Category: Economics
Blog dare
I dared Bryan Caplan, our resident non-bleeding heart libertarian, to blog today’s lunch conversation. The result is called Let Them Get Roommates. His best fact is:
[the] poorest 25% of Americans have more living space than the average European.
His bottom line is:
Before anyone starts collecting welfare, it is more than fair to ask them – for starters – to try to solve their own problem by taking on some roommates. Is it beneath their dignity to live like college students? I think not.
Addendum: Several of you have asked what is my point of view. I worry about the idea of a welfare bureaucracy "residency police." And the general cost of welfare — as opposed to broad-based entitelments such as Medicare — is relatively small. So I would not push the button on this one. I also would fear the symbolic connection to workhouses and the like.
Complementary Goods
In the box with my TaxCut software, a coupon for Prilosec.
Does trade with animals remedy market failure?
…the externalities in these problems might be remedied if animals can trade with humans or offer contingent rewards for better treatment. A farm animal might offer affection, for instance, if made a pet. If the farmer knows he can expect some benefit of this kind, he will be more likely to keep more animals in the pet sector.
The idea of animal trade is not as absurd as it may at first sound. Even if the animal does not understand contingent rewards, a disposition towards loyalty may cause animal behavior to mimic a consciously trading animal. (Animals that co-evolve with trading animals, such as dogs co-evolving with humans, may themselves develop trading characteristics, even if they do not trade consciously.) For this reason, the allocation of dogs may show greater efficiency than the allocation of less intelligent and less loyal animals. Buying a dog comes bundled with a credible (?) precommitment of good behavior from the animal, whereas buying a lizard does not. Even within the category of dog, some breeds seem able to precommit to good behavior (German shepherds?) whereas others do not (Irish setters?). On the side of the owners, the agreement may be self-enforcing. The owner of the pet may "send the animal to the glue factory" if the animal misbehaves or fails to deliver enough surplus to the owner.
Even if we buy into the basic idea of animal trading, this mechanism will not solve most of the institutional failures we observe in the real world. If we have too many animals in the farm sector, for instance, remedying this problem would require the farmer to trade with farm animals. Most farm animals find it difficult to signal that they would be docile and loving pets, if only they could be brought inside the house. And the very best sectors, such as family petdom, have only limited room for a large number of animals, even at zero price. Or if we think of reallocating animals from a worse farm sector to a better farm sector, it is not clear what the animals can offer the farmer in exchange for being sent to the better sector. The farm animals are already exploited to maximum yield. The animal might try to signal greater cooperativeness on the farm, but under many forms of factory farming animal cooperativeness is not required. The animals are kept in large halls, fed, and simply slaughtered once they reach a certain age. In short, even if animals can trade, often they have nothing to offer.
That is from my paper-in-progress on animal welfare; I must submit it very soon. Here is my previous post on that paper.
The War on Drugs
Becker and Posner both argue against the War on Drugs. Becker writes:
After totaling all spending, a study by Kevin Murphy, Steve Cicala, and
myself estimates that the war on drugs is costing the US one way or
another well over $100 billion per year. These estimates do not include
important intangible costs, such as the destructive effects on many
inner city neighborhoods, the use of the American military to fight
drug lords and farmers in Colombia and other nations, or the corrupting
influence of drugs on many governments.
The best economics piece on this issue is Drug War Crimes a short book by Jeffrey Miron published by Independent Institute where I am the director of research. Miron demonstrates that the war on drugs greatly increases the violent crime rate (just as it rose during alcohol prohibition) and that the policy is not very effective in reducing consumption.
One interesting reason why the drug war reduces consumption less than people imagine is that prohibition reduces some costs. Drug sellers, for example, do not pay social security taxes for their employees, they do not follow minimum wage laws and they do not obey costly FDA regulations. On net prices are still pushed up by the threat of prosecution but the lack of taxes and regulations is a countervailing factor.
Fab labs
Fab labs are going to rock the world economy like no technology has since the advent of the internal combustion engine. People wonder about the future potential of the Internet – this is a big part of it.
At first, fab labs will be a novelty. They will be hailed as a way for U.S. manufacturers to compete with cheap overseas labor. For the most part manual labor will be eliminated altogether. These first fabricators will be large machines capable of a narrow range of manufacturing. Consumers will be happy with the new goods, mostly plastic toys at first, cheap and marked "Made in America." The Chinese will grumble.
