Category: Economics

Cannabis Emptor

When goods are prohibited, quality tends to fall because of lack of competition and legal recourse. Quality in illegal markets, however, may still beat that available from government production. Health Canada spends millions of dollars growing marijuana for distribution to patients with medical need. The government grown pot is so awful, however, that patients are returning their 30 gram bags and asking for refunds! The government certifies and advertises that their product contains 10.2% THC but independent labs report only 3% THC. Furthermore, the government pot is contaminated with lead and arsenic. “This particular product wouldn’t hold a candle to street-level cannabis,” said Philippe Lucas of Canadians for Safe Access, the group that sponsored the tests. Thanks to Eric Crampton for alerting us to this story.

The economics of diets

Meat sales are up and bread sales are sluggish. The Atkins diet tells us to dump bread, pasta, and rice, and allows us to eat plenty of meat. Could it be driving this trend? Slate examines the economic impact of diets and offers a cautionary note. Only six million people –about three percent of national population — have tried the Atkins diet. Most people are buying convenience, the growth is beef sales is centered in ready-to-serve products. By the way, sales of Krispy Kreme donuts grew last year. In case you didn’t already know, they are forbidden under the Atkins plan. Cookie and potato chip purchases are up as well. When it comes to weight gain, some economists blame sedentary jobs and cheap, readily available foods.

Addendum: Today’s Wall Street Journal reports that Krispy Kreme sales are now sagging, though keep this in perspective, the company has averaged a 63% growth in operating earnings, per quarter, over the last ten quarters.

The beast isn’t starving

I caught a lot of flak from conservatives when I wrote in an op-ed that the so-called Bush tax-cuts were a fraud. If spending isn’t cut then in the long run taxes can’t be cut either. Since spending has gone up under Bush, all he has done, I argued, is to raise our future taxes (at precisely the wrong time too given the coming fiscal problems created by demography) . Conservatives complained that I missed the strategic beauty of the Bush plan. A tax cut, they said, will keep spending down, it will “starve the beast.” Well Bush is now asking for another $87 billion to fight the war in Iraq, employment is down everywhere but in the federal government where it is higher than under Clinton, and Bush is already touting how his administration is responsible for the largest increase in Medicare in its 38 year history. Apparently, on the Bush diet you can eat all you want and still lose weight.

Globalization and poverty: a debate

The Cato Institute offers an on-line debate on globalization and poverty, here is the last installment. Johan Norberg, author of In Defense of Global Capitalism, takes on Robert Kuttner, of The American Prospect. I am closer to Norberg’s market orientation, but Kuttner gets the better of this exchange. Norberg needs to concede a clear role for government in development, in producing public goods and basic infrastructure, and emphasize that most developing countries today don’t have strong enough markets or anything close to it. That debate he could win.

Should we be surprised that the Cancun WTO talks failed?

Cnn.com and other major news sources use the word “collapse.” The rich countries won’t give up their agricultural subsidies, some of the poor countries won’t open up their investment and procurement rules.

A recent IMF Working Paper, “The WTO Promotes Trade: Strongly but Unevenly,” by Arvind Subramaniam and Shang-Jin Wei (not on-line) provides an account of the longer history. In the early days of WTO (GATT), developed nations used the institution to reduce their average tariff barriers from 27 to 4.5 percent. Since that time the institution grew and deteriorated in quality: “our result is a more damning indictment of the WTO than even that in Rose [the link is from me, of course, not the authors of the paper]…He found that membership in the WTO had no significant effect on trade. We find that membership has a significantly negative effect on trade…”

It is the developing countries that drive the negative result. The authors emphasize that the result is not statistically robust, but in any case this is hardly a ringing endorsement of WTO.

Addendum: The paper is now on-line.

Sweden rejects the Euro

The margin is decisive, so far it looks like 56 percent against, 42 percent for, read here for one early account of the voting.

It is a tough call, but I think the Swedes did the right thing. Mostly the Swedes feared that the fiscal discipline of the EU will curtail their welfare state, but I don’t think this should have been the main issue. The Netherlands, another small country, has created a generous welfare state (albeit with some spending cuts), prosperity, and relative fiscal responsibility, all under the rubric of the EU. In the long run it is hard to see the EU curtailing Swedish spending more than international capital markets and other competitive pressures would. And it remains to be seen how binding the EU fiscal requirements will prove, after France is violating them.

