Category: Economics

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.

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.

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.

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.

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.

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.
 

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.

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.

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.

Now it is bottled water for your dog or cat:

Jason, a spaniel-retriever mix, is now the chief product tester for…PetRefresh for finicky critters nationwide…

It’s also costly to slake a pet’s thirst from bottles. With the average 60-pound dog drinking a liter of water a day, that’s a roughly $400-a-year habit at $2.29 per 2-liter bottle of PetRefresh.

The company is now selling about 50,000 bottles a year.  And Jason, by the way, is no longer drinking from the toilet bowl (in fact the water tries to mimic some qualities of the ever-loved toilet juice, poochies like coolness too).  That is from Friday’s Wall Street Journal, and thanks to Courtney Knapp for the pointer; here is the link, here is her blog.  NB: The product is also considered safe for people.

Addendum: Jacqueline Passey (whose excellent blog relates the gripping and  dramatic story of her life) sent me this NPR article and clip about music and songs for your dog.  Apparently dogs don’t like percussion, or the word "no" in songs.

Julio Rotemberg.  OK, so being tenured at Harvard Business School is not the same as lost in the woods.  But you don’t hear enough about him in the economics profession, when in fact he is one of our most creative thinkers.

My favorite Rotemberg paper is "A Theory of Inefficient Intrafirm Transactions," American Economic Review, 1991.  It is poorly written and the model is clumsy but I love the idea.  Firms do not exist to lower transactions costs, rather they usually raise transactions costs (price aside, wouldn’t you rather go buy a new computer from a retail outlet than try to order one through your purchasing department?).  An asset is brought into a firm when an entrepreneur sees that the asset is currently underpriced.  The firm buys the asset to capture future rents, but don’t expect ex post transactional efficiency to result.  That being said, it makes sense to allow this process to continue, given the absence of serious alternatives to market bidding, however imperfect it may be.

Rotemberg’s paper on altruism explores the idea that you often feel altruism for your co-workers, but you rarely feel altruism for your boss.  This will limit the degree of hierarchy; furthermore some firms may fear inter-employee altruism, knowing that it will be used against them.  His paper on fairness constraints on market pricing is a brilliant, sprawling mess on a vitally important topic.  Why do firms hold poorly publicized temporary sales?  They want one group of customers to think the firm cares about their welfare, while those who buy after the sale ends feel no regret at paying the higher prices.

Here is a previous installment in this series on Brian Loasby.

Simon World, written by an Aussie in Hong Kong, is a good place for keeping up with China and the rest of Asia.  Here’s an interesting post on the accuracy of Chinese economics statistics and did you know that Hong Kong Disneyland will open in September?

Randall Parker offers his two cents on transhumanism; Anthony Evans responds to my recent worries about plagiarism.  Thanks to Kail for the pointer.

$2.97, and here is the full story. Note the accompanying discussion of how Wal-Mart can make it hard for companies to develop a premium image and price.

Thanks to Scott Sameroff for the pointer.