Then some electronics manufacturer, perhaps even a Japanese firm like Sony, will begin single-step fabrication of electronics in factories close to the markets – often right here in the U.S. These electronics will be cheap and tough. The toughness is fortunate because they won’t be repairable. They will be a solid piece of plastic with the electronics embedded within. The electronics will be embedded, printed really, within the plastic like another layer of ink on a page. Again, consumers will be happy.
Around this time a large home-building operation will start fabricating homes. The homes will be compared to Henry Ford’s Model T. A three-man crew will be able to run a fabricator capable of producing a completed home within three days. The homemaker will run three shifts so that the fabricator can operate night and day.
Homebuyers will love these new cheap homes. Homeowners will grumble as home prices dip.
But the real shakeup will begin when some enterprising computer firm offers the first home fab lab. It will connect directly to the computer and look like a large printer. But it will also "print" solid objects. The first models will be capable of fabricating simple things. Manufacturers will laugh nervously at these first models. "Who wants to pay $5,000 to wait 48 hours to print a toothbrush?" they will ask. And they’ll be right. At first just a few nerdy enthusiasts will have them. But they’ll begin writing and exchanging fab plans.
That whoosing sound you’ll hear will be money flying out of the manufacturing and distribution sectors into computer companies (and elsewhere). The home fab labs will get cheaper, faster, and more capable.
And the file sharing black market will grow by leaps and bounds. There will be congressional hearings as companies like Apple and Motorola complain that their intellectual property, the plans for iPods and telephones, are being cloned or just flat stolen and posted on the Internet. There will be efforts to outlaw or limit these devices. People will be jailed for fabricating illegally powerful new fab labs. Others will go to jail for intellectual property theft. But consumers will demand better and better fab labs. Ultimately the majority will rule.
We’ll get the fab labs, but intellectual property theft will be prosecuted more and more seriously. Other types of petty theft will become less common. Why shoplift when you can steal the fab plans for the Playstation 5 off some obscure website or file sharer? File sharing will be heavily policed, but the black market will always be with us.
There will be other changes. Brick and mortar retail stores will be converted to public spaces or abandoned. Some public spaces will be restaurants, coffeehouses, clubs, bars, and churches. But multi-use space will be in increasing demand as connectivity tools allow easy coordination of impromptu events.
Here is the whole post, courtesy of The Speculist.
My puzzles: Say this were true. What general investments should you make? Would we expect real interest rates to rise or fall? The growing wealth of the future suggests that the marginal utility of future dollars will be very small. That suggests high real rates of interest (intuition: future dollars aren’t worth so much, so you need a high return to "deliver" dollars into that period). That being said, time preference would be relatively low, given higher wealth. The average product of capital would be high but how about the marginal product of capital? Capital would be so plentiful you might do very trivial things with it. When Western economies were relatively stagnant, were real rates of interest higher or lower?
Roland Fryer, Harvard economist, on race
I am headed out the door to the Salvador Dali exhibit in Philadelphia; supposedly it rehabilitates his often rather sloppy work. In a rush, I offer you today’s New York Times article on Roland Fryer, the 27-year-old African-American Harvard economist who is studying race. Stephen Dubner — Steve Levitt’s co-author on Freakonomics — wrote this excellent piece, which is worth printing out and reading in its entirety. Here is an alternative link, if the first one doesn’t work. Here is Alex’s earlier post on Fryer, which deals with the effectiveness of buying grades with cash.
Markets in bunny lives?
Here is the gruesome side of the Coase Theorem:
Toby is the cutest little bunny on the planet. Unfortunately, he will DIE on June 30th, 2005 if you don’t help. I rescued him several months ago. I found him under my porch, soaking wet, injured from what appeared to be an attack from an alley cat. I took him in, thinking he had no chance to live from his injuries, but miraculously, he recovered. I have since spent several months nursing him to health. Toby is a fighter, that’s for sure.
Unfortunately, on June 30th, 2005, Toby will die. I am going to eat him. I am going to take Toby to a butcher to have him slaughter this cute bunny. I will then prepare Toby for a midsummer feast. I have several recipes under consideration, which can be seen, with some pretty graphic images, under the recipe section.
