Category: Economics

Which countries have the most human capital?

Here is a new Lancet paper by Stephen S. Lim, et.al., via the excellent Charles Klingman.  Finland is first, the United States is #27, and China and Russia are #44 and #49 respectively.  There is plenty of “rigor” in the paper, but I say this is a good example of what is wrong with the social sciences and more specifically the publication process.  The correct answer is a weighted average of the median, the average, the high peaks, and a country’s ability to innovate, part of which depends upon the market size a person has in his or her sights.  So in reality the United States is number one, and China and Russia should both rank much higher (Cuba and Brunei beat them out, for instance, Cuba at #41, Brunei at #29).  And does it really make sense to put North Korea (#113) between Ecuador and Egypt?  I’m fine with Finland being in the top fifteen, but I am not even sure it beats Sweden.  Overall the paper would do better by simply measuring non-natural resource-based per capita gdp, though of course that could be improved upon too.

Now, I did zero work on that one, and came up with a better result than the authors.  What does that tell you?

Addendum: You will note the first sentence of the paper’s background claims: human capital refers to “the level of education and health in a population”.  The first two sentences of the actual paper immediately contradict this: “Human capital refers to the attributes of a population that, along with physical capital such as buildings, equip­ment, and other tangible assets, contribute to economic productivity. Human capital is characterised as the aggregate levels of education, training, skills, and health in a population, affecting the rate at which technologies can be developed, adopted, and employed to increase productivity.”  The paper does an OK job of measuring the former, but absolutely fails on the latter.

The Liberal Radicalism Mechanism for Producing Public Goods

The mechanism for producing public goods in Buterin, Hitzig, and Weyl’s, Liberal Radicalism is quite amazing and a quantum leap in public-goods mechanism-design not seen since the Vickrey-Clarke-Groves mechanism of the 1970s. In this post, I want to illustrate the mechanism using a very simple example. Let’s imagine that there are two individuals and a public good available in quantity, g. The two individuals value the public good according to U1(g)=70 g – (g^2)/2 and U2(g)=40 g – g^2. Those utility functions mean that the public good has diminishing utility for each individual as shown by the figure at right. The public good can be produced at MC=80.

Now let’s solve for the private and socially optimal public good provision in the ordinary way. For the private optimum each  individual will want to set the MB of contributing to g equal to the marginal cost. Taking the derivative of the utility functions we get MB1=70-g and MB2= 40 – 2g (users of Syverson, Levitt & Goolsbee may recognize this public good problem). Notice that for both individuals, MB<MC, so without coordination, private provision doesn’t even get off the ground.

What’s the socially optimal level of provision? Since g is a public good we sum the two marginal benefit curves and set the sum equal to the MC, namely 110 – 3 g = 80 which solves to g=10. The situation is illustrated in the figure at left.

We were able to compute the optimum level of the public good because we knew each individual’s utility function. In the real world each individual’s utility function is private information. Thus, to reach the social optimum we must solve two problems. The information problem and the free rider problem. The information problem is that no one knows the optimal quantity of the public good. The free rider problem is that no one is willing to pay for the public good. These two problems are related but they are not the same. My Dominant Assurance Contract, for example, works on solving the free rider problem assuming we know the optimal quantity of the public good (e.g. we can usually calculate how big a bridge or dam we need.) The LR mechanism in contrast solves the information problem but it requires that a third party such as the government or a private benefactor “tops up” private contributions in a special way.

The topping up function is the key to the LR mechanism. In this two person, one public good example the topping up function is:

Where c1 is the amount that individual one chooses to contribute to the public good and c2 is the amount that individual two chooses to contribute to the public good. In other words, the public benefactor says “you decide how much to contribute and I will top up to amount g” (it can be shown that (g>c1+c2)).

Now let’s solve for the private optimum using the mechanism. To do so return to the utility functions U1(g)=70 g – (g^2)/2 and U2(g)=40 g – g^2 but substitute for g with the topping up function and then take the derivative of U1 with respect to c1 and set equal to the marginal cost of the public good and similarly for U2. Notice that we are implicitly assuming that the government can use lump sum taxation to fund any difference between g and c1+c2 or that projects are fairly small with respect to total government funding so that it makes sense for individuals to ignore any effect of their choices on the benefactor’s purse–these assumptions seem fairly innocuous–Buterin, Hitzig, and Weyl discuss at greater length.

