Category: Economics

Naomi Klein argues that ads are a rip-off, a perversion of culture, and should be ignored or boycotted whenever possible. The well-known “Adbusters” group continues the campaign, calling for “Creative Resistance.”. Here is a useful article about the whole movement.

It is less commonly recognized that ads support free speech. No, I don’t mean that the ad itself is free speech, although this of course is true. Rather ads subsidize the free speech of others.

A simple example makes the point. A full issue of Forbes, without ads, would cost about $9.

The figure is taken from Why Not?, by Barry Nalebuff and Ian Ayres, click here for more information on the book and their web site.

An hour of network television, without commercials, would cost an additional 32 cents an hour to finance. This seems like less of a good deal to me, I would rather pay the 32 cents to eliminate the ads (that’s only 16 cents per Seinfeld episode!), but then again, I am not a typical viewer. I wouldn’t watch much TV, with or without the ads, and that is one reason why we have them, even in this age of cable TV. The people who are truly bothered by ads move to other forums, such as books, that stick few advertisements in your face.

On Nov. 24 cell phone users will, for the first time, be able to take their phone numbers with them when they switch carriers. The added convenience is a good thing but comes at a price. A locked-in customer is a valuable customer so when switching costs are important firms compete especially vigorously at the entry level. Today, you can get a cell phone for free if you sign up for a phone plan. After Nov. 24, I expect to see up-front giveaways become less generous. Overall, consumers will be better off as the competition for switchers lowers the price of service plans. Consumers who use their phones intensively will benefit the most, less intensive users will benefit less because the fall in service plan rates may not compensate for the rise in up-front fees. That at least, is my prediction. A good dissertation lies here.

Here is the take of Brad DeLong:

First, and most important, the unemployment rate is high because the Federal Reserve misjudged how much investment spending would fall in the aftermath of the collapse of the NASDAQ bubble, and because the Federal Reserve then misjudged how fast productivity would grow. If the Federal Reserve had had an accurate forecast of the investment-spending slowdown, it would have taken appropriate action and the labor market would be in good shape. And if labor productivity growth had exhibited its “normal” recession-and-stagnation slowdown rather than zooming ahead, the amount of demand growth we have had in the past two years would have been enough to put the labor market in good shape. However, don’t blame the Federal Reserve too much: it has a very hard task, it’s policies can’t be perfect, and all-in-all its performance over the past two decades has been amazing.

Plus the Bush tax cuts have not had much of a stimulatory effect on employment. Most of all, Brad tells us, we should not blame trade with China. I am less negative toward the Bush economists than is Brad, but I agree with the core of his analysis.

…after people attempt suicide and fail, their incomes increase by an average of 20.6 percent compared to peers who seriously contemplate suicide but never make an attempt. In fact, the more serious the attempt, the larger the boost–”hard-suicide” attempts, in which luck is the only reason the attempts fail, are associated with a 36.3 percent increase in income. (The presence of nonattempters as a control group suggests the suicide effort is the root cause of the boost.)

Here is a link to the original research.

Now, you may wonder, how can this be?

Why should suicide be an economic boon? Once you attempt suicide you suddenly have access to lots of resources–medical care, psychiatric attention, familial love and concern–that were previously expensive or unavailable. Doubters may ask why the depressed don’t seek out resources earlier. But studies have demonstrated that psychological and familial resources become “cheaper” after a suicide attempt: It is difficult to find free medical care when you are sad, but once you try to kill yourself, it’s forced on you.

So what should we do? The Slate.com article, the source of this post, suggests “well funded educational campaigns”. A cynical economist might suggest social stigma for suicide, rather than forgiveness. Personally, I suspect that few people attempt suicide for the resulting free medical care, but rather for the attention. We can’t precommit to ignoring them, so perhaps we are simply stuck. I invite Alex to offer some suggestions on how to limit the number of suicides; keep in mind it is a bigger killer in the United States than is homicide.

Addendum: Thanks to Fabio for the pointer. And Eric Crampton suggests the following: “I have a different take on the suicide post – mean reversion. Assume that people are hit with heterogeneous shocks, positive and negative. If people are most likely to commit suicide at the worst point (after the biggest negative shock), then future income increases are just mean reversion. People who just contemplate it have had negative shocks, but not as strongly negative.”

Our colleague Vernon Smith argues that new traders are most susceptible to asset market bubbles, largely because of their inexperience. If the market rises again after a bubble bursts, we should take the run up in prices seriously:

Smith points out that market double dips don’t occur in rapid sequence. Indeed, since 1926 the space between down years for the broad market has always been at least two years, and usually much longer, according to Ibbotson Associates data. The closest sequence in the recent past was the two positive years between the 1973-74 bear market and the 7% downturn in 1977.

In other words, Smith argues that the second round of high prices is usually for real. Experience has beaten the traders down into a state of fearfulness, so presumably there is good grounds for their optimism.

I would like to see the more systematic time series evidence, in the meantime here is the article from Forbes.

Here is my favorite part from the article:

To Professor Smith, bubbles perform a great service for capitalism. “Every bubble is driven by great innovations, and they all leave behind a lot of long-term value,” he says.

