What is the economic value of the internet?
There is a new and very interesting study out from McKinsey on this topic. If you get past the press release, however, and give it a closer read it is consistent with stagnation hypotheses, contrary to some claims. The study shows a few things:
1. Most of the economic benefits of the internet are in fact captured in current economic statistics, which I’ve already argued do not look so fabulous. The point is not to blame the internet, as without it things would have been worse. The point is that the internet gains, in absolute terms, haven’t been large enough to produce a rosy picture overall.
2. The direct and indirect economic effects of the internet account for 3.8% of U.S. gdp, as currently measured (p.15). That’s less than many people think and that value is already incorporated in the current gdp measure. The good news — and it is good news — is that there is lots of room for future growth from internet impact. We’ve yet to really organize our economy around the internet, as we someday will, and then the gains will be enormous. In the meantime we are waiting.
3. What about the unpriced consumer surplus gains from the internet? The study considers that too:
In general, this surplus is generated from the exceptional value users place on Internet services such as e-mail, social networks, search facilities, and online reservation services, among many others. This value far outweighs the costs, both actual costs such as access and subscription fees and annoyances such as spam, excessive advertising, and the need to disclose personal data for some services. In the United States, for example, research conducted with the Interactive Advertising Board found that consumers placed a value of almost €61 billion on the services they got from the Internet, while they would pay about €15 billion to get rid of the annoyances, suggesting a net consumer surplus of about €46 billion.
A nice gain, but in an economy with a $14 trillion gdp it’s not that big a deal. It’s also less than the previous Goolsbee and Klenow estimate of about two percent of gdp, for the consumer surplus from internet use. That is not nearly enough to refute the view that median income growth is much slower in recent times, and that’s without adjusting for the problematic status of expenditures on health care and K-12 education. Arnold Kling and Bryan Caplan stress this point — the unpriced benefits of internet use — but I don’t see them offering a better number than this rather paltry calculation, now confirmed as low, at least relative to the claims of internet boosters, by two differing sources.
In fairness, I should note that I cannot trace the study cited above. It may be wrong. The Goolsbee and Klenow paper may be wrong, and it is somewhat out of date, from 2006. I think a consumer surplus estimate of three or four percent is entirely plausible for 2011. We’re still left with relative stagnation. After all, penicillin had some consumer surplus too.
Why not let the dead pay for Medicare?
Kevin Drum reports:
Medicare stays roughly the same, but every time you receive medical care you also get a bill. You don’t have to pay it, though. It’s just there for accounting purposes. When you die, the bill gets paid out of your estate. If your estate is small or nonexistent, you’ve gotten lots of free medical care. If it’s large, you’ll pay for it all. If you’re somewhere in between, you’ll end up paying for part of the care you’ve received.
Obviously this gives people incentives to spend all their money before they die. That’s fine. I suspect they wouldn’t end up spending as much as you’d think. What it does mean, though, is that Medicare has first claim on their estate, not their kids. But that seems fair, doesn’t it?
There is more at the link.
Open entry schools, the university as forum
I’ve been reading the fascinating A Pattern Language: Towns, Buildings, Construction by Christopher Alexander et.al., a book which I recommend to all urbanists, all architecture fans, Jane Jacobs fans, and Hayekians. In passing, the authors toss out a proposal for reorganizing modern universities. It has two simple principles:
1. Anyone can take a course…
2. Anyone can give a course…
Maybe that would make Peter Thiel happy. The authors also believe that a university should consist of a series of relatively low buildings, with a lot of pedestrian pathways, with the buildings at fifty foot intervals. (The book is in large part about how the organization of space and construction shapes spontaneous orders.)
It sounds a bit outrageous to turn Harvard into Hyde Park Speaker’s Corner, but Harvard admin. could publish a list of approved courses, all other courses you take your chances. There still could be a “Harvard admin.-approved degree,” based on those courses, even if not everyone goes that route. (How many current Harvard classes could keep reasonably high enrollments in the face of such competition?) If you still find this proposal either unpalatable or commercially unpersuasive, are you prepared to admit how much the current university model is based on the idea of exclusion? And how would you square that emphasis with university ideals more generally?
