Category: Economics

Click here and smile. If you read this blog regularly, I don’t have to explain the underlying deeper point about markets. Thanks to AndrewSullivan.com for the pointer.

From 1960 to 1992, which countries nationalized the most industries? (N.B.: Data are not available for every country, the source is a new book about multinationals, called GlobalInc.)

The winners are Chile, Algeria, and Tanzania, which all lie in the “31-50” range. Chile, of course, has undone most of its earlier mischief, and has grown rapidly and moved to democracy. Algeria is wracked by a disastrous civil war and economic collapse. Tanzania has privatized more than 380 of 400 state-owned companies, read here, which is one reason why their growth rates have been exceeding five percent, despite miserable infrastructure.

In IO theory we teach our students that price discrimination requires monopoly power and monopoly power allows the firm to make above-normal profits. So why don’t the industries that practice a lot of price discrimination seem especially profitable? Airlines, movie theatres, universities – all classic examples of users of price discrimination yet none seem especially profitable. There are examples of profitable industries that use price discrimination, pharmaceuticals for example, but there are also profitable firms that don’t use a lot of price discrimination. If we graphed use of price discrimination against profits would we find a positive slope across the economy as a whole? I doubt it, yet this is what the theory would seem to predict. Send me your thoughts.

Sunday I found a very cool pair of shoes for my 5 year old for just $14.99. Made in China, of course. When I got to the checkout counter the clerk told me I could have a second pair for half-off. Wow! Note to President Bush, Don’t you step on my (kids) blue suede shoes.

Having just visited New Jersey, I am reminded once again that service stations in New Jersey are full service only. That’s right, self-serve is against the law. My wife wonders what a public choice explanation could possibly be, I postulated a kind of “full employment act” for the undereducated, the public rhetoric once claimed that without full-service stations the supply of auto repairman would dry up, although that hardly seems plausible. Here is a summary of a recent New Jersey debate, the piece notes that NJ gas prices are not especially high.

The real puzzle, for me, is precisely that full-service gasoline in New Jersey is typically no more expensive than the typical self-service prices in Virginia. (I am writing from a Kinko’s in Manhattan and don’t have the exact numbers handy.) Yet full-service gas in Virginia is much more expensive than self-service in Virginia, often thirty, forty, or fifty cents a gallon more, at least.

You might that the marginal cost of providing service explains this differential, but then why is full-service gas in New Jersey so cheap? More likely, you have gas stations in Virginia, and elsewhere, practicing a common price discrimination, here is some empirical support for such a model. In other words, the stations believe that those who purchase full-service gas are simply willing to pay much more. Such price discrimination, of course, is impossible in a perfectly competitive market. You would think, surely, that the retail gasoline market is very competitive. The product is relatively homogeneous and there are many different service stations in developed regions. Yet it does not appear to behave like a competitive market, and that is the source of my puzzle. Here is a good piece on the use of priceline.com, and how it serves price discrimination, including in the gasoline market.

Here are Capitalistchicks complaining about full-service requirements in Portland, where they claim that gas prices are especially high, they consider public choice arguments as well.

The final lesson?: You have to look really hard to find a truly competitive market, in the sense defined by the economist’s notion of perfect competition.

Addendum: Gary Leff relates how priceline.com pulled out of the gas market several years ago. And here are gas taxes by state, though they do not explain the observed price gaps in this case, thanks to David Hartley for the tip.

Paul Schervish and John Havens at the Boston College Social Welfare Research Institute have projected that between 1998 and 2052, between $31 trillion and $41 trillion of [American] wealth (in 1998 dollars) will move from one generation to another. They estimate that during this fifty-four-year period, our economy will produce 10.1 million new millionaires.

The stock market crash did not require much of a revision in this estimate, according to an article on Schervish’s home page. Here is the home page itself, you will see that Schervish studies donor behavior. Here is the home page of John Havens.

Of course their numbers are, in some ways, gross underestimates. Let’s not forget the even more important bequests of decent institutions, the American Constitution, science, and technology. The next generation will enjoy something better than Stone Age conditions, not because they are so especially smart, but because of the shoulders they will be standing on.

All of a sudden, I don’t feel so bad about making these people pay for my retirement and the retirement of my baby boom generation.

The above quotation is from The Greater Good, by Claire Gaudiani, a keen treatment of the importance of philanthropy in American life. The author notes that many more people donate to charity than vote. It is also more people than eat fast food or would read a book.

There is, of course, William Baumol’s “cost disease” thesis, which is that productivity tends to stagnate in the service sector in general and in the government sector in particular.

That is from Arnold Kling.

Consider this, from The New York Times.

Dr. Baumol, director of the C.V. Starr Center for Applied Economics at New York University, likes to explain the disease by using Mozart as an example. In the centuries since the composer’s death in 1791, playing one of his quartets for string still requires four instruments and four players and the same number of minutes. No way has ever been found to make this process more efficient, even though huge gains in industrial productivity have occurred during the same time.

Now here is from the 7 November Wall Street Journal, lead article:

For more than 200 years, “The Marriage of Figaro” has been performed with a full orchestra. But when the Opera Company of Brookly stages the Mozart opera in January, the pit will be occupied by only 12 musicians – and one technician overseeing a computer program that plays all the other parts….

