Category: Economics

Other people, it seems:

Are you selfish or generous? Or do you follow the herd, always giving whatever the majority of people deem appropriate?

Society is a mixture of these three types of character, but most of us are the last type, altering our generosity to fit the societal norm, new research has found. It suggests that governments could prompt huge swathes of the population to become more charitable simply by giving more itself or by providing other benevolent role models.

I am a little doubtful about that last sentence (remember crowding out?, and note that the policy implication comes from the journalist, not the researchers!), but here is the story from The Economist.  The quotation is from the 22 January New Scientist.  Here is Dan Houser’s home page.  Here is one paper behind the research.

One bottom line: You are not as benevolent or generous as you think.  The main reason you gave to tsunami victims is because other people did.

Basic microeconomics recommends a simple strategy. Have the number of children that maximizes average utility over your whole lifespan. When you are 30, you might feel like two children is plenty. But once you are 60, you are more likely to prefer ten sons and daughters to keep you company and keep the grandkids coming. A perfectly selfish and perfectly foresighted economic agent would strike a balance between these two states. For example, he might have four kids total – two too many at 30, six too few at 60.

Trust me – you’ll thank me later. Your third child ought to thank me too, but we all know better than to expect gratitude from the young. Now all you have to do is convince your spouse!

Here is the full post.  In case you didn’t already know, Bryan will be guest-blogging over at EconLog for at least a month.

My Arnold Kling-like questions: Is Bryan overestimating the gratitude of grown children?  And given that most people are unwilling to concentrate their bequests on a single child, will you get more attention if you have fewer children?

This one is graphics only, thanks to Jacqueline Passey for the pointer.

1. I would think that Asian central banks, by buying U.S. dollars, have been driving a massive distortion of real exchange and interest rates.

2. I would think that the U.S. economy is overinvested in non-export durables, most of all residential housing.

3. I would think that we have piled on far too much debt, in both the private and public sectors.

4. I would think these trends cannot possibly continue.  Asian central banks may come to their senses.  Furthermore the U.S. would be like an addict who needs an ever-increasing dose of the monetary fix.  This, of course, would eventually prove impossible.

5. I would think that the U.S. economy is due for a dollar plunge, and a massive sectoral shift toward exports.  Furthermore I would think it will not handle such an unexpected shock very well.

6. I would buy puts on T-Bond futures and become rich.

7. I would think that Hayek’s Monetary Nationalism and International Stability, now priced at $70 a copy, is the secret tract for our times.

Of course that is not me.  But at least someone appears to believe in Austrian business cycle theory.  By the way, here is one summary of the theory, although I do not agree with the characterization in all respects.

PartyBuddys, the inspiration of James King and Jason Roefaro, both 30 and both from Union City, N.J., promises to "make normal people feel fabulous for the night," according to its Web site, www.partybuddys.com.

Its night-out package includes a guide (the party buddy) to usher clients "through crowds of jealous bystanders," limousine service, complimentary drinks and V.I.P. treatment at six Manhattan clubs (Cielo, Plaid, Webster Hall, Copacabana, Spirit and China Club).

Fees for the night start at $350 a person; full rock-star treatment is available for $1,200.

Mr. King and Mr. Roefaro, who operate the business out of Mr. Roefaro’s late grandmother’s brick house in Union City, estimate that at least 60 percent of their clients are middle-aged professionals from out of town who have never visited a New York nightclub.

"This service is like paying to drive a race car or be taken up in a fighter plane," Mr. Roefaro said. "They’re not race car drivers or fighter pilots, they’re accountants and lawyers, but for a short time they can imagine they are. For that night, they’re not an accountant; they’re Paris Hilton or P. Diddy."

A personal bodyguard costs $45 an hour.  Here is the full story, and thanks to Daniel Drezner for the pointer.

This time it is Arnold Kling vs. Max Sawicky, read the exchange here.

Addendum: Also read Jane Galt on whether there is a social security crisis.

Here are some nice examples from the Wall Street Journal of how firms alter products, sometimes making them worse at some expense, in order to increase the potential for price discrimination.