What is really the advantage if Sweden had adopted the EU? Price competition would have become more intense, as buyers would have an easier time comparing prices across countries with only a single currency unit (admittedly this violates various economic theories, which suggest people “see through” the monetary unit, but it nonetheless seems to be true, noting that in the short run prices get bumped up before later falling). That counts as a real gain, but on the other side the Swedes would have given up the ability to control their own monetary policy.

The Swedes have a history of pursuing a monetary policy independently of Western Europe. The Swedish depression of the 1930s was milder than for the rest of Europe, in part because Sweden broke with gold, devalued, and avoided a disastrous deflation, for one treatment read here.

Supposedly the Swedes don’t now have the “proverbial seat at the table,” but as more countries adopt the Euro, how much is this worth anyway? They decided to keep a whole table of their own, albeit a much smaller one. Does anyone really know how the European Central Bank will operate over time, as more members join, or if a crisis hits? Some critics charge that foreign investors will now stay away from Sweden, due to exchange rate volatility, that would be one factor on the side of Euro adoption.

Perhaps it will prove most important that the Swedish government supported the change, and voters didn’t cooperate. Swedes usually have great trust in their government, more than we are accustomed to seeing in the United States. This may signal a break between Swedish elites, who often have closer ties to Europe, and many Swedish voters. The consequences of today’s vote will likely include more than just macroeconomic policy.

Liberalization of capital markets

How much does liberalizing capital markets spur economic growth in developing countries? It depends on what kind of country you look at, according to a recent paper by Kenneth Rogoff, formerly chief economist at the IMF, also Professor at Princeton.

He suggests that financial integration should be “approached cautiously.” Many of the benefits kick in only after countries have achieved a particular level of financial integration. Improvements in integration, starting from low levels of integration and development, often have increased the volatility of consumption. Trade integration is associated with faster increases in health and infant mortality, but financial openness is not.

Rogoff sees four problems with financial integration for poorer countries: investors engage in herd behavior, investors engage in speculative attacks on unsound currencies, the risk of contagion, and governments may use financial globalization to overborrow. Financial integration can, in principle, bring great benefits but it is not always used responsibly.

We should take these results seriously. Rogoff is a highly respected economist and he has no starting bias against market globalization. Read his open letter to Joseph Stiglitz, which offers a good statement of his overall perspective on global markets.

Did you know that Rogoff had an earlier career as a chess grandmaster? Read the story he once wrote for Seventeen magazine on this time in his life.

Did Mussolini make the trains run on time?

Not according to Urban Legends at www.snopes.com. Consider this:

The Italian railway system had fallen into a rather sad state during World War I, and it did improve a good deal during the 1920s, but Mussolini was disingenuous in taking credit for the changes: much of the repair work had been performed before Mussolini and the fascists came to power in 1922. More importantly (to the claim at hand), those who actually lived in Italy during the Mussolini era have borne testimony that the Italian railway’s legendary adherence to timetables was far more myth than reality.

Two interesting blogs

On corporate law and governance, check out the new Corporation Law and Economics, with occasional discussions of wine as well. Stephen Bainbridge, main blogger, is professor of law at UCLA.

I also learned of a blog on neuroeconomics. Neuroeconomics is a new “movement,” I would define it as trying to better understand economic choice by looking inside the individual brain. Neuroeconomists take the Austrian economists literally in viewing choice as a process. My colleagues Kevin McCabe and Dan Houser are central to this research, they spend much of their time with brain scanners, trying to see which parts of the brain are used for which kinds of economic decisions. Neuroeconomics is a new field, and spans the disciplines, which makes a blog especially useful.

Surprise! Fox News is Fair and Balanced!

Accusations of media bias are common but are typically based upon nothing more than subjective standards and anecdote. A brilliant new paper by Tim Groseclose (GSB Stanford, currently visiting GMU) and Jeff Milyo (U. Chicago, Harris School) pioneers a more promising approach. Since 1947, the interest group Americans for Democratic Action (ADA) has tracked how Senators and Represenatives vote on key issues and they have used these votes to rank politicians according to their liberalism. In the 2002 session, for example Ted Kennedy received an ADA score of 100 and Phil Gramm a score of 0. Political scientists are familiar with ADA scores and have come to rely on them as a measure of ideology.