I don’t want to eat Toby, he is my friend, and he has always been the most loving, adorable pet. However, God as my witness, I will devour this little guy unless I receive 50,000$ USD into my account from donations or purchase of merchandise. You can help this poor, helpless bunny’s cause by making donations through my verified PayPal account by clicking on any of the Donate buttons on this site, or by purchasing merchandise at the Savetoby.com online store.
So far the guy claims (it appears to be verified but who knows?) to have received over $18,000, here is the site. My advice, by the way, is not to send the guy a cent. Here is the guy’s hate mail. Here is the Washington Post coverage. And while you might be appalled (or is that the point?), keep in mind that most of you do in your versions of Toby without offering a reservation price at all.
Thanks to Mitch Berkson for the pointer.
Addendum: Here is an argument that the site is a hoax.
Post for capital theory geeks
Bryan’s central argument is the following:
In the modern world, the typical person gets richer in the typical year. Once again, this gives even perfectly patient people a reason to increase their demand for current consumption. Imagine you are going to inherit $1,000,000 next year. According to the law of diminishing marginal utility, you would want to increase your consumption now when the marginal utility is high, and pay for it by cutting back your consumption in the future when the marginal utility is low. No time preference story need apply.
I would put it differently. The argument for positive interest rates does not require "pure time preference," but it does require assumptions about the intertemporal substitutability of consumption. Diminishing marginal utility, in the classic sense, is defined at a single point in time. But how do differing marginal utilities of consumption vary across time? How does my two millionth dollar next year compare to my one millionth dollar today (Steve Miller asks the same)? This variable is distinct from either classic time preference or classic diminishing marginal utility. For Caplan’s argument to work, we must assume that consumption tomorrow is a relatively close substitute for consumption today.
So the Austrians are correct that we must consider "preferences across time" as a broad category behind the phenomenon of interest. That being said, the intertemporal substitutability of consumption is closer to Irving Fisher’s notion of time preference as a marginal allocation than it is to Mises.
Why does all this matter? There is no quick, easily bloggable explanation. But to race ahead to the conclusion, this extra dimension of preferences offers us some hope in explaining apparent anomalies in equity returns and market pricing of debt securities (though here is one critique). And here are some implications for the conduct of monetary policy.
Intertemporal consumption involves local complements, not substitutes, when habit formation (this link is for Bryan) is sufficiently strong. If you would like a fun exercise, try to figure out what this implies for the term structure of interest rates in a world with zero time preference…
And if you don’t already understand what this post is about, don’t bother trying to learn.
Markets in everything
How many times have you had a deer head ready to go and then realize it had a pair of feet to go with it? Well now, with Van Dyke’s freeze dried deer feet you can always have a few on hand and ready to go. Keep a few mounted on a panel in your show room and make a little extra income without all the work. These beautiful whitetail feet come ready to go. Simply install a piece of 1/4" threaded rod and attach to any panel. Available in three sizes, these will certainly be a real timesaver and moneymaker for your shop!
Here is the link, with photo, and thanks to Elizabeth Childs for the pointer. Try this one too.
Steve Levitt’s Freakonomics
What five terms in a housing ad correlate with higher prices?
1. Granite
2. State-of-the-Art
3. Corian [read here, I didn’t know what it was either…]
4. Maple
5. Gourmet
And what correlates with lower prices?
1. Fantastic
2. Spacious
3. !
4. Charming
5. Great neighborhood
In economics language, it is the costly signals which carry real value. You use general words when you have nothing better to say, and remember that for next Valentine’s Day.
The list is from the new Freakonomics: A Rogue Economist Explores the Hidden Side of Everything [you can pre-order, Amazon lists May 1 but it hits the stores April 12], by Steve Levitt and Steven Dubner. Imagine the best of Levitt put into readable form by an excellent journalist. When it comes to the popular exposition of contemporary economic research, this book is a milestone. Why do drug dealers still live with their moms? How do we know that sumo wrestlers cheat? Here is Alex’s previous post on Levitt and names and race. Here is my previous post on Levitt and teacher cheating.
The bottom line in one sentence: "People lie, numbers don’t."
