Category: Economics

…some parts of the analysis may apply to young children as well. Children are allocated to various "tasks" to their parents, and cannot easily trade or voice marketplace demands. In some countries parents or relatives allocate children rather ruthlessly to hard labor. Even in richer settings parents claim to be altruists but in fact many care more about the safety of their child per se, or about the social status of the child (proxies for their genetic investment), rather than caring for the utility of their child. Parents might therefore overinvest in safety and rigorous education for their child, not taking the child’s utility into account.  Under some conditions the policy recommendations would involve a reallocation of children into "fun" activities. This would favor easy schools, sugar-coated cereals, and disfavor government regulation of fun but dangerous children’s toys.

That is a possible concluding paragraph for a piece I am writing on animal welfare; you will hear more about this soon.  But that bit may not make the final cut.

Yes we don’t treat animals well enough, but what are the parallels between animals and children?  I am not sure where the relevant intra-family externality lies.  Are selfish parents not spending enough time looking out for their kids?  (Do partially benevolent parents get lazy and use the TV as a socially costly babysitter?)  Or do uptight parents seek too much control over their kids?  Are both somehow true at the same time?  I find these underexplored questions to be among the most important for normative economic investigation.

A new Slate article (click here) reports that Superbowl commericals are very inefficient. You can easily reach many more viewers by purchasing cheaper air time on other "unwatched" shows that air during the Superbowl. Broadcasting and Cable magazine (click here) reports an experiment showing that a computer can generate a buying schedule consisting of non-Superbowl ads that reaches 60% more viewers. Why, then, do firms insist on buying these insanely inefficient commercials? Slate’s Timothy Noah answers:

"I suspect the answer is that, while the Super Bowl may not be an especially smart forum in which to sell the advertisers’ products, it’s a great forum for selling the ad agency itself."

I don’t buy this argument, at least in the way it is presented. The explanation ignores the fact that the client is still paying for the ad time. Does a Chrysler executive really give a $$$ that their hired Saatchi wannabe ad guys have acquired another Mobius award or that they made ESPN’s top 25 sports commercials list? I think the answer is no.

So what is a better answer? I’d revise Noah’s explanation to say that clients are buying ad firm prestige rather than raw viewer numbers. High prestige ads reinforce the company’s position within their industry. Noah doesn’t believe this: "The clients are receptive because having an ad on the Super Bowl confers an undeniable glamour. But glamour doesn’t pay the bills."

Actually, it does. It’s similar to real estate – companies often purchase pricey real estate and fancy architecture not for the immediate impact on profits, but because they want to signal their legitimacy to the business community. In the business world, there’s a tendency to go with "tried and true," and glamour helps reinforce the image. If you were an executive unsure of who to hire and with bosses to impress, would you go with the company that advertised during the Superbowl, or the company that advertised more efficiently on Manimal?

In previous writings I have argued we should gradually index social security benefits to the rate of price inflation, rather than the rate of wage growth.  Matt Yglesias and Brad DeLong, among others, have objected to this view on several occasions.  Is it not unfair for everyone to grow wealthier but the elderly?  Are we not increasing the relative gap between the young and the elderly over time?  Imagine if today’s elderly had been frozen at the living standard of the elderly in 1930?

We should keep several points in mind, noting that a correct approach will use the rate of price inflation experienced by the elderly:

1. The real standard of living of the elderly still will rise over time.  This will come from private savings and market innovations, rather than from government social security benefits.  We are not freezing the standard of living of the elderly forever.  Furthermore the freeze in real benefits will be done slowly and will be generally expected.

2. The standard of living of the (future) elderly can rise even more, if those individuals choose to save more or earn more.  Just to make it clear, I do not buy the moral theory which says: "They chose not to save, let’m starve."  But if we are judging the relative gap between the elderly and other individuals, surely the (partially) voluntary nature of the standard of living of the (future) elderly has some bearing on this judgment.  Admittedly not all of the elderly have had the life capacity to control their earnings and savings, but most have.   And the richer society becomes, the more will have this capability.

3. It is necessary to freeze social security benefits only because Medicare is in future fiscal trouble.  Social security itself can keep on going at current levels with only marginal adjustments, if we so choose.  But broader fiscal problems loom, as Bush’s critics so correctly and frequently remind us.  Medicare, of course, benefits the elderly.  We would not be freezing social security benefits to throw a giant party for the young.  I will admit that if we can solve the Medicare problem (I don’t know how to), we can drop my social security proposal.  I will also admit that my social security proposal is only one drop in a much bigger bucket; other reforms and spending cuts will be needed also.  Many of these burdens should fall on the young, which will make the relative effects fairer to some degree.

4. The projected growth in Medicare implies a huge shift in relative resources devoted to the elderly.  A gradual freeze of social securty benefits should be viewed in this broader context.  The net flow of resources is still very much toward the elderly.

5. If demographics and productivity growth are more favorable than expected, we can always boost social security benefits again.  Believe me, it won’t take politicians long tocatch on to this idea.

6. Why the big concern about the relative standard of living of the elderly?  I care more about absolute living standards.  If you think that freezing real social security benefits is morally wrong, must you not also think that the current level of benefits is a moral outrage?  Are we not then required to boost social security benefits today?  (Admittedly some of you will accept this attempted reductio.)

To oversimplify just a bit, there are two theories for caring about the poor.  One is prioritarianism, which stipulates that low standards of living are intrinsically bad, whether or not other people are wealthier (NB: there is more to the prioritarian position than this implication).  The greater wealth of others does not make poverty a greater moral problem.  The second is egalitarianism, which objects to the difference in living standards between the rich and the poor.  The presence of wealthy Beverly Hills somehow makes poverty in Mali more obscene, even if Californians had no role in the causal chain of African poverty. 

