall Street Journal, “India Emerges as New Drug Proving Ground,” Marketplace section. Here is an earlier MR post on medical outsourcing.