Groseclose and Milyo have found a way to compute ADA scores for media outlets as if they were politicians. What they did was to examine the Congressional Record for every instance in which a politician cited a think tank. They then did the same thing for newspapers, network news shows and other media outlets. By matching newspapers with politicians who had similar citation records they can impute an ADA score for the media outlet. Joe Lieberman, for example, has an ADA score of 66.3. Suppose that in his speeches he cites the Brookings Institution twice as much as the Heritage Institute. If the New York Times has a similar citation style then the New York Times is assigned an ADA score of 66.3. (The method is slightly more complicated than this but this gives the right idea.) Note that Groseclose and Milyo do not have to determine whether the Brookings Institution is more liberal than the Heritage Institute all they need to know is that the Times has a similar citation style to Lieberman.

Ok, what were the results? It turns out that all of the major media outlets, with the exception of Fox News: Special Report are considerably more liberal than the median member of the House over the 1993-1999 period. Moreover, although Fox News: Special Report was to the right of the median house member it was closer to the median member than were most of the other media outlets. (Interestingly, all of the liberal media outlets were less liberal than the average Democrat and Fox News is less conservative than the average Republican – thus there is a sense in which all media outlets are less biased than is the typical politician.) Here are the ADA scores of various media outlets along with some comparable politicians.

Joe Lieberman (D-Ct.) 66.3
New York Times 64.6
CBS Evening News 64.5
USA Today 62.6
NBC Nightly News 62.5
Los Angeles Times 58.4
Ernst Hollings (D-SC) 56.1
ABC World News Tonight 54.8
Drudge Report 44.1
Arlen Spector (R-PA) 44.0
House Median 39.0
Senate Median 36.9
Olympia Snowe (R-Me) 36.0
Charlie Stenholm (D-Tex) 29.3
Fox News Special Report 26.4

The next Fed chairman?

The popular press has begun to mention Martin Feldstein as a possible successor to Alan Greenspan. The other listed candidates, Stanley Fischer and Larry Summers, probably do not have sufficient “right-wing credentials” to get the job. Feldstein offers some recent thoughts on monetary policy. He also endorsed the Bush tax cuts, arguably a sign that he is angling for the job. Feldstein tends to favor targeted fiscal incentives in lieu of traditional Keynesian remedies. Overall he commands the respect of his peers and has had significant administrative experience in building up the National Bureau of Economic Research. But it is hard to tell what kind of monetary policy he would pursue, and how strong an independent stance he could define, if he held the office.

Productivity puzzles, or are we seeing a miracle?

Here is the ever-insightful Brad DeLong on why the current productivity and employment data are so hard to understand. Read Brad here and here (a longer, more technical post) for more context. The key point is this: many companies are prospering, and increasing absolute output, even as they are laying off workers. The implied numbers for productivity increases, per remaining worker, are simply astounding.

Why do intellectuals oppose capitalism?

This essay by the deceased Robert Nozick has a few years on it, but I never knew there was an on-line version. It is the best piece I know on why so many intellectuals oppose capitalism. See my earlier blog post on the inability of some researchers to find a single registered Republican within some departments of MIT and other universities (of course Republicans commonly fail capitalism but I suspect that is not the objection of the MIT faculty). With thanks to Cato, Newmarksdoor, and BrianMicklethwait.com.

Here is one excellent sentence of many:

“The intellectual wants the whole society to be a school writ large.”

Bhagwati criticizes the WTO

Read this on how the WTO is becoming a forum to regulate the behavior of the poorer nations, rather than bring free trade. Eminent trade economist Jagdish Bhagwati of Columbia University calls WTO a “sham,” and a “legal…straitjacket of do’s and don’ts…”

Here is a money quote:

“The developing countries are scared out of their wits now,” Bhagwati says, “because they don’t understand what they’re being forced to sign. The agreements are going way outside the trade issues and involve a helluva lot of things like your access to oil, your access to intellectual property and capital controls…. When I looked through the investment agreements, it was worse than reading my insurance policy for the fine print. I couldn’t make anything out of it, and I’m a reasonably informed person, a pretty smart economist as they go.”