New Econoblog on WSJ.com
Max Sawicky and I square off on taxes and spending, here is the link. Here is one short bit from Max:
The other connotation of "surrender" here is surrender to the market, or to the fates. It is surrender to amorality, since market outcomes have no positive ethical qualities. Choices are determined by endowments, and endowments — the wealth and social status resulting from the accident of birth — are a matter of pure luck.
Addendum: Sawicky says impossible, Greenspan says inevitable.
Addendum II: here is the WSJ.com forever permalink, the one above expires in thirty days.
What are the macroeconomics of depopulation?
Few if any wealthy countries are breeding fast enough to replenish their populations without immigration. So Matt Yglesias asks about the macroeconomics of population decline: how different would things be?
First we must distinguish between an aging population and a smaller population, although outside of wartime the two usually go together. Most people who die are old, and most people, when they are born, are quite young (duh).
An aging population brings dissaving, slower growth, less innovation, and a worsening of the government’s fiscal position. Whether the stock market adjustment means ongoing lower rates of growth, or a one-time adjustment of prices is a complicated issue (I’ll bet on something in between). The biggest question is whether the economy is throwing off enough surplus to buy off the relevant interest groups and keep growth relatively untrammeled for the next generation. The Western European economies are running a huge test of this proposition but so far they are failing.
That all being said, we must keep in mind the relevant alternative. If it is more young people, great. If it is shorter lifespans, give me aging.
A smaller population will bring lower land prices and lower aggregate values across the board. I don’t worry much about the transition path, given how slowly the changes usually come; plus monetary policy can make up for some of the nominal rigidities. When it comes to assets such as land, it is again complicated to what extent we will see ongoing lower rates of return and to what extent we will see one-time adjustments in prices. (Ask what is anticipated when, how liquid the market is, whether you can
sell short, whether the asset has carrying costs, and whether anyone must own land for consumption reasons in the interim, while prices are falling.)
Small populations can in principle do quite well; just look at Singapore or Ireland. Free resource movement will allow the region to reap increasing returns at the world level. That being said, the biggest drawback of a smaller population is the brute fact that you simply have fewer people around. To me that is a tragedy of foregone opportunity.
The bottom line: At least for countries with reasonably well-functioning institutions, we should be happy when the birth rate is higher.
Branding countries
Tony Blair recently established a Public Diplomacy Strategy Board, an outgrowth of his earlier ”Cool Britannia” campaign, to improve perceptions of the country abroad. And in November, the Persian Gulf state of Oman signed a contract with the marketing firm Landor Associates to develop and sell ”Brand Oman.”
”All nations need to compete for a share of the world’s attention and wealth, and that development is as much a matter of positioning as anything else,” Anholt wrote in 2003, ”so it makes perfect sense for governments to do everything possible to ensure consistency of behavior in every area.” He even recommends that countries appoint Cabinet-level branding ministers. ”I’ve visited a great many countries where they have ministers for things that are far less important than branding,” he says.
Read more here. Here is the excellent Grant McCracken on Nike’s recent "curation" branding. Alex Wipperfurth’s new Brand Hijack argues that if you are marketing your brand, you must understand how your customers (and others) will take over and control the process. If you don’t believe him, just ask Kazakhstan…
Addendum: Speaking of branding, Yana is in the running for "Neighborhoodies of the Week" (individually customized T-shirts), please vote for her. It takes but a second, she is second from the left (with the "Do You Hate Me? T-shirt), click here to vote.
Easterly on Sachs
Read Tyler’s post below for more reactions to Sachs’s The End of Poverty. Here are some key grafs from William Easterly’s review.
The piecemeal reform approach (which his book opposes) would
humbly acknowledge that nobody can fully grasp the complexity of the
political, social, technological, ecological and economic systems that
underlie poverty. It would eschew the arrogance that "we" know exactly
how to fix "them." It would shy away from the hubris of what he labels
the "breathtaking opportunity" that "we" have to spread democracy,
technology, prosperity and perpetual peace to the entire planet.
Large-scale crash programs, especially by outsiders, often produce
unintended consequences. The simple dreams at the top run afoul of
insufficient knowledge of the complex realities at the bottom. The Big
Plans are impossible to evaluate scientifically afterward. Nor can you
hold any specific agency accountable for their success or failure.