The Spencer Scholarship plan
For months, Fitzsimmons gave each of the women $200 weekly, promised to pay for their college tuition, treated them to lavish nights on the town and even bought one a car as part of his so-called Spencer Scholarship Plan. They were spanked if they violated rules, such as failing to call Fitzsimmons or drinking too much alcohol…
The Spencer Plan started in the 1930s as a form of “carefully regulated corporal punishment” between husband and wife. Couples agreed to a list of things the wife needed to change, such as not spending money frivolously. If the rules were broken, the husband punished her by spanking and it was put behind them. It has expanded through the years.
One 21-year-old woman testified Thursday that the day she joined the program in November, Fitzsimmons spanked her and gave her $300. He paid for her to live in an oceanfront suite and gave her a $200 weekly allowance. In return, she was required to walk 20 blocks each day, keep a log of her meals and spending and refrain from drugs. When she didn’t, she was spanked.
Fitzsimmons took it further, she said, when on three occasions he sexually assaulted her with a curtain rod, a hairbrush and a horse riding crop. When asked by attorneys why she allowed it to happen, she replied: “I’m not allowed to tell him no.”
I can’t bring myself to file this one under “Markets in Everything,” though read the last line of the piece. For the pointer I thank DL.
Assorted links
1. The wisdom of Garett Jones and Reihan Salam.
2. Are they raising a gender-free baby?
3. The story of economics, a three-minute video, via Tim Harford, quite good I thought and also pleasingly philosophical.
4. Thwarted markets in everything: Denmark bans Marmite.
5. Do medical patients have an excess status quo bias?
SWORD for Peer Grading
Jennifer Imazeki who blogs at Economics for Teachers has an interesting post about SWORD, a peer review system for grading writing. Basically students write an assignment and submit it to SWORD which randomly assigns 5 other students to grade the assignment and offer helpful comments; the gradees, in turn, grade the quality of the comments. Here’s Imazeki on some neat aspects of the system:
One of the coolest things about the SWoRD system is how it calculates grades. Students receive a grade both for reviewing and for writing. The reviewing grades are based half on ‘consistency’, which takes into account things like if a student just gives all high scores or all low scores, or scores that are really different from the other reviewers of the same papers, and half on the back evaluation ‘helpfulness’ scores. The writing grades are based on the numeric rubric scores from the reviewers but adjusted for the consistency of the reviewers so, for example, if a paper has four reviewers who give high scores and one reviewer who gives low scores, the low scores from that one reviewer will be given less weight. The instructor can also adjust how much weight is given to the reviewing and the writing scores for each assignment.
The big virtue of SWORD is that it makes written assignments feasible even in a large class. I will be interested to read how Imazeki’s pilot experiment works out.
What if all the HFTers run away from the market?
That’s a common criticism of high-frequency traders, or for that matter of the older specialist system, or of some other trading practices; many MR readers make that point in these comments.
But is that a problem with uninternalized, Pareto-relevant externalities?
Let’s say many men visit a bar for its beautiful women. That said, if the women, on a given evening, don’t see enough desirable men, they go home. The beautiful women run away, but the plain women stick in the other bar, across the street, no matter what. Men choose between bars, knowing that the one bar will often be very crowded, but sometimes empty.
The negative externality from the beautiful women, if there is one at all, is on the bar with the plain women. That bar might find it harder to achieve critical mass and get off the ground. But the first bar is not made worse off by the possibility that beautiful women might show up or instead might “flake.” Men internalize that knowledge when deciding whether or not to visit that bar.
In other words, potential negative externalities from HFT (or other culprit trading strategies) are on the markets where HFT is not very active. Yet the complaints you hear are about the markets where HFT is very active, and those complaints don’t correspond to the theoretical argument which might make sense. They are wishing for the beautiful woman who sticks around at the bar no matter what.
The high-frequency traders are like the beautiful women. If their biggest “threat” is to stay home, we are not worse off for their existence. If we fear their flaky departures enough, we may prefer to trade in other markets or at other time horizons, namely very long.
All this is assuming that such flaky departures occur — relative to the relevant alternatives — and that point can be debated.
John Delaney passes away
He was 42, climbing Mount Everest (more here), and he was best known for his role in running InTrade.com. He was also an MR reader and sometimes he wrote to me. He will be missed.
The very sad pointer is from Chris F. Masse.
Assorted links
Your Better Life Index
The OECDs Your Better Life Index lets you weight 11 dimensions of a better life such as housing, income, community, health, and life-satisfaction and then produces a flowery graph showing how countries score according to your metric. Looks like I screwed up. According to my metric, I should be living in Canada. What’s up with that, eh?
