Category: Economics

Why are people more outgoing when they are young than old?  Robin Hanson attempts an answer:

As you reveal more to strangers, the distribution of their evaluations spreads out, some moving up toward friends, others down toward enemies. You want to reveal more to potential friends in the hope that some of them will rise above the friend threshold, but you do not want to reveal to potential enemies, for fear they will fall below the enemy threshold. Once people do cross these thresholds, however, your preferences about revelation switch. You want to stop revealing things to confirmed friends, for fear of losing them, and you want to reveal more to confirmed enemies, in the hope of winning them over.

So when looking for someone to marry, you’ll want to open yourself to people. And to help this process, you’ll want to learn about yourself. Once you are married with children, however, you will not want to learn or reveal more about yourself. Similarly, when searching for a new career or entry level job, you’ll want to reveal yourself, but once tied to a career or workplace, you will not want to learn or reveal more. When moving to a new neighborhood you’ll ponder what you really want, but once you live there you will not want reveal too much to neighbors, or think too carefully about how much you like them.

This may go a long way toward explaining standard life cycles in openness and conformity. The young discover and celebrate their passions and uniqueness, except not always with their old friends. The old prefer stability and conformity to community, and reveal and discover the most (in private) with their deepest adversaries. To the young the old will seem boring and conformist, while to the old the young will seem lonely and flighty. The young and the old can really be the same sort of people, but in different circumstances.

Croatia may reopen its most notorious communist-era prison for tourists willing to part with their money to re-enact the life of a political prisoner – including hard labor, stale food and nights in solitary confinement.

The plan has the support of some local officials and even former inmates, who have offered to work as tour guides, though the city council has yet to make a final decision.

"If you want to experience some of the torture that political prisoners underwent … just come along," said Josip Modric, an architect who is promoting the project.

Modric envisions tourists being issued convict uniforms, pounding large stones with a sledgehammer and hauling the pieces on their backs to quarries around the prison on Goli Otok, a barren island in the northern Adriatic Sea.

Those who sign up would be given written awards after completing their "prison sentence."

Here is the full story, which notes that real torture will not be allowed.  Thanks to Jonathan Dingel (read his blog) for the pointer.

Along related lines, The Wall Street Journal (November 19, p.A12) reports that communist-era "nostalgia brands" are sweeping Eastern Europe.

Shoot at animals over the Internet and activate a real gun to kill them.  Here is the website, and thanks to GeekPress.com for the pointer.

My question: If you add them all up, what percentage of these "Markets in Everything" installments is actually appealing?

From Jane Galt, read the whole thing.

For me the most intriguing passage (but not the central point) is:

Something that conservatives, and especially libertarians, have been slow to grapple with is that the more productive our society gets, the greater the possibility that some peoples’ labour simply isn’t productive enough to support them at a minimum level. Can we really tell former welfare mothers to go bunk ten to a room the way my Irish ancestors did? We’re a pretty rich country. Are we comfortable telling people to live as if they’re nineteenth century peasants, if their cognitive gifts, or education, won’t stretch to more?

I wonder whether increasing wealth will ever eliminate the case (sound or not) for, say, welfare payments or the public funding of education.  Won’t the U.S. at some point, however near or distant, become rich enough so that government won’t have to…fill in the rest of the sentence yourself…?  Or does growing wealth jack up land prices so much that subsistence becomes increasingly harder to achieve?  I’m not talking about a relative status effect here, or changing expectations as to what is a decent life (though those factors play a role too).  To some extent higher real wages also boost the cost of producing human beings (i.e., raising children), analogous to William Baumol’s "cost disease."  You can raise a family of seven in Mexico on one thousand dollars a year, just try that in Fairfax County.  And might further economic growth only exacerbate this contrast?