Piecemeal reform, by contrast, motivates specific actors to take small
steps, one at a time, then tests whether that small step made poor
people better off, holds accountable the agency that implemented the
small step, and considers the next small step.
…[Sachs] seems unaware that his Big Plan is
strikingly similar to the early ideas that inspired foreign aid in the
1950s and ’60s. Just like Sachs, development planners then identified
countries caught in a "poverty trap," did an assessment of how much
they would need to make a "big push" out of poverty and into growth,
and called upon foreign aid to fill the "financing gap" between
countries’ own resources and needs. …Spending $2.3 trillion (measured in
today’s dollars) in aid over the past five decades has left the most
aid-intensive regions, like Africa, wallowing in continued stagnation;
it’s fair to say this approach has not been a great success. (By the
way, utopian social engineering does not just fail for the left; in
Iraq, it’s not working too well now for the right either.)
Meanwhile, some piecemeal interventions have brought
success. Vaccination campaigns, oral rehydration therapy to prevent
diarrhea and other aid-financed health programs have likely contributed
to a fall in infant mortality in every region, including Africa.…the broader development successes of recent
decades, most of them in Asia, happened without the Big Plan — and
without significant foreign aid as a proportion of the recipient
country’s income….Success in ending the poverty trap," Sachs writes, "will be much easier
than it appears." Really? If it’s so easy, why haven’t five decades of
effort gotten the job done? Sachs should redirect some of his outrage
at the question of why the previous $2.3 trillion didn’t reach the poor
so that the next $2.3 trillion does. In fact, ending poverty is not
easy at all.
Can we cure world poverty for $150 billion a year?
Jeff Sachs says yes. Daniel Drezner offers excellent links, background, and context. Here is one summary of Sachs’s view:
Africa,
through no fault of its own, is trapped. Held back by geographical
impediments like climate, disease and isolation, it cannot lift itself
out of poverty. What Africa needs, then, is not more scolding from the
West. It needs a ”big push” — a flood of foreign aid — to boost its
prospects and carry it into the developed world.
Sachs’s article in this week’s Time is maddeningly vague — "Commit to the Task" and "Adopt a Plan of Action" count among the policy recommendations. But how far will $150 billion go? By Sachs’s own count, over one billion people live in extreme poverty; the next billion up would count as very poor under any Western standard. Round down grossly to a billion and you have about $150 per head per year to play with.
My take: No way.
I’ll start with two admissions. I have been an admirer of Sachs, and I don’t think all foreign aid fails. But $150 billion a year won’t get us very far.
Let’s say you had ten years’ worth of contributions upfront, and invested the whole $1500. You would be very very lucky to reap 10% a year. That is a flow of $150 in yearly living standards. It will buy some fertilizer and mosquito nets but it probably won’t up returns above the ten percent level. When the East Asian countries made beneficial social investments they grew at about ten percent per annum and that is a best case scenario.
Then come the traditional problems of foreign aid. Not only is there wastage in aid administration and poor spending patterns, but many essential services simply are not there to be purchased. Infrastructure requires complementary goods — tractors need roads, and vice versa — which means that the early stages of growth are slow and cumbersome. Furthermore very poor communities often try to convert their aid into consumption by refusing to perform maintenance on the new capital stock.
I’ll count per capita income of $1000 a year (roughly Guatemala or Morocco) as "no longer very poor." Given this number, I’ll guesstimate that Sachs’s plan would eliminate severe poverty for about five to ten percent of the one billion very poor, provided the money is spent in concentrated fashion.
Should I be reminded of James Glassman’s Dow 36,000? Sooner or later the claim will likely be true. With (or without?) an extra $150 per capita per year, most poverty will someday end. But when?
OK, you can’t judge a whole book by a Time magazine summary, especially not when it is by a thinker of Sachs’s caliber. So I’ve ordered The End of Poverty, and I will pass along any further impressions once it arrives. In the meantime, it looks as if Sachs is overselling on behalf of a noble cause.
Whatever we are going to spend fighting international poverty, I would spend on freer immigration, keeping in mind that ongoing remittances will kick in over time. We also could send a small military mission to Darfur, and focus our aid on one "doable" country or region. I am a believer in demonstration effects; get it right once, and the world will beat a path to your door.
Addendum: Matt Yglesias offers his views, and William Easterly’s review is very critical of Sach’s policy suggestions.