To save money, Chris Caine, a resident of Fiji, always orders
computers made by Apple
Computer Inc. from the U.S., where they are significantly cheaper. Recently,
he purchased Apple’s newest desktop, the iMac G5.

Soon after the computer arrived from the U.S. he plugged it in.
There was "a big bang, like an explosion, and white smoke out of the speaker
grilles," he says. The machine then died.

Mr. Caine didn’t have a defective unit. It turns out that, unlike
the 17 other Apple computers that he had purchased in recent years for his
DVD-rental business, the new iMac G5s sold in the U.S. are designed to work only
with the electric power systems in the U.S. and Japan…The iMac G5s Apple sells everywhere except the U.S. and Japan are dual voltage,
meaning they can cope with the electrical systems in Fiji, Europe and most of
Asia, as well as those in Japan and the U.S….

H-P has quietly begun implementing "region coding" for its highly lucrative
print cartridges for some of its newest printers sold in Europe. Try putting a
printer cartridge bought in the U.S. into a new H-P printer configured to use
cartridges purchased in Europe and it won’t work. Software in the printer
determines the origin of the ink cartridge and whether it will accept it.

Will Wilkinson writes:

…there is something more we can do that will have long-term
positive benefits for the citizens of tsunami-battered
nations–something that will buy us goodwill but cost us almost nothing.

Let them work in the U.S. (emphasis added)

Here is the full argument.  Not only are the migrants better off, but they can send remittances back home.

Textiles are getting smarter, as companies weave tiny sensors into
fabric to gather and distribute information about the human wearing it.

Philips, the Dutch multinational, has developed a line of underwear,
bras and accessories containing tiny electronic devices that monitor
heart rates, body temperature, insulin levels and other parameters.
When some measure goes awry — think heart attacks or strokes — your
boxer shorts call an ambulance.

Philips expects the product to be widely available in Europe by the end of 2006.

Germany’s Infineon Technologies offers something called a
thermogenerator, which measures the difference between body temperature
and the temperature of the garment. Too cold or too warm? Your shirt
will be able to fix it.

Then there’s the "joy dress," which has been prototyped by Alexandra
Fede, an Italian designer. It massages women as they wear it, again via
tiny sensors and a programmable microchip in the fabric.

The ideas are coming fast and furious. Orvis has a hit with its Buzz
Off line of clothes, which emit insect-repellant scents (from $18 for
socks to $170 for a jacket). Fly fishers like them, but so would people
in malaria-ridden neighborhoods.

Here is the full story.

At the AEAs Tyler and I would ask our job candidates what countries do you think are currently overvalued and what countries do you think are currently undervalued (in terms of growth prospects, reasons for investment optimism etc.)  Many candidates were surprised by this question.

Of those able to give an answer, China was repeatedly picked as overvalued as to a lesser extent was Argentina.  Good reasons were given for both cases.  Fewer people were able to articulate a case for undervalued nations.  My own pick for undervalued nation was Germany while Tyler chose Mexico.  No one thought that Iran, Iraq or Saudia Arabia was undervalued but these are the surprising picks of
Glenn Yago and Don McCarthy writing in today’s Wall Street Journal (and available online here).  Yago and McCarthy point primarily to rising stock markets but also increased FDI:

Regionally,
stock markets rose over 30% in 2004 and represent a market
capitalization of $470 billion. This has been accompanied by a surge in
regional property values and a higher number of tourists. The main
Egyptian equity index has increased 165%, while that of Saudi Arabia
has gone up by 158%. The Saudi market’s stellar performance is
especially striking given the great amount of attention paid at the
moment to that country’s security problems. Israel’s leading index has
risen by 32%, the benchmark index of Kuwait’s exchange by 73%, Jordan’s
by almost 60%, and that of the United Arab Emirates by 110%.

What countries do you think are overvalued or undervalued and why?  I have opened the comments section up for this post.