Notice that we are solving for the optimal contributions to the public good exactly as before–each individual is maximizing their own selfish utility–only now taking into account the top-up function. Taking the derivatives and setting equal to the MC produces two equations with two unknowns which we need to solve simultaneously:

These equations are solved at c1== 45/8 and c2== 5/8. Recall that the privately optimal contributions without the top-up function were 0 and 0 so we have certainly improved over that. But wait, there’s more! How much g is produced when the contribution levels are c1== 45/8 and c2== 5/8? Substituting these values for c1 and c2 into the top-up function we find that g=10, the socially optimal amount!

In equilibrium, individual 1 contributes 45/8 to the public good, individual 2 contributes 5/8 and the remainder,15/4, is contributed by the government. But recall that the government had no idea going in what the optimal amount of the public good was. The government used the contribution levels under the top-up mechanism as a signal to decide how much of the public good to produce and almost magically the top-up function is such that citizens will voluntarily contribute exactly the amount that correctly signals how much society as a whole values the public good. Amazing!

Naturally there are a few issues. The optimal solution is a Nash equilibrium which may not be easy to find as everyone must take into account everyone else’s actions to reach equilibrium (an iterative process may help). The mechanism is also potentially vulnerable to collusion. We need to test this mechanism in the lab and in the field. Nevertheless, this is a notable contribution to the theory of public goods and to applied mechanism design.

Hat tip: Discussion with Tyler, Robin, Andrew, Ank and Garett Jones who also has notes on the mechanism.

Monopoly power does not seem to be up at the actual market level

Using U.S. NETS data, we present evidence that the positive trend observed in national product-market concentration between 1990 and 2014 becomes a negative trend when we focus on measures of local concentration. We document diverging trends for several geographic definitions of local markets. SIC 8 industries with diverging trends are pervasive across sectors. In these industries, top firms have contributed to the amplification of both trends. When a top firm opens a plant, local concentration declines and remains lower for at least 7 years. Our findings, therefore, reconcile the increasing national role of large firms with falling local concentration, and a likely more competitive local environment.

That is from a new NBER working paper by Esteban Rossi-Hansberg, Pierre-Daniel Sarte, and Nicholas Trachter.

Call for Emergent Ventures proposals on talent search and major life changes

Here is my earlier description of Emergent Ventures.  In addition to the general request for proposals, we are looking to fund research in two particular directions, so if you are interested I would encourage you to apply here.  Here goes:

1. What do we know about the best ways to search for additional talent?  What features characterize successful talent searches?

2. How do people make “big” decisions?  This could include the decision to migrate from one country to another, the decision to change religions, the decision to start a new business, to marry, and so on.  Are there general principles here?  What is known or believed, either theoretically or empirically?

We are open as to what form a contribution might take, but as a default I am envisioning a paper (on either) of say 60-80 pp., surveying and conceptually summarizing academic literature, but written for very smart non-academics and with a somewhat practical bent.

I encourage you to apply, both on these topics and more generally.

My Conversation with Bruno Maçães

Here is the audio and transcript, here is the opening summary:

Political scientist Bruno Maçães has built a career out of crossing the globe teaching, advising, writing, and talking to people. His recent book, born out of a six-month journey across Eurasia, is one of Tyler’s favorites.

So how does it feel to face Tyler’s rat-a-tat curiosity about your life’s work? For Bruno, the experience was “like you are a politician under attack and your portfolio is the whole of physical and metaphysical reality.”

Read on to discover how well Bruno defended that expansive portfolio, including what’s missing from liberalism, Obama’s conceptual foreign policy mistake, what economists are most wrong about, how to fall in love with Djibouti, stagnation in Europe, the diversity of Central Asia, Hitchcock’s perfect movie, China as an ever-growing global force, the book everyone under 25 should read, the creativity of Washington, D.C versus Silicon Valley, and more.

Here is one bit:

MAÇÃES: This raises deep philosophical questions and political questions. If you want Turkey to become like Europe, then you have to project European power across Turkey. If Europe no longer has that ability, then you shouldn’t be surprised that Turkey looks elsewhere.

It’s very simple. I think I say in the book that in order to be loved, you also have to be feared. This idea that you find in Europe now, that without projecting any kind of power, other countries will be attracted to the European model, that’s a form of utopianism. I just cannot see that happen.

COWEN: So Europe lacks the spirit of adventure.

