Category: Economics

All Oil to the People!

In an economy based on labor, leviathan government faces an inherent, albeit weak, constraint – tax and regulate too much and you will kill the goose that lays the golden eggs (or the goose will run away). But in an economy based on oil the goose can’t run away and is almost impossible to kill. As a result, natural resource based economies tend to be corrupt, war-stricken, and slow growing. After 35 years and some 350 billion dollars in oil revenues the people of Nigeria, for example, have had no increase in per-capita GNP.

Iraq is another case in point, which is why it’s crucial that we not squander the opportunity to create new institutions for getting oil wealth away from governments and into the hands of the people. Norway and Alaska distribute revenue from “stabilization funds” but these appear not to be very effective, especially in countries that begin with weak institutions. Economists Xavier Sala-i-Martin and Arvind Subramanian argue in favor of direct payments of revenues to citizens but I think Vernon Smith, our colleague and recent Nobel prize winner, offers the best approach – distribute shares, real ownership, in the oil producing lands to every citizen.

Aside from the benefits to the Iraqi’s can you imagine what a great public relations boost this would be to the United States? In one swoop, we would credibly demonstrate to the Muslim world that the war was not about our rapacity, provide for a thriving domestic economy in Iraq, and lay the foundations for a stable democracy.

How well can we measure performance?

Imagine Cass Sunstein and Richard Thaler writing a co-authored book review for The New Republic. The book is Michael Lewis’s Moneyball, which pretends to be about baseball but is in fact a profound meditation on behavioral economics, management science, and how hard it is to measure value. An obvious question: if it is so hard to measure the performance of first basemen, when there is a slew of publicly available statistics, how about the rest of the economy?

Thanks to Will Baude for the pointer.

Does Milton Friedman believe in free will?

“In a sense we are determinists and in another sense we can’t let ourselves be. But you can’t really justify free will.”

So spoke Milton Friedman in a recent interview. Read here for the full account.

I have long felt that this whole issue poses great difficulties for the merit-based argument for the market. If people don’t “deserve” the value they create, the moral case against redistribution becomes weaker.

The usually crystal-clear Friedman also says the following about luck:

“My wife and I entitled our memoirs, ‘Two Lucky People.’ Society may want to do something about luck. Indeed the whole argument for egalitarianism is to do something about luck. About saying, `Well, it’s not people’s fault that a person is born blind, it’s pure chance. Why should he suffer?’ That’s a valid sentiment.”

So what are the implications of luck for public policy?

“You’ve asked a very hard question,” he said. In part, he added, because it’s not clear that what we think of as luck really isn’t something else. “I feel,” he said, “and you do, too, I’m sure, that what some people attribute to luck is not really luck. That people are envious of others, you know, `that lucky bastard,’ when the truth of the matter is that that fellow had more ability or he worked harder. So that not all differences are attributable to luck.”

Vernon Smith

Newsweek magazine is running a feature article on last year’s Nobel Laureate and father of experimental economics (and our colleague) Vernon Smith. The most interesting part is toward the end, when the article discusses how experimental economics is improving real world business practices, such as allowing people within a firm to bet on which ideas will prove successful.

Who is stingy?

I found this list of charitable donations per capita for a handful of countries, of course beware of cross-country measurement problems. The amounts are in Euros-per-capita.


Czech Republic……………25

My source is the excellent blog, the post also offers some good observations on inequality, this is what a cultural critic sounds like when he is properly skeptical and appreciative of the rich at the same time.

Gamblers are financially conservative

Well, sort of. Read this:

The Roper ASW survey of 2,000 Americans finds that despite a penchant for taking risks, wagerers are relatively conservative with money at home: 61% say they always or almost always pay off their credit cards every month, compared with 52% of the general population. Saving money in a retirement plan was cited by 50% vs. 40% of the general public.

Financial conservatism also marks gamblers’ shopping habits. The typical player is a coupon clipper (56%, compared with 51% of the general population) and buys in bulk to save (47% vs. 35%). The survey’s margin of error is plus or minus 3 percentage points.

N.B.: This is a survey, not a regression controlling for the relevant variables.

And who gambles?:

The survey pegged median household income for casino gamblers at $50,716 vs. $42,228 for the population as a whole…The typical bettor? A woman. The survey finds 54% of gamblers are female. The typical gambler also is aging: 57% are older than 50. And gamblers are not the flashy card sharks portrayed on TV. Most like pulling the slots; 74% say it’s their casino favorite. Just 14% say they prefer table games like blackjack.

Here is the study of gamblers, and here is the Roper home page. The study description and quotations are from USA Today.