Alex and I learned during this weekend’s job interviews that behavioral economics remains "hot."  Frequently a behavioral model will find some imperfection in individual choice or aggregate market outcomes.  Behavioral economics often is used to argue for paternalism, for the relevance of sticky wages and prices, and against the efficiency of asset markets.

I’ve been a fan of behavioral economics from the beginning, as you might expect from a former student of Tom Schelling’s.  But behavioral economics has overemphasized market failure at the expense of government failure.  I would like to see more behavioral investigations along the following lines:

1. A productive entrepreneur exploits behavioral imperfections to defeat a blocking coalition.

2. A market that would otherwise have no equilibrium "core" in fact becomes quite stable, due to behavioral frictions.

3. A politician self-deceives and builds a self-aggrandizing "empire" rather than serving the median voter.  Voters know that the potential political competitors will end up doing the same, and so they accept this tendency.

4. Median voters pick politicians on the basis of looks, height, or behavioral quirks, not expected policy or past performance.

5. Behavioral models often stress how choices can make people worse off.  How about a model where welfare payments lead to a breakdown in self-restraint and community?

Brad DeLong, Irwin Stelzer and many others complain that the payroll tax is unfair because it is regressive.  True, but twice misleading. 

The payroll tax is regressive but benefits are progressive and on net
the social security system is progressive – a 45 year old male with an income twice the
national average, for example, will in present value pay into the
system $243,700 more than he will receive in benefits (Murphy and Welch, 1998, Table 2 (JSTOR)).   (Part of this net loss comes from progressivity and a larger part from the fact that all currently young workers will pay more in present value taxes than they will receive in benefits).

More fundamentally, if you want to complain about the regressivity of the payroll tax, go ahead, but then you ought to admit that the social security system is a welfare program and defend it, and reform it, on those grounds (as usual, Tyler has the right idea).

It makes sense to complain about a regressive welfare system but it makes no sense to complain about a regressive social insurance or forced savings program.  Is the unemployment insurance system unfairly regressive because construction firms, and thus construction workers, pay higher UI tax rates than professors?  Are IRAs unfair because people who put more in get proportionately more out?

Savings are hard to measure; the government’s Bureau of Economic Analysis almost surely understates the true figure…

Perhaps the biggest problem with the way the government measures
savings is its failure to take account of changing asset values like
rising home prices. If we looked at the balance sheets of American
families, instead of just subtracting consumption from income, we would
find a more favorable picture, despite some short-term volatility.

In
a speech last fall, Roger W. Ferguson Jr., vice chairman of the Federal
Reserve, expressed concern that households weren’t saving more, but he
acknowledged that the ratio of household net worth to disposable income
"has been essentially trendless over the past two decades," adding in a
footnote that "this alternative concept of the personal saving rate
has, in fact, shown a slight positive trend since the early 1950’s."

The
treatment of capital gains in the widely cited saving figure leads to a
number of problems. Consider pensions. Employer contributions are
counted as personal income, but later – and larger – payouts to
retirees register as consumption, while the capital appreciation that
substantially finances these payouts registers nowhere.

That’s
according to a Dartmouth economist, Steven F. Venti, who contended in a
2003 report written with two Dartmouth colleagues, Annamaria Lusardi
and Jonathan Skinner, that the treatment of pensions had played a large
role in dragging down savings to record levels, "accounting for over 40
percent of the total decline in the personal saving rate from 1988
through the turn of the century."

Other measurement issues also
play a role. In a paper on alternative measures of personal saving,
Marshall B. Reinsdorf, a research economist at the Bureau of Economic
Analysis, asserts that adjusting the calculation for several such
factors, including the treatment of spending on durable goods and the
effect of inflation on interest rates, can account for much of the
apparent decline in personal saving in the 1990’s.

Daniel Akst at The New York Times offers more; I’ve added the links in the above quotation.

Note also that the U.S. spends more on education than most countries, but this is counted as consumption not savings (admittedly we wish to measure outputs, not inputs, but U.S. higher education is excellent).  R&D investments do not count toward national savings figures either; on these facts see the Michael Mandel article in 17 January Business Week.