MAÇÃES: That is certainly the case. I think you see that. One of the areas where the spirit of adventure today is more relevant and important is technology. You see in Europe the idea that technology’s against us, and we should resist this rather than embrace it. A very negative spirit, which I think is a good example of how adventure has disappeared from the European psyche.

And:

COWEN: Russia. Why is Russia as a world power currently underrated?

MAÇÃES: The most impressive thing about Russia is, in fact, something that you might not think at first: the power of organization. We have this image of Russia as a failed state in many respects.

But in order to keep that empire, in order to keep it together throughout the centuries, in order to develop it to some extent, in order to bring together so many ethnicities, so many religions . . . it’s fair to say that Russia has done a better job of integrating its Muslim population, which is close to 15 percent, than any other country, I would argue — certainly any other major country.

The power of the Russian state, the ability to organize, to dispose, to connect, is one of the great political stories of mankind — to see how the Russian state was able to grow and to extend itself. And that’s still there.

Original and highly recommended.  Again, here is Bruno’s book The Dawn of Eurasia: On the Trail of the New World Order.

Climate change may be more expensive than we think

That is the topic of my latest Bloomberg column, here is the closing bit:

I am struck by the costs of climate change suggested in the UN’s Intergovernmental Panel on Climate Change report, hardly a source of denialism. Its cost estimate — “1 to 5% of GDP for 4°C of warming” — is relatively reassuring. After all, global GDP is right now growing at more than 4 percent a year. If climate change cost “only” 4 percent of GDP on a one-time basis, then the world economy could make up those costs with less than a year’s worth of economic growth. In essence, the world economy would arrive at a given level of wealth about a year later than otherwise would have been the case. That sounds expensive but not tragic.

Unfortunately, that is not the right way to conceptualize the problem. Think of the 4 percent hit to GDP, if indeed that is the right number, as a highly unevenly distributed opening shot. That’s round one, and from that point on we are going to react with our human foibles and emotions, and with our

highly imperfect and sometimes corrupt political institutions. (Libertarians, who are typically most skeptical of political solutions, should be the most worried.)

Considering how the Syrian crisis has fragmented the EU as well as internal German politics, is it so crazy to think that climate change might erode international cooperation all the more? The true potential costs of climate change are just beginning to come into view.

Get your money for nothin’ get your chicks for free

The manager of Dire Straits earned a percentage of their royalties and he’s selling a big chunk of it to the public. For $3,970–a little cheaper if you buy in bulk–you can get 1/925 of an asset which has been paying around $296,992 per year over the last year for an annual return of about 8%* (corrected from earlier)–that’s pretty good and the prospectus argues that growth in streaming and a forthcoming Mark Knopfler tour will increase royalties.

I think it would be pretty cool to hear Sultans of Swing on the radio and shout “turn it up!” because you knew were earning but only accredited investors need apply. In related news Matt Levine has an excellent piece on accredited investor rules and his alternative:

  • Anyone can also invest in any other dumb investment; you just have to go to the local office of the SEC and get a Certificate of Dumb Investment. (Anyone who sells dumb non-approved investments without requiring this certificate from buyers goes to prison.)
  • To get that certificate, you sign a form. The form is one page with a lot of white space. It says in very large letters: “I want to buy a dumb investment. I understand that the person selling it will almost certainly steal all my money, and that I would almost certainly be better off just buying index funds, but I want to do this dumb thing anyway. I agree that I will never, under any circumstances, complain to anyone when this investment inevitably goes wrong. I understand that violating this agreement is a felony.”
  • Then you take the form to an SEC employee, who slaps you hard across the face and says “really???” And if you reply “yes really” then she gives you the certificate.
  • Then you bring the certificate to the seller and you can buy whatever dumb thing he is selling.

Do moving and making big decisions tend to happen together?

We use exogenously determined, long-distance relocations of U.S. Army soldiers to investigate the impact of moving on marriage. We find that marriage rates increase sharply around the time of a move in an event study analysis. Reduced form exposure analysis reveals that an additional move over a five year period increases the likelihood of marriage by 14 percent. Moves increase childbearing by a similar magnitude, suggesting that marriages induced by a move are formed with long-term intentions. These findings are consistent with a model where the marriage decision is costly and relocation lowers the costs to making this decision. Our results have implications for understanding how people make major life decisions such as marriage, as well as the cost of migration.