Some mid-level developing countries address this problem by allowing shantytowns to spring up in or near their major cities.  The wealthy live in the "normal" city, the poor in the shantys.  There are other ways of setting up parallel colonies on low-wage land.  Randall Parker writes of old people moving to low-cost cruise ships (no, not ice floes), and of course many of the elderly migrate to Mexico or Costa Rica.  The default of course is to keep everybody in the higher-rent, higher-value network, and not coincidentally raise general taxes over time.  We will all continue to pay lip service to the integrationist ideal, but let’s say you think the case for welfare will never go away, no matter how wealthy we become.  This view implies that the pressure for "separate colonies" will only increase over time.

The field of education is littered with reforms designed to increase student performance – everything from the "new math," to more teachers to better pay.  Yet the most obvious reform of all has hardly been tried – pay the students to learn.  That’s the simple idea of an impressive young economist, Roland Fryer (earlier I posted on Fryer’s controversial work with Steven Levitt on the causes and consequences of distinctively black names).

Fryer was here on Monday and he told me of a large scale experiment he is running in 24 of the poorest performing New York schools.  Every three weeks students are tested and if they improve they are paid on the order of $20.  Control groups are also tested.  Early results are very encouraging.  No other reform has anywhere near the bang for the buck as paying the students.

As Fryer said to me, ‘for years white parents have been giving their kids money for As, now we are trying the same system for black kids.’   

U.S. stocks yield six to eight percent on average, while T-Bills yield just a bit over one percent.  Might we reap higher social returns by investing a social security trust fund in equities?  That of course is one motivation behind many plans for social security reform.  Even if our government is borrowing more, the higher equity returns might more than compensate.

Under one common view, stocks yield more because they are riskier.  Yet stocks outperform bonds for any thirty year period in U.S. history.  So perhaps a sufficiently long-lived institution can ignore the short-term risks.  The return differential could instead exist because a) equity markets are not perfectly liquid, and b) many of us are irrational fraidy-cats, or have excessively short time horizons.

To make the case as strong as possible, let us put risk aside.  But even then the measured returns differential does not measure the gain from investing social security funds in equities:

1. Once the plan is announced, the price of equities will rise, eliminating some or all of these returns.  Current equity holders will be the beneficiaries on a once-and-for-all basis.  Of course if equity markets are not perfectly liquid — one of the assumptions — the current equity holders won’t capture all of these gains.

2. Higher stock returns, driven by a change in liquidity, might just redistribute wealth rather than creating more wealth.  The real question concerns not measured nominal returns but rather the real output of goods and services.  Say that one group of people suddenly earned far more on their investments.  Without a corresponding rise in productivity, the economy as a whole does not have greater opportunities.  We have simply divvied up the pie in a new way.

3. So what is the real gain?  When stock prices rise, it becomes more profitable for a company to issue new stock shares.  This will increase investment and eventually output.  But the magnitude of this effect is not given by the measured differential in stock and bond returns.  The real questions concern a) the elasticity of investment with respect to equity values, and b) the value of the next marginal investment to be made; we should not confuse average returns with marginal returns.   

Note that companies do not usually prefer to finance investments from new equity issues.  Retained earnings and debt are more popular.  The value of a company typically falls on the stock market when new equity issues come forth.  This suggests that markets do not think so much of new investments financed by new equity issues.

The bottom line: There may be some equity premium to be captured, but it is much less than the measured return differential between stocks and bonds.  Most likely, the equity premium is not a strong argument for investing the trust fund in equity or social security privatization; Alex agrees.  The more relevant argument is simply that savings will increase.

Read all about it.  Here is my earlier post on neuticles.

The current academic publishing system is slow, tedious, and error prone.  David Zetland, a clever economics graduate student at UC Davis, has a better idea.  Zetland suggests that journal publishers should buy manuscripts in an auction.  You probably already have some objections, Where would the money come from?  Why would journal editors buy what they can get for free? etc.  But wait.  Here comes the clever part:

The money paid in the auction would flow not to the author of the paper but to authors cited by the paper and their publishers.  For example, if a journal buys a paper by A.Tabarrok for $1000 which cites an article by T.Cowen published by Oxford University Press and an article by M. Friedman published by the University of Chicago Press then Cowen, Friedman and their publishers would each receive $250 (the author/publisher split could vary.)