Now I find prioritarianism more convincing than egalitarianism.  This suggests we worry about the absolute living standards of the elderly, and not their relative conditions vis-a-vis the young.  Now you might argue that the future should pay the elderly more, simply because the future will be richer.  I’ve already recognized this fact in my #1, #2, and #4.  It is not a separate argument in favor of an egalitarian approach to the moral issues.

7. The elderly, by definition, already have had long lives.  If we are judging relative deprivation, as defined over the course of a lifetime, they are not the big losers.  Life itself is the greatest good.  Bigger losers are those who die young; AIDS victims are one example.  I would rather fund more biomedical research, to cite one alternative use of the funds.  And if you have cosmopolitan sympathies, surely we could use the resources to take in more immigrants or otherwise help the very very poor in other locales.

8. Has anyone provided a convincing moral theory as to what the gap between young and old should be?  I believe not.  Until we have a theory of which young-old living standards gap we should be aiming at, we should not object per se to an increase in the relative position of the young.

The bottom line: I still think that a gradual freeze of real benefits is our best current fiscal solution, subject to the caveats offered above.  The biggest problem occurs if the rate of price inflation faced by the
elderly is so high that we don’t save so much money by this reform.  Even if my position is wrong, the opposing view is very much underargued in terms of the underlying moral philosophy. 

Not enough.  Here are a few simple relationships, noting in advance that theory and empirics sometimes conflict.

1. A high nominal interest on a currency "ought to" predict forthcoming depreciation of that currency, on average.  After all, market equilibrium has to offer you more to hold this asset precisely because investors expect it to fall in value.  This is known as uncovered interest parity. 

In other words, exchange rates should not be a random walk.  But returns on currencies should be a random walk.  This means that future exchange rate movements should be predicted by the nominal interest rate differential, but additional exchange rate movements, adjusting for that differential, should behave like a random walk.   

2. In reality these relationships are not obviously true.  Many investors believe that the market overestimates the risk of high nominal interest rate currencies.  If you simply slotted your money into high nominal interest rate currencies from, say, 1970 to 1990, you would have done very very well.  This view, however, is not as popular as it once was.  Starting with the Asian financial crises of the 1990s, investors have been burned speculating in high nominal interest rate currencies.

3. In a world of multiple currencies, nominal interest rates in fact serve as the true real rates of return.  Let’s say you live in America but hold Japanese yen.  (Are there always enough non-liquidity-constrained investors in this position and able to drive a market equilibrium?)  Your real rate of return in dollars depends on your nominal rate of return in yen plus your ability to convert yen into dollars.  Once you take the yen-dollar conversion rate into account, the rate of inflation in Japan should not matter.

4. Given #3, theory suggests that the real interest rate differential between Japanese yen and U.S. dollars should not, ceteris paribus (a daunting stipulation in this context), affect future exchange rates.  The nominal rates should be doing the work.  That being said, theory seems to be wrong.  Real interest rate differentials do have predictive power for future currency movements.

So the puzzle is this.  When it comes to future currency values, nominal interest rates do not obviously matter as much as they ought to, given theory.  Real interest rate differentials matter more than they ought to.  Also see my earlier post on microeconomic vs. macroeconomic perspectives on currency movements.

And how does this fit into social security reform?  Andrew Samwick has the lowdown, with all the appropriate links.

When I originally heard about First Contact, a trip offered by Woolford’s trekking company, Papua Adventures, I couldn’t believe he was really doing what he claimed to be doing. An easygoing American expat from Springfield, Missouri, who jokingly describes himself as a "hillbilly," Woolford marches into the jungle in search of uncontacted native tribes who have never seen outsiders–and who aren’t supposed to mind tourists barging into their lives. I had trouble buying the idea that, in the 21st century, there were still nomadic hunter-gatherers out there using stone tools and rubbing sticks together to start a fire. But there are, Woolford assured me. From his home in Ubud, Bali, he explained the strategy behind his First Contact trips.

"There are a handful of places in West Papua that are untouched–still Stone Age tribes, still cannibals," he said. "It’s just that a lot of people are too scared to go look for them."

Making contact with tribal people is a risky business–a simple flu could wipe them out. But Kelly Woolford insists that he’s mindful of such risks. "We don’t try [sic] to corrupt them," he says. "Five minutes is all we do."

Here is the story.  Here is the company’s website.  Thanks to the ever-useful www.politicaltheory.info for the pointer.

Polygamy makes perfect sense to many rich men in poorer countries but it is bad for the economy overall, according to a report called The Mystery of Monogamy by three economists.

The study, published recently by the Centre for Economic Policy Research, argues that mass polygamy, which still exists in sub-Saharan Africa, Egypt and Thailand, can make it hard for economies "to break out of the poverty trap".

The practice, it says, allows rich men "to spend their money on quantity rather than investing in child quality" and stretches a wealthy man’s resources across a larger number of children.

The authors also argue that the practice has only died out in the west because it no longer makes economic sense for the middle classes, who can no longer afford more than one wife.

Read more here.  Here is the paper in html, I can’t get the pdf versions to open (addendum: try this one).

My take: I am not convinced.  Polygamy does not contradict the idea of quality children, relative to available alternatives: the kids get papa’s good genes and full-time attention from mama.  Keep in mind if this is worse on average than other options, women won’t want the deal.  If there is a social cost from polygamy, it more likely stems from the young men who cannot find wives and resort to violence and risky behavior.  Polygamy ends when children cease to be a net economic asset.  As society progresses and urbanizes, there are cheaper ways of having sex with multiple women, if that is one’s goal.