That is from a new paper by Susan Payne Carter and Abigail Wozniak.  It’s as if the move jolts you out of complacency and activates your long-term planning modules.  Here are some bits from the paper, as assembled by an MR reader:

– …marriage rates rise sharply shortly before and in the first two months after a move.
– Additional moves encourage marriage, raising the likelihood of marriage and of having children present as dependents.
– The likelihood of marrying prior to five years of Army service rises by 8 percentage points with an additional domestic move, representing an increase of 14 percent from the mean marriage rate.
– We first considered a model in which relocation likely requires investment in thinking about long-term plans that may simultaneously lower the cost of considering other types of long-term commitments, like marriage.
– This suggests that the decision to marry may be affected by other events requiring long-term planning. This in turn implies that a disruptive event, like a relocation, may actually strengthen family ties rather than strain them.

For the pointers I thank two MR readers.

World War II and African American Socioeconomic Progress

Here is a job market paper from Andreas Ferrara, University of Warwick:

This paper argues that the unprecedented socioeconomic rise of African Americans at mid-century is causally related to the labor shortages induced by WWII. Results from combining novel military and Census data in a difference-in-differences setting show that counties with an average casualty rate among semi-skilled whites experienced a 13 to 16% increase in the share of blacks in semi-skilled jobs. The casualty rate also has a significant reduced form effect on cross-state migration, wages, home ownership, house value, and education for blacks. Using survey data from 1961, IV regression results indicate that the economic upgrade, which is instrumented with the semi-skilled white casualty rate, is also associated with an increase in social status. Both black and white individuals living in treated counties are more likely to have an interracial friendship, live in mixed-race neighborhoods, and to have reduced preferences for segregation.

Via John Holbein.

Syverson on Productivity

The FRB of Richmond has a great interview with Chad Syverson:

EF: Some have argued that the productivity slowdown since the mid-2000s is due to mismeasurement issues — that some productivity growth hasn’t been or isn’t being captured. What does your work tell us about that?

Syverson: It tells us that the mismeasurement story, while plausible on its face, falls apart when examined. If productivity growth had actually been 1.5 percent greater than it has been measured since the mid-2000s, U.S. gross domestic product (GDP) would be conservatively $4 trillion higher than it is, or about $12,000 more per capita. So if you go with the mismeasurement story, that’s the sort of number you’re talking about and there are several reasons to believe you can’t account for it.

First, the productivity slowdown has happened all over world. When you look at the 30 Organization for Economic Co-operation and Development countries we have data for, there’s no relationship between the size of the measured slowdown and how important IT-related goods — which most people think are the primary source of mismeasurement — are to a country’s economy.

Second, people have tried to measure the value of IT-related goods. The largest estimate is about $900 billion in the United States. That doesn’t get you even a quarter of the way toward that $4 trillion.

Third, the value added of the IT-related sector has grown by about $750 billion, adjusting for inflation, since the mid-2000s. The mismeasure­ment hypothesis says that there are $4 trillion missing on top of that. So the question is: Do we think we’re only getting $1 out of every $6 of activity there? That’s a lot of mismeasurement.

Finally, there’s the difference between gross domestic income (GDI) and GDP. GDI has been higher than GDP on average since the slowdown started, which would suggest that there’s income, about $1 trillion cumulatively, that is not showing up in expenditures. But the problem is that was also true before the slowdown started. GDI was higher than GDP from 1998 through 2004, a period of relatively high-productivity growth. Moreover, the growth in income is coming from capital income, not wage income. That doesn’t comport with the story some people are trying to tell, which is that companies are making stuff, they’re paying their workers to produce it, but then they’re effectively giving it away for free instead of selling it. But we know that they’re actually making profits. We might not pay directly for a lot of IT services every time we use them, but we are paying for them indirectly.

As sensible as the mismeasurement hypothesis might sound on its face, when you add up everything, it just doesn’t pass the stricter test you would want it to survive.

And he makes an excellent point about the potential productivity growth from AI

…it seems that with some fairly modest applications of AI, the produc­tivity slowdown goes away. Two applications that we look at in our paper are autonomous vehicles and call centers.

About 3.5 million people in the United States make their living as motor vehicle operators. We think maybe 2 million of those could be replaced by autonomous vehi­cles. There are 122 million people in private employment now, so just a quick calculation says that’s an additional boost of 1.7 percent in labor productivity. But that’s not going to happen overnight. If it happens over a decade, that’s 0.17 percent per year.