The cleverness of the idea now becomes apparent.  Publishers will be willing and able to pay for papers because they expect to earn revenues when in turn those papers are cited.  Publishers will pay $1000 for the paper by A. Tabarrok, for example, if they expect that paper to be cited many times.

Once it gets off the ground, the market for journal articles is self-sustaining and self-fulfilling.

A market established in this way has all kinds of beneficial properties.  Publishers will have an incentive not only to seek out the best papers and pay for them but also to improve those papers in order to make them more citable.  Publishers might offer online data collection and color graphs, for example.  Similarly, if this proposal takes off we might expect a big improvement in the speed and accuracy of the refereeing process.  Who knows, editors might even edit papers!

In 1940 the instructions to the Form 1040 were about four pages. Today they are more than 100 pages, and the form itself contains more than 10 schedules and more than 20 worksheets. The complete tax code totals about 2.8 million words – about four times longer than "War and Peace" (and considerably harder to parse).

That is from a New York Times Op-Ed.  And Andrew Sullivan has been pushing for a flat tax. 

My comments:

1. In a sufficiently wealthy or sufficiently egalitarian society, a flat tax is a no-brainer.  Distributional dilemmas are the main obstacle, whether in reality or the public perception.

2. Much of the complexity of the U.S. tax system stems from the definition of income; the simplification benefits from moving to a single flat rate, while real, are often overrated.  A VAT can be complex as well.

3. If I were spending political capital on reforming a tax system, I would sooner push for a more favorable treatment of capital income.  Similarly, if we were sacrificing revenue or fairness, my priority would again point toward capital income.

The bottom line: My ideal tax system has two or three rates, with slight progressivity.  I would keep the tax privileges of non-profits, but otherwise be reluctant to use the tax system for social engineering.  So I favor a "not quite flat tax."  Tax simplification is worth doing, whether or not it is linked to pure flatness of rates.  That being said, flat tax advocacy remains a good way to hold politicians’ feet to the fire.  All tax systems are too complicated, and moves toward simplification are rarely a mistake.

Addendum: Bruce Bartlett summarizes some tax reform ideas.

This one gives every indication of being real, although at first I was convinced it was a fraud or a joke.

Thanks to Radley Balko for the pointer.

Addendum: The FDA won’t allow it for people.

Larry Kotlikoff tries to make everyone happy: 

†¢ Part 1 [of the plan] replaces Social Security’s payroll tax with a federal retail sales tax.

†¢ Part 2 eliminates any further Social Security benefit accrual, paying (with the sales tax receipts) only the benefits now owed current retirees and current workers.

†¢ Part 3 sets up an individual account system, but one that Democrats as well as Republicans can support.

The change in taxation is progressive, while the account receipts are put in a global index fund with government guaranteeing the downside.  Here is the full argument.

I file this under the "would likely lead to massive socialism" category, but many leading (and market-oriented) economists have endorsed the idea.  In the best case scenario it could work, but this would require reasonable fiscal transition costs, that the accounts remain truly private, and that returns capture some of the "equity premium" on stocks.  I’ll turn to the latter topic within the next few days.

Thanks to Craig Newmark for the pointer.

Should we give people prizes for helping the poor?  Robin Hanson thinks so:

Organized charities (especially government ones) spend a large fraction of their income on administration and still suffer relatively poor information regarding who is worthy of what charity. The most effective charity is often one on one, one charitable person helping one person in need they have met through some ordinary social context. Such personal charity is more likely to offer the kind and amount of aid needed, and to satisfy the emotional needs of both parties. The problem is, charity money often comes concentrated from taxes or a few rich donors.

My solution idea comes from the Bible, which tries to convince its readers that they should be kind to strangers in need, because they might be angels in disguise come to test their charity. (Paul said "be ye not fearful to entertain strangers, for some have entertained angels unawares".) What if concentrated charities funded "angels" to go around acting like they are in need of help, noting who helped them the most, and then giving those people large publicized rewards later, say in a couple of years? The help offered could range from giving directions to offering a job.