This reminded me of Gordon Tullock

Security at diamond mines the world over makes antiterrorism security efforts at airports look like they’re conducted by the Boy Scouts. In Namibia, for instance, at the De Beers-owned Oranjemund claim, the only cars in the town in the 1970s were company cars that could never leave its borders. Private vehicles were banned when an enterprising engineer removed several bolts from the chassis of his car, bored out the middle for holding diamonds, and then screwed them back in tight. The fact that he was actually caught is testament in itself to how high the security was; from then on, De Beers outlawed new cars. All vehicles in the town had to stay there until they rusted away. One worker at the same site stole diamonds by tying a small bag to a homing pigeon, which would fly the diamonds back to his house. One day, he got too ambitious and overloaded his winged courier; the pigeon was so laden with stolen diamonds, it couldn’t fly over the fence and was discovered by security guards a short time later. They reclaimed the diamonds and let the bird go, following it to the man’s home, where he was arrested after work.

From Greg Campbell’s recent Blood Diamonds: Tracing the Deadly Path of the World’s Most Precious Stones.

The jobless recovery?

Allan Meltzer argues that employment is growing, albeit not in a strong or robust fashion. His explanation: many former employees are being rehired as contractors, and our employment statistics do not measure this trend accurately.

Here is the relevant statistical issue, according to Meltzer:

There are two sources of labor market statistics, the Establishment Survey and the Household Survey–both conducted by the Labor Department. The first asks manufacturing and service sector companies how many employees they have. The second asks a sample of people whether they have jobs. The two give different answers and, important right now, the difference changes systematically over time. The reason is that the number of companies does not remain fixed. In our dynamic economy, old firms die and new ones are born. The Labor Department learns about the deaths quickly, but it takes longer to learn about the births.

Nor is the longer-term record of the Bush administration on employment as dismal as is commonly believed:

For the year ending in August, the Establishment Survey shows a loss of 463,000 jobs. The Household Survey shows that the economy added 313,000 new jobs in the same period. The Establishment Survey also shows the much discussed job loss since the Bush administration took office–2.7 million jobs. The Household Survey reduces the loss to 220,000, not good but far more typical of a period with recession and slow recovery. As the speed of recovery picks up, the latter loss will disappear by early next year.

Revisit this post in a few days for an addendum, I will let you know if there is any reaction to this argument (Brad DeLong once wrote a critique of Meltzer) in the blogosphere.

Thanks to John Charles for the pointer to the original article.

Addendum: Brad DeLong offers critical commentary on Meltzer’s argument.

Why did it take so long to integrate baseball?

The Chicago/UCLA approach has long suggested that if black or minority workers are underpaid, for reasons of discrimination, an employer would find it profitable to hire them and bid up their wages. I have long since wondered why it took major league baseball so long to play African-Americans. The “Negro Leagues” had been around a long time, with many talented players, but Jackie Robinson did not debut for the Brooklyn Dodgers until 1947.

Here is one suggested answer, from a recent book Jackie Robinson and the Integration of Baseball:

…a showboat minor league operator named Bill Veeck…wanted to buy the Philadelphia Phillies and stock it with aging Negro League stars while younger white major and minor league players were at war. A team with, say Satchel Paige, Josh Gibson, and Ray Dandridge might well have won a World Series…But baseball commissioner Kenesaw Landis disapproved of the idea. He didn’t care for Bill Veeck, he didn’t trust his money, and he certainly didn’t endorse his scheme. What if Philadelphia’s fans decided that they liked winning and didn’t want to return to segregated, second-divison baseball?

In other words, the league structure of major league baseball allowed for collusion and thus enforceable discrimination, through the medium of the commissioner.

The book also relates that club owners had a financial incentive to keep the Negro Leagues going. Commonly the club owners rented out their stadiums to the Negro League clubs, often reaping more than $100,000 a year from this source of income.

It is worth noting that jockeys, bicyclists, runners, and boxers — all more individualistic sports — saw integration much earlier. But in basketball, another league sport, the first black entered the NBA in 1950. Football is a more complicated story, showing integration followed by a segregation in the 1930s, followed by reintegration in the 1940s, read here for one account, I hope to cover football in more detail in a future post.

Chess and mixed strategies

Many laboratory experiments fail to find evidence for the game-theoretic concept of “mixed strategies.” But Doru Cojoc, a graduate student at Clemson University, looks at data taken from the world of chess, where high prizes are on the line and we find repeated games between the same players (there is no copy of the paper on the web).

A player might prefer one opening move over another (e.g., “1. e4” vs. “1. d4”), but if a player always uses his favorite, the opponent will find it easier to prepare a defense. So players tend to vary their opening moves in an effectively random manner, as confirmed by Cojoc’s data from championship matches. The returns to differing opening moves end up being the same, in expected value terms, even though players have their favorites. Note: For purposes of contrast, I would like to see if chess champions do any better with their favorite moves in non-repeated settings, Cojoc says he is working on this.

Doru tells me he is also preparing work on whether chess players ever reason using backwards induction strategies. And click here for a lead on the Chiappori, Steve Leavitt, and Tim Groseclose paper on mixed strategies in soccer.

By the way, did you know that for world championship games since 1951, the player with white is more than twice as likely to win as the player with black (26% white wins, 12% black wins, 61% draw)?