…Once confined to the computer sector and a few technologically savvy companies, productivity gains have spread into the nation’s vast service sector, from airports to pet stores and package deliveries.

The title of the article is “Behind Surging Productivity: The Service Sector Delivers.” Need I say more?

Our new colleague, Russ Roberts, author of the economic romance (really!), An Invisible Heart, gave a talk on economic growth where he briefly mentioned the staggering improvements in egg production over the past century. Here are some facts.

Last year the United States produced 86.7 billion eggs.

An early 20th century hen – or a third world hen today – laid perhaps an egg or two a week. Today’s hens lay approximately 5 eggs a week.

Prior to World War II a hen-house might hold 400 hens. Today, a typical hen-house, contains 150,000 hens.

Today’s “hen-houses” are really high-tech factories. The eggs are collected automatically on conveyor belts, graded by robots according to external factors like shape, color, size and also internal factors like consistency and yolk size. See here for a pictorial power-point presentation of the process.

Most amazingly, did you know that from the time it leaves the hen to the time it reaches your table an egg is unlikely to have been touched by human hands!

Addendum: I do not claim that capitalism is good for the chickens.

Cato tells it like it is:

The United States should be a leader but has fallen behind on tax reform. For example, the United States now has one of the highest corporate tax rates among major nations. The chairman of the president’s Council of Economic Advisers, Glenn Hubbard, believes that “from an income tax perspective, the United States has become one of the least attractive industrial countries in which to locate the headquarters of a multinational corporation.” …

One-third of the sales of the 500 largest U.S. companies is now from their foreign affiliates. …

A new survey by the accounting firm KPMG, which takes into account both national and subnational taxes, found that the average 40 percent U.S. federal and state corporate rate combined is almost 9 percentage points higher than the OECD average in 2002 of 31.4 percent. …

In all there are six often-overlapping anti-deferral regimes that create a complex web for Americans to navigate through when investing abroad. The U.S. international tax rules are generally considered the most complex and aggressive among the industrial nations. In a 1999 report, the National Foreign Trade Council concluded that “U.S. anti-deferral rules have been subject to constant legislative tinkering, which has created both instability and a forbiddingly arcane web of rules, exceptions, exceptions to exceptions, interactions, cross references, and effective dates, giving rise to a level of complexity that is intolerable.” …

The complexity of tax rules on U.S. foreign income is so great that one estimate found that 46 percent of federal tax compliance costs for Fortune 500 companies stemmed from rules on foreign income. As a result, U.S. companies are at a tax disadvantage in world markets. … Intel’s vice president for taxes testified before Congress that, “if I had known at Intel’s founding what I know today about the international tax rules, I would have advised that the parent company be established outside of the U.S.”

Thanks to RegionsofMind for the link. My bottom line: I’d rather have cut the corporate income tax than have cut the tax on dividends.

Here’s a nice summary of the Alternative Minimum Tax:

Let’s devise a politically inept income tax policy. We’ll begin by eliminating tax breaks people have been accustomed to for decades, such as those for qualified retirement accounts, and state and local taxes. Next, we’ll negate the child tax credit so that families with young children will be hit especially hard. Then, we won’t adjust for inflation, so that our tax will affect more people each year as their incomes grow along with the economy and inflation. We’ll tell people that they must calculate their taxes twice, using two different formulas — and finally we’ll add insult to injury by requiring them to pay whichever amount is higher.

The full story, available here, is chilling but worth reading in its entirety. Even the IRS has criticized the AMT:

Nina Olson, the IRS’s National Taxpayer Advocate, made this declaration last month: “It’s a horrible provision. We are really sorry about the impact of this tax, but it is not for us to rewrite the laws; it’s for Congress to act.”

It is estimated, however, that outright repeal would cost the Treasury $1 trillion between 2003 and 2012. So get ready for some ongoing tax increases, even if you hear that your taxes are being cut you might have to pay the AMT instead.

You are in hell and facing an eternity of torment, but the devil offers you a way out, which you can take once and only once at any time from now on. Today, if you ask him to, the devil will toss a fair coin once and if it comes up heads you are free (but if tails then you face eternal torment with no possibility of reprieve). You don’t have to play today, though, because tomorrow the devil will make the deal slightly more favourable to you (and you know this): he’ll toss the coin twice but just one head will free you. The day after, the offer will improve further: 3 tosses with just one head needed. And so on (4 tosses, 5 tosses, ….1000 tosses …) for the rest of time if needed. So, given that the devil will give you better odds on every day after this one, but that you want to escape from hell some time, when should accept his offer?

From CrookedTimber.org.

I haven’t worked through this one formally, but I have the sinking feeling that the correct answer is to choose an awfully long (infinite?) period of torment. Think about it. Waiting another day adds only slightly to suffering, viewed as part of a potentially very large total. But you improve your odds of escape by a considerable amount. Your best chance of getting out of the paradox is to have a very high discount rate and a very low level of risk aversion, noting of course that under some utility functions this combination of features cannot be made to fit together.

By the way, if you are into this kind of thing, Will Baude has an excellent post explaining the St. Petersburg Paradox.