If you don’t like the OECDs better life ranking, here is Oprah’s best life series.
Hat tip: Real Time Economics.
Questions that are rarely asked
If people really fell in love for non-superficial reasons, shouldn’t we expect to see more couples who don’t match on superficial criteria such as age?
That is from Katja Grace. Which observable characteristic of a relationship is the best predictor of its expected depth and non-superficiality?
The Brazil-Bolivia border
Who thinks of that region as having been important for the technological progression of mankind? Yet it was, as Charles Mann explains:
Agricultural geneticists have long argued that the area around the railroad route — the Brazil-Bolivia border — was the development ground for peanuts, Brazilian broad beans…, and two species of chili pepper… But in recent years evidence has accumulated that the area was also the domestication site for tobacco, chocolate, peach palm (Bactris gasipaes, a major Amazonian tree crop), and most important, the worldwide staple manioc (Manihot esculenta, also known as cassava or yuca).
That is from Mann’s forthcoming book 1493: Uncovering the New World Columbus Created, reviewed enthusiastically here.
Crime is falling, still
The number of violent crimes in the United States dropped significantly last year, to what appeared to be the lowest rate in nearly 40 years, a development that was considered puzzling partly because it ran counter to the prevailing expectation that crime would increase during a recession.
In all regions, the country appears to be safer. The odds of being murdered or robbed are now less than half of what they were in the early 1990s, when violent crime peaked in the United States. Small towns, especially, are seeing far fewer murders: In cities with populations under 10,000, the number plunged by more than 25 percent last year.
This development reminds me of a fallacy committed by (some) intellectuals. Occasionally you will read it insinuated that if inequality continues, or continues to rise, “the public will take matters into its own hands,” or something like that. Apart from being potentially factually false, such an outcome is neither endorsed nor condemned by the intellectual. The writer is hinting that the losers from such a rebellion would deserve what is coming to them, without having to say so. Least of all is the writer willing to throw his or her efforts behind dissuading or criticizing such a public response (is it so hard to write “don’t bring out the guillotine”?). The ostensibly “positive” description of what the public will do is used as a veiled threat, to be enacted if the warnings of the supposedly smarter intellectual are not heeded, yet without the intellectual having to make the threat himself.
A similar issue comes up in some discussions of free trade. It is sometimes hinted that if more is not done to help victims of free trade, the public will turn against free trade and force through extreme populist anti-trade measures. Again, the writer is playing on mood affiliation rather than analyzing such an outcome dispassionately and then evaluating the behavior of the public and trying to prevent it by framing the issue in a different manner.
The reality is that the public does not respond to most events, or most changes in the income distribution, as the intelligentsia likes to think it should, or will.
Maybe I will call this “the public as billy club” fallacy. I have a low opinion of sentences in which this fallacy is committed.
Bob Dylan’s 70th birthday
It is today, here are a few underrated highlights of his career:
1. No Direction Home, the biopic directed by Martin Scorsese. It’s one of the best documentaries on American music more generally, and a superb albeit hagiographic portrait of Dylan and his music.
2. The Freewheelin’ Bob Dylan and Another Side of Bob Dylan and Blood on the Tracks and most of all Bob Dylan’s Greatest Hits volume II are the albums I listen to most often. The last one sounds horrible from its name, but it was conceived conceptually, avoids the traditional problems of greatest hits albums (unlike Vol. I), and has some not otherwise available tracks; highly recommended. Then comes Time Out of Mind. I think of Bringing it All Back Home as the “best” Dylan album, but I enjoyed it so much at age fifteen that I don’t listen to it much today. Blonde on Blonde is overreaching and Highway 61 Revisited is half wonderful, half embarrassment in the lyrics.
3. Dylan as disc jockey is first-rate, and you can buy his XM Satellite Radio selections of early American music. He has an encyclopaedic knowledge of the period.
4. As a singer Dylan is influenced by Al Jolson and Bing Crosby, as an acoustic guitarist he remains underrated.
5. Dylan once said that Barry Goldwater was his favorite politician.
Sentences to ponder
Despite the length of On What Matters, we glean little of its author’s view on what really does matter.
That’s Peter Singer reviewing the new Derek Parfit, in the new TLS, never to come on-line. In fact what really matters is that the books are finally coming out! Singer claims, probably with justification, that the two-volume set will prove the most important works on ethics since Sidgwick in 1873.