Those rewards, and the publicity that goes with them, might induce people to try to help folks they meet more often, so that they might win this "charity lottery". The percentage of administrative costs might be lowered by offering large rewards relative to the wages of the angel.

Prizes tend to induce the appropriate effort when the desired result is well-specified in advance; this condition appears to be satisfied in this case.  But if I was poor, would I rather just receive the funds directly, in lieu of seeing a prize for helping me?  (If you think that Robin deserves the prize of tenure, as I do, we should be giving prizes to people for thinking of prizes for those aiding the poor..and perhaps I should get a prize for voting for him…)

The prize competition is better for the poor if you can get people to compete very intensely for the prizes, perhaps in negative-sum fashion.  Good samaritans might treat the game as a fun lottery, thereby spending more resources than the government has pledged in the first place.  Alternatively, the prize system may mobilize decentralized information better than a simple government cash drop.

The bottom line:

We don’t spend nearly enough time trying to figure out how to help the poor.  Here is Robin’s full argument.

Arnold Kling, Brad DeLong, Jane Galt, Matthew Yglesias, Ed Prescott all flirt with various versions of the forced saving idea, typically in the context of social security reform.  Should government, even as a second best solution, require individuals to put aside a certain percentage of their funds for retirement?  This is not "pay as you go," we are talking about individual lockboxes.

The idea tempts me but I must decline.

First, how much can our government force people to save in the first place?  You can make them lock up funds in an account, but they can respond by borrowing more on their credit cards, taking out a bigger mortgage, and in general investing less in their future.  The net increase in savings will be much less than the mandated increase.  And this will make it much harder to avoid the welfare aspect of social security.

When do the savers receive true property rights over the funds?  Surely not at 65.  They could then spend it all and apply for the dole.  We are back to letting people starve or constructing a secondary safety net; the latter is almost certain to happen, although that was precisely what the forced saving scheme was trying to avoid.  Alternatively, the government could regulate how much a person can spend from the lockbox each year (must it limit your borrowing too?).  Imagine being on the verge of death and petitioning the government to spend down your account to meet your medical bills or make a large donation.  The complications are not encouraging.

Let’s put aside the parallels with IRAs and the like.  Those plans work as they do because we already have a safety net in place for the elderly.  And note that Chile (and many other countries), which has "privatized" its social security plan, maintains a secondary safety net as well.

Private accounts meet further problems if people live for a long time.  What about the woman who survives to 105?  It is impractical to force everyone to save enough to last until that age.  So either the 105 year olds starve or we are back to the secondary safety net.  Perhaps you are a libertarian who thinks none of these people will starve; still I predict that the political pressures for public assistance will be overwhelming.  We will end up with both forced savings and a welfare system.   

Ed Prescott suggests that private accounts would lower marginal tax rates on labor by lowering the current payroll tax.  But while the payroll tax is lower, the newly created "forced savings tax" is higher.  Fewer toys, less hard work.  The net tax distortion likely falls to the extent that the private accounts do not occasion any redistribution of wealth (impatient or not, you keep what you put in, instead of losing it altogether).  But then Prescott’s real point becomes transparent.  A social security system with no transfer aspect involves a lower resource burden.  This is true, but hardly news and hardly a strong argument against welfare per se.  Put the transfers back in, and there is no guarantee that the real resource burden falls.

Yes there are some good arguments for forced savings, as Brad DeLong has pointed out.  But they are the least libertarian arguments available, namely that we should have forced savings, as a means of instituting government allocation of capital, and a large safety net.  The most robust libertarian argument is simply the view that we should not coercively transfer wealth to the elderly poor.  And this I cannot imagine sticking as policy.  I stand where I started, namely that social security should evolve into a welfare system for the elderly, but without the forced savings component.

My exchanges from last week are back behind the subscriber-only gates, but here are newly created permalinks: Social Security, Outsourcing, Europe and China, Fiscal policy, and What should Bush do?.