Thanks to Bob Tollison for the pointer on this work.

Capitalism comes to Iraq

Most of the talk about the reconstruction of Iraq has been about US aid, a so-called “Marshall plan for Iraq.” But as Tyler pointed out the Marshall plan never did that much for Europe – what made the difference was economic liberalization (and recall that the key reform in Germany, Ludwig Erhard’s lifting of price controls, was done without the permission and against the wishes of the US administrators). It is heartening therefore that liberalization appears to be coming to Iraq. Here is the key information from The Economist (subscription required).

A shock programme of economic reforms signals a radical departure for Iraq. The changes, announced by the country’s provisional rulers at the annual World Bank/IMF jamboree in Dubai, could see its battered economy transformed abruptly into a virtual free-trade zone.

If carried through, the measures will represent the kind of wish-list that foreign investors and donor agencies dream of for developing markets. Investors in any field, except for all-important oil production and refining, would be allowed 100% ownership of Iraqi assets, full repatriation of profits, and equal legal standing with local firms. Foreign banks would be welcome to set up shop immediately, or buy into Iraqi ventures. Income and corporate taxes would be capped at 15%. Tariffs would be slashed to a universal 5% rate, with none imposed on food, drugs, books and other “humanitarian” imports.

How good is the Dutch social welfare miracle?

Despite recent economic troubles, the Dutch social welfare state is commonly considered one of the most successful in Western Europe. The country also is reputed to have low unemployment, a 2002 estimate (see the above link) cited an unemployment rate of 4.1 percent, other measures give a figure closer to seven percent. In any case note that measured unemployment rates are higher in most other parts of the EU, Ireland being one exception.

I now learn that the Dutch miracle may not be so special after all:

…disability leave…can be taken at full salary for a year and, after a single day’s work, is renewable for another year, and so on indefinitely. If one includes the disproportionate number of Dutch goldbrickers as unemployed, then the job-creation part of the miracle looks more like a magician’s sleight of hand. Even though the Netherlands is at the very top of longevity charts, estimates of persons on disability run from 8 to 13 percent of the workforce – between two and three times the EU average. They raise the true rate of Dutch unemployment into double digits.

This may be one reason why the Dutch economy grew only 0.3 percent in 2002.

The quotation (p.378) is from John Gillingham’s excellent European Integration, 1950-2003: Superstate or New Market Economy?.

Penny facts and optimal denominations

$10.5 billion in small change sits around people’s homes.

The average U.S. transaction produces 4.7 coins in change.

Eliminating the penny would lower this figure to 2.7 coins.

The average Canadian transaction produces 5.9 coins in change (Canada has a dollar coin), this would be 3.9 coins in a pennyless world.

A mathematical technique known as Diophantine equations can be used to calculate the coin denominations that would produce the least amount of expected change per transaction. If we replaced the dime with an 18-cent coin, the average number of coins per transaction would fall from 4.7 to 3.89. If we must keep the dime, adding a 32-cent coin would give us a figure of 3.46. The best solution of all would be to combine an 18-cent piece, and actually use the half-dollar coin, for a figure of 3.18 coins per transaction. N.B.: These calculations do not consider the limited ability of Americans to do math in their heads.

These facts are taken from the October issue of Discover magazine, although only a small fragment of the article is available on-line.

Thomas Sargent’s excellent The Big Problem of Small Change (co-author Francois Velde) provides a fascinating historical look at how our denominations evolved, and why we use fixed denominations rather than monies with floating exchange rates against each other, as in medieval times. Imagine having a daily rate for how much a dime is worth, vis-a-vis a quarter. Sargent and Velde claim that fixed rates, combined with a willingness of the central bank to trade at those rates, offers the best possible mix of denominations. They stress that this solution requires good safeguards against counterfeiting.

According to one poll, seven percent of Americans use coins to stabilize table legs, seventy-three percent to scratch off lottery tickets.

One individual wisecracked: “Actually the United States does have an 18-cent coin…It’s called the Canadian quarter.”

Addendum: About $600 worth of coins pass through the hands of a typical American each year. Using pennies may make an average cash transaction three seconds longer.

Second addendum: Professor Bainbridge tells us that the penny will never be abolished, and that sales tax is the reason why. He also cites this link on why abolishing the penny would raise government expenditures by more than a billion dollars, due to CPI effects.

The higher the bill, the lower your tip percentage

Two psychologists studied nearly 1000 tips for restaurants, hair salons and with cab drivers. The larger the bill, the smaller the percentage tip. This is consistent with a reciprocal “payment for service” model. You pay the waiter enough to get the job done, but you don’t feel he has to work much harder to bring you a more expensive entree. Or you might simply be feeling poorer, the larger the bill.

Note that the effect levels off for sums larger than $100. After that point larger bills don’t lead to smaller tips in percentage terms. Servers also get bigger tips when they split the bills for large groups. Read here for more detail. Other research shows that servers get bigger tips if they resemble or can mimic the customer.