Bad news for America but no surprise

The United States has dropped in its standing for the 2004 Index of Economic Freedom. We used to be sixth, now we are tenth.

Here are some of the leaders:

1. Hong Kong, for the tenth consecutive year.
2. Singapore
3. New Zealand
4. Luxembourg
5. Ireland

Moving down in the list, France was #44, North Korea comes in last, and Venezuela, Iran, and Libya were among the ten worst. No polling was possible for Angola, Burundi, and Iraq, among other disaster areas.

The United States was downgraded for poor fiscal policy. Note that the Freedom Index is done by the Heritage Foundation and The Wall Street Journal, hardly left-wing critics of Republican economic policy.

Addendum: The Economic Freedom of the World index offers slightly different rankings. For 2003 America remains in third place. The EFW is considered to rely more heavily on quantitative measurement, the Index of Economic Freedom relies more on observer assessments of economic freedom.

The further decline of the mass audience

Total U.S. movie box office just barely held its own for 2003, as reported by the January 5-11 issue of Variety (not on-line). The number of moviegoers declined by three percent. A few major movies, such as “Finding Nemo” and “Return of the King” did very well, but the overall picture was flat. Elizabeth Guider writes: “…unleashing dozens of $150 million films aimed at the global mainstream audience is an increasingly losing proposition.” Audiences for network TV have been poor as well.

Where is everyone going? Are you all reading blogs instead? That I doubt. The big cultural winner for this year is the DVD:

Check the year-end reports from the various sectors of the entertainment industry, and it’s clear that DVD stands alone as an unqualified sensation. It’s such a success that it might even be eclipsing – and cutting into – other leisure pursuits.

Total DVD revenue last year hit $17.5 billion – $12.1 billion in sales, $5.4 billion in rentals – according to new industry totals from market tracking firm Adams Media Research. That surpasses the most optimistic expectations and overshadows spending on movie tickets, music CDs and video games.

Here are some numbers from the side of the consumers:

Hours spent with home video increased 18% from 1997 to 2002. For the average person that means an increase to 58 hours each year, while time spent listening to music, watching network TV and reading books, magazines and newspapers dropped.

This year, movie fans spent an estimated 67 hours watching discs; that is expected to jump another 46% over the next four years to about 98 hours per person per year…nearly a DVD a week…Meanwhile, total TV watching is expected to rise only 3% (with network TV dropping 3%) and moviegoing 8%. Listening to music is expected to fall 19%.

So what does this mean for culture? People are watching the same movies over and over again. Over time we can expect movies to stand up better on multiple viewings, which is the whole point of the DVD format. Movies should become deeper. It is an open question whether the number of movies issued will rise or fall, but I am an optimist. On one hand repeated viewings mean less time to sample extra titles. On the other hand, the compact and popular DVD format gives filmmakers a new way of reaching audience. It will benefit the blockbusters, such as Nemo, but also will help niche films. For instance many people now order otherwise unavailable foreign movies through netflix.com.

Addendum: Do you resent your loyalties to DVDs? Here is a lengthy and excellent post, from Michael of www.2blowhards.com, on how to think about and revitalize your reading. However his remarks will spur your further interest in cinema as well.

SUV safety debate

A theme in writings about SUV’s (see here for a recent New Yorker article) is that consumers tend to overestimate SUV safety and grossly misunderstand the factors behind auto safety. The basic point is that safety comes from avoiding risky situations and quickly responding to danger. It turns out SUV’s tend to lull drivers into a false sense of safety and they respond more slowly to danger (e.g., SUV’s come to a complete stop much more slowly than many other popular types of cars). Because SUV’s are cosmetically altered trucks, they don’t have many basic safety features now standard in small cars or minivans, so you are more likely to die in an SUV accident than in another car (an anti-SUV site collects some Insurance industry reports). Consumer Reports has for many years argued that SUV’s are quite likely to tip over.

One response I’ve seen is to avidly defend consumer choice (see here for Car and Driver’s Brock Yate’s defense, or here for Peter Klein’s comment), or to minimize the SUV’s dangerous design. I think this misses a basic point. When events are infrequent (like fatal auto crashes), or when cause and effect are hard to link, people can opt to believe anything they want. All economics tells us is that markets are extremely good at responding to possibly erroneous consumer beliefs.

My take on this entire issue is that the central issue is liability. In general, you can’t hold someone accountable for the fatalities created by the use of a car with less then optimal safety features, any more than you can hold somebody accountable for the extra risk created by using a less than best bicycle, motorcycle or other device. In short, there is not much people can do about SUV safety because some people will always want to make the trade-off between safety and other product features.