Not as sexy a topic as cads and dads, see immediately below. But here is the best short article I have seen on why we should reform the corporate income tax.

Levi Strauss was able to put about $100,000 into a sham Brazilian venture that netted it $180 million in tax deductions. And it was all perfectly legal.

The answer?:

Loopholes need to be closed, rules simplified and the 35 percent rate reduced. And serious thought has to be given to augmenting the corporate tax with an export-friendly value-added tax like the ones used by nearly every other industrial country.

I agree with the first sentence of that paragraph, but not the second. I worry about the transition costs to a VAT, I expect we would end up with both a VAT and an income tax and on that one I vote no.

If France were to reduce its effective tax rate on labor income from 60 percent to the U.S. 40 percent rate, the welfare of the French people would increase by 19 percent in terms of lifetime consumption equivalents. This is a large number for a welfare gain. This estimate of the welfare gain takes into consideration the reduction in leisure associated with the change in the tax system and the cost of accumulating capital associated with the higher balanced growth path. The reduction in leisure is from 81.2 hours a week to 75.8 hours, which is a 6.6 percent decline in leisure. I was surprised to find that this large tax rate decrease did not lower tax revenues.

That’s the take of Ed Prescott, one of America’s smartest economists, here is the original research paper.

Consider just how radical the flip has been:

Americans now work 50 percent more than do the Germans, French, and Italians. This was not the case in the early 1970s when the Western Europeans worked more than Americans.

According to Prescott, changes in marginal tax rates are the main reason for this shift. The Prescott cite is from www.2blowhards.com, a never-ending source of interesting material.

My take: Prescott’s critics like to squawk about his oversimplified models and his use of the representative agent construct. Having a background in Austrian economics, I have some sympathy for these criticisms. But on this matter, it is hard to deny that Prescott has nailed it.

Estimating the effect of police on crime is more difficult than it sounds because places with a lot of crime tend to have a lot of police and vice-versa. As a result, naive analyses tend to find that police cause crime! Jon Klick and I, following the amazing Steve Levitt, have what we think is a pretty clever solution. We look at what happens to crime in Washington DC when the terror alert level rises from elevated to high. During a high-alert period the police put on extra shifts, monitor closed circuit cameras on the National Mall and in general step-up policing. We find that crime falls a lot during these high-alert periods. Our new paper is, Using Terror Alert Levels To Estimate the Effect of Police on Crime. Comments welcome.

Here is the abstract:

We argue that changes in the terror alert level set by the Department of Homeland Security provide a shock to police presence in the Mall area of Washington, D.C. Using daily crime data during the period the terror alert system has been in place, we show that crime drops significantly, both statistically and economically, in the Mall area relative to the other areas of Washington DC. This provides strong evidence of the causal effect of police on crime and suggests a research strategy that can be used in other cities.

Our top categories of imports, by billions of dollars:

$8.6 Shoes
$6.1 Toys
$5.6 Input-output units
$5.1 Data processing machine parts
$3.2 VCRs
$2.6 Wood furniture
$2.0 Transmission equipment
$1.7 Data storage units

Get past the first two categories, and this is not just low-tech junk at your local Wal-Mart.

Now, consider our top imports from China, as a percentage of the overall imports in the stated category:

88% Radios
87% Christmas and festive items
83% Toys
70% Leather goods
67% Shoes
67% Handbags
65% Lamps and lights

From The Fruits of Free Trade, a publication by the Federal Reserve Bank of Dallas, the piece offers many nice illustrations of the benefits of trade.

In the average can of mixed nuts, you might find almonds from Italy, walnuts from china, Brazil nuts from Bolivia [sic], cashews from India, pistachios from Turkey, hazelnuts from Canada – a true international assortment.

Being a nut lover, that was my favorite bit from the brochure.

I am pleased to report from a Milton Friedman tribute conference, held by the Federal Reserve Bank of Dallas. Milton, now 91 years old, remains incredibly sharp and quick on his feet. Gary Becker, in his talk this evening, challenged Milton as to why he does not believe in competitive supply of currency. Milton replied by saying he does not have a good answer to that question, but that he does not see how to get government out of the money business, given that dollars are already in place. He did suggest freezing the supply of high-powered money, and otherwise letting markets work and supply whatever forms of outside money might be demanded. Richard Ebeling discusses how Friedman’s thoughts on this issue have evolved.

My take: For a long time I favored Friedman’s position. In the meantime I have been more influenced by behavioral economics. I fear that some downward adjustments of prices and wages might be required, which people often find painful or resist, so I wonder if a very slight rate of price inflation might be superior. Of course a frozen supply of high-powered money does not necessitate deflation, but sometimes it will bring it. I also wonder how much short-run interest volatility would result. The supposed advantage of freezing high-powered money is to limit the potential for a repeat of the bad monetary policy of the 1970s, but has the Fed or government really engaged in effective precommitment? I doubt it. So right now I count myself as a monetary agnostic.

Addendum: Virginia Postrel, who is attending the conference, tells us about a forthcoming television biography of Friedman.

Second addendum: Here is a detailed conference report, written by a very smart and articulate attendee, his blog will be giving you updates as well.