About 2 million people work in call centers. Plausibly, 60 percent of those jobs could be replaced by AI. So when you do the same kind of calculation, that’s an additional 1 percent increase in labor productivity; spread out over a decade, it’s 0.1 percent per year. So, from those two applica­tions alone, that’s about a quarter of a percent annual accel­eration for a decade. So you only need maybe six to eight more applications of that size and the slowdown is gone.

Read the whole thing. There’s no fluff in this interview. Syverson packs every answer with substantive content.

Congestion pricing is not just slanted toward the elite

From Luz Lazo at The Washington Post:

The average user [of the optional toll lanes] is younger than 45 and has a household income of less than $100,000 a year, according to a new survey.

About 60 percent of the frequent users said they have household incomes of less than $100,000, and a similar share have a bachelor’s degree or higher. About one-third of those users said they don’t mind the tolls because their employers pick up the bill, according to the survey.

And this:

They are loyal Amazon customers who get a package from the online retailer at least once a month.

“They don’t mind paying a fee for convenience services and similarly don’t mind paying for tolls,” Bell said.

Congestion pricing in the D.C. area has been a major success.  And many of its benefits are overlooked.  Consider me, a relatively well-educated and high-income user of the roads.  After a few years, I still can’t figure out how to use the new Beltway lanes, and when they let me get off where I want to, or not.  So I have never used them once.  Still, they clear the rest of the road for me.

The three kinds of charter cities

First, there is the minimal charter city.  During a cruise ship vacation, everyone lives under cruise ship law.  This works fine, and is easy to start up, but it also has limited applicability.  No one has to make a big cultural shift, as long as they don’t get too drunk while playing shuffleboard out on the deck.

Second, there is hegemon-backed charter city.  The British empire ran Hong Kong, and the mainland United States (partially) has run Puerto Rico and earlier managed the Panama Canal Zone.  By definition, a hegemon is required to enforce the law in the external jurisdiction, and of course such hegemons may be scarce, unwilling, or their rule may be oppressive or counterproductive.  Portuguese rule over Goa was not a major success, nor was British rule over India more generally.  European extraterritoriality in China proper was an imperialist disaster.  One problem is that exporting legal systems without exporting their cultural preconditions can lead to failure.

Third, some charter cities are based on the idea of a complementary exported culture.  Singapore did in fact absorb many parts of British culture and law, and some parts of Western mores; it now feels like the most Western part of Asia.  The partial export of Western law and culture has been extremely successful, and the role of culture here means there is strong indigenous support, within Singapore, for Singapore being the Singapore we all know and love.  These are the charter cities that work best, but they are also the hardest to pull off.

You can think of the original charter city idea as postulating law as a non-rival public good.  Why not just spread the best laws to more jurisdictions?  But does spreading the law without the underlying culture suffice?  You can think of the three kinds of charter cities, as mentioned above, as varying responses to this problem.

And spreading culture does not seem to be a public good at all, rather it involves a lot of hard work and it often fails or backfires.

This blog post is drawn from a talk I gave in San Francisco at an inaugural conference for Mark Lutter’s new Center for Innovative Governance.

Has private philanthropy become underrated?

My latest Bloomberg column focuses on Jeff Bezos in particular, and his recently announced $2 billion gift to preschool education and to help the homeless.  Here is one excerpt:

…the gift is unlikely to take the form of Jeff Bezos dictating terms, even if he is the world’s richest man. Bezos and his team will have to work through many institutions — not just preschools and homeless shelters but other organizations that help them do their work. Even brand new preschools and homeless shelters, funded entirely by Bezos, will have their own charters, missions, staffs and fiduciary responsibilities.

Any wealthy person who wants to give away money will find that incentives and the nature of decentralization and bureaucracy impose their own set of checks and balances. Real philanthropic influence goes to those who can persuade others to work with them and share their vision.

Rob Reich, a professor of political science at Stanford, argues in his forthcoming book that the philanthropy of the wealthy is not very democratic. But philanthropy operates a lot more like democracy than it might — and in fact, it may be too democratic. Voters, like philanthropists, can wish for a particular set of outcomes, but what they get will be filtered through broadly similar constraints of bureaucracy and decentralized incentives.

And this:

How about replacing philanthropy with higher taxes and more spending from the government, which is at least democratically controlled? Well, obviously there is room for both democracy and philanthropy in American society. But the elderly vote the most, and democratic expenditures — Social Security, Medicare, pensions and the like — are skewed toward the elderly. Philanthropy, including the Bezos initiative with its stated focus on homeless families, is usually more oriented toward the young or future generations.