Since the insurance industry is still willing to insure SUV’s, I wonder if the risk associated with them is tolerable given our current legal and economic standards. I invite knowledgable readers to email me information about how much more it costs to insure SUV vs. other vehicles.

The end of the French cultural exception?

The French cultural exception may be coming to an end, but not because of American pressure. The EU, that darling of the French, has decided that film subsidies should not be tied so closely to domestic production. After all, that would be discriminatory. Under the new proposal, a government could demand only that fifty percent of the subsidized film, in revenue terms, is made at home. Currently the figure stands at eighty percent. So they could shoot French films in Greece and still get the subsidies. More generally, the proposed change would force French filmmakers into more co-production agreements with other European nations. Here is the full story from the Financial Times.

Many of the French fear that we would get a bland cinematic “Euro-pudding” as a result. Note, however, that the renowned film Amelie was a French-German co-production, yet it retained a distinctive French flavor. The more likely “problem” is that the domestic political coalition behind French subsidies will be disturbed and may not survive in the long run.

The decision is not yet final, but Brussels can strike down the subsidies without approval from the French government and is expected to do so. Several weeks ago Brussels ruled that the French can no longer ban the advertisement of novels on television. The French feared that blockbuster novels, fueled by aggressive TV campaigns, will drive out more serious literature.

It should be clearer than ever that the French will have to give up their vision of the American bogeyman. France and America have many common interests. The real fear of (many of) the French is modernity and commercial culture, not American culture per se. In fact American culture, and the American presence on the world scene, might in the long run give France an appropriate counterweight to an EU that is growing in power and influence.

The Poincare conjecture

Has the Poincare Conjecture been solved? Possibly. Read this recent news report about a new proof by an obscure Russian loner, Grisha Perelman. The Conjecture is one of the famous Millennium Problems in mathematics.

“This is arguably the most famous unsolved problem in math and has been for some time,” said Bruce Kleiner, a University of Michigan math professor reviewing Perelman’s work.

Here is the clearest statement I can find of what the whole thing means:

To solve it, one would have to prove something that no one seriously doubts: that, just as there is only one way to bend a two-dimensional plane into a shape without holes — the sphere — there is likewise only one way to bend three-dimensional space into a shape that has no holes. Though abstract, the conjecture has powerful practical implications: Solve it and you may be able to describe the shape of the universe.

Or try this:

[the] work has huge implications for our understanding of partial differential equations. PDEs (as they are known in the trade) are the mainstay of physics and engineering. Mazur notes that physicists and engineers use PDEs to model everything from the flow of water to the buildup of heat in aircraft engines. “I would expect this work to have enormous applications in many fields of science,” he says.

There may also be applications for scientists studying DNA…Some kinds of DNA wrap themselves into knot formations that can be insanely difficult to decipher. But Mazur says Thurston’s classification [referring to related work] may provide a way to calculate the exact nature of any knot – so in theory it could be used to work out the structure of knotty DNA molecules.

The upper reaches of mathematics can often seem absurdly detached from life down here on planet earth, but Mazur points out that you can never know where things might lead. He cites the case of James Clerk Maxwell. In the late 19th century Maxwell worked out the equations of electromagnetism. “At the time it would have been easy to write off Maxwell’s ideas about invisible forces as a mystical abstraction,” Mazur says. But Maxwell’s work laid the foundations for the development of radio, and hence the communications revolution. Every time we turn on the TV or pick up a cellphone or log onto a WiFi system we are reaping the rewards of Maxwell’s equations.

Another bottom line: Perelman will receive a million dollars if his result stands up. Alex says this is another win for bounty hunters!

Does the case for free trade require factor immobility?

Paul Craig Roberts has been claiming that the traditional case for free trade requires immobile factors of production. Michael Kinsley offers his [critical] understanding of the argument as well. I take the bottom line to be as follows. If labor can migrate, trade will not always benefit both countries, in all conceivable circumstances. Those laborers will move to the country with the strongest absolute advantage. This may lead to a brain drain at home, and perhaps crowding and lower wages in the recipient country. In other words, there are potential externalities from the migration of labor.

Another scenario is that American capital flows, say, to China, instead of Chinese labor coming to America. America will not experience overcrowding, nor will China have a brain drain. Still the real wages of some American workers might fall. Chinese labor will be concentrated in some sectors more than others. Certainly some American workers will be worse off, though economists will continue to insist that wealth as a whole will go up.