The points I make about taxation of capital income should already be familiar to attentive MR readers.

Revolving Door Patent Examiners

The revolving door between government and private industry creates opportunities for regulatory capture. Dick Cheney’s moves between Secretary of Defense, CEO of Halliburton and Vice-President certainly raised eyebrows. Secretaries of the Treasury, Robert Rubin, Hank Paulson and Steve Mnuchin were all former bankers at Goldman Sachs. Former members of Congress who become lobbyists are common as are bureaucrats and congressional staffers who turn to lobbying on behalf of the industries they previously regulated. At the same time, it seems desirable that government should be able to draw from top notch people in the private sector and it’s not surprising that private sector firms would want to hire people with government experience. It’s unfortunate (in my view) that government is so entwined with the private sector but that is inevitable in a mixed economy. Nevertheless, it would be useful if we had more data and less anecdote when it comes to the revolving door.

In a new and impressive paper (summary here), Haris Tabakovic and Thomas Wollmann take a detailed look at this issue using patent examiners. Using data on over 1 million patent decisions they find that examiners grant significant more patents to firms that later hire them.

It’s possible that examiners want to work for firms that have high quality patents but several considerations suggest that this is not the explanation for the correlation between grant probability and firm hiring. First, the firms doing the hiring are law firms that handle patent applications. We are not talking about USPTO examiners all wanting to work for Google.

Second, in a very clever analysis the authors show that USPTO examiners who leave for the private sector tend to go to a city near their college alma mater. Moreover, examiners who leave are more likely to approve patents to firms located their alma mater (even when these firms subsequently do not hire them). In other words, it looks as if (on the margin) patent examiners are more generous to firms that they might want to subsequently work for because they are located in places desirable to them. Patent examiners who do not leave do not show a similar bias which removes a home-city boosterism effect. All of these effects are after taking into account examiner fixed effects–so it’s not that examiners who leave are different on average it’s that examiners who leave act differently when firms are located in regions that are potentially desirable to those examiners.

Finally, the authors show that patent quality, as measured by future citations, is lower for patents granted to firms that later hire the examiner or to firms in the same city who are granted patents by the examiner (i.e. to firm-patents the examiner might have given a pass to in order to curry favor). The authors also find some evidence in the patents themselves. Namely, patents that are grant to subsequent employers tend to have claims that are shorter (i.e. stronger) because fewer words were added during the claims process.

The policy implications are less clear. Waiting periods are crude–in other contexts we call these non-compete clauses and most people don’t like them. Note also that these relationships appear to be driven by norms rather than explicit bargaining. USPTO examiners are paid substantially less than their private sector substitutes and that nearly always seems like a bad idea. Paying examiners more would reduce the incentive to rotate.

Delaware markets in everything

A 2003 Mercedes station wagon fetched nearly $420,000 at a Delaware auction last month—$6,800 for the car, $410,000 for the license plate.

“I wanted it,” says the tag’s winning bidder, William Lord. “I’m happy I did it.”

And who wouldn’t be? The plate reads “20,” a highly coveted low Delaware license-plate number.

The bidding was fierce. “I got caught up in the moment,” says Dr. Lord, 83, a retired dentist in Rehoboth Beach, Del. “My father and I used to go to auctions to buy cattle, machinery. There was nothing I liked better than looking at an opponent across the way and outbidding him.”

For a fringe of American drivers, having a fine car isn’t enough. They must have low license-plate numbers, too, and they’re fueling competition for the tags that can be relentless. In Delaware, a decadeslong obsession over tags with few digits has given rise to a vibrant private market.

This isn’t China, however, where lucky numbers are part of a longstanding cultural or even religious tradition.  May I be allowed to wonder whether the residents of Delaware have nothing better to spend their money on?  This point has at least been addressed:

“It’s a real part of who we are,” says state Transportation Secretary Jennifer Cohan. “We’ve got some loyalty to some strange things, and license plates is one of them.” A low number signifies one of two things, she says: deep roots or deep pockets.

“They are something people fight over a lot. A lot,” says Delaware divorce lawyer Marie Crossley. “It’s almost a badge of how Delaware you are.”

Here is the WSJ article, via the excellent Kevin Lewis.  And note: “The state has never used letters, thanks to a population under a million.”