None of these arguments are new and they do not represent a novel critique of free trade. The first version of the argument suggests, at best, that we cannot currently move to complete free immigration. It does not dent the case for free trade. The second argument simply points out that wealth-improving policies do not benefit everyone.

The ever-insightful Daniel Drezner offers some further commentary on the new anti-free trade arguments. He also notes that the “factor mobility” scenario does not involve fundamentally new considerations from the “factor immobility” scenario.

The bottom line: We should take care to minimize the negative externalities from foreign trade and investment, and this is best done by well-functioning labor markets and sound macroeconomic policy. Basically Roberts is peddling snake oil. His argument boils down to old-style protectionism, dressed up in new rhetorical garb, not new substance.

By the way, as an economist, I sometimes receive irate emails telling me I have never had to compete with subsidized foreign workers. It is then suggested that if I faced such competition, I would not favor free trade. This description of the facts is not true. Most of my Ph.d. class at Harvard came from other countries, and many of them were heavily subsidized by their governments. I was not subsidized by the American government and yet I had to compete with these people for jobs.

Addendum: See further remarks by Joseph Salerno. See also Truck&Barter., which offers further links of value.

Free trade and factor price equalization

I agree with the sophisticated points that Tyler makes above regarding free trade. The more basic point, however, is that contra Paul Craig Roberts and Charles Schumer, the theory of free trade does not rely on factor immobility. In fact, the theory shows that free trade and factor mobility have similar effects. Free trade in commodities tends to create factor-price equalization – i.e. the same prices for wages and capital of equal productivity everywhere in the world even when the factors themselves are immobile. But factor price equalization is exactly what would be produced by factor mobility. You can be against free trade or be for it but being against the theory in one form and against it in another is just wrong.

Cads vs Dads II

Social psychologists have found that women prefer to have sex with a “Cad” when considering a brief affair but for longer term relationships they prefer “Dads.” Leading Tyler to ask in an earlier post, Why do women like cads?

Patrick Vlaskovits, a reader, hypothesizes that Cads have better genes than Dads. Patrick writes:

Why is a Cad a Cad? I think it is because: He can be. His genes are so good, so much in demand, that women are willing to mate with him knowing that he might not stick around. Same reason why a Dad is a Dad. He knows if based solely on looks (proxy for gene competition), he will lose to the Cad every time. So, he must compensate for his lower quality genes by investing more resources in the female and offspring.

Symmetry is an important aspect of beauty and has been shown to be a signal of good genes so the theory can be tested by looking at how mating strategies vary with symmetrical features. Psychologists Steven Gangestad and Jeffrey Simpson report that this has been done with birds:

In a recent review of 18 bird species, Møller and Thornhill (1997a) have documented an association between extra-pair paternity and the extent to which attractive males engage in direct parental care. Specifically, when the rate of extra-pair paternity is high (and, thus, when males can benefit more from trying to attract extra-pair mates), attractive males perform a smaller proportion of offspring feedings than do less attractive males. Exerting greater extra-pair mating effort should yield larger payoffs for more attractive males, and this is evident in the time they fail to spend engaging in a competing activity: providing direct parental care.

Gangestad and Simpson suggest that the theory also applies to humans:

Over evolutionary history, men who had indicators of genotypic quality should have experienced larger gains in fitness payoffs than men who lacked these indicators. Moreover, men should have evolved to conditionally “decide” to allocate more versus less effort to mating or parenting, depending on the degree to which they possess these features.

Note, however, that the context in which men play the Cad v. Dad strategy, human society, is much more variable than that faced by birds. The Cad strategy will not work well in times and places where extra-marital sex is uncommon. Ever heard of an Amish Cad?

French revenge on Hollywood?

Henri Crohas’s company, Archos SA, makes a small hand-held device, like a bulky Palm Pilot, that can record and then play back scores of movies, TV shows and digital photos on its color screen or a TV set. The gadget — which in effect does to movies what Apple Computer Inc.’s iPod does to music — already has sold 100,000 units world-wide during the past six months, beating the big consumer electronics makers to the U.S. market.

Archos’s device, which costs about $500 to $900 depending on the model, ignores an anticopying code found on a majority of prerecorded DVDs. That means consumers can plug the Archos device into a DVD player and transfer a movie to it. Users also can transfer recorded TV programs and digital music files to the Archos device.

Yes this item is from a small company in France, here is the full story. Stay tuned for further developments. The bottom line is that the Internet is not the only means of pirating music and movies.

You are a better bargainer than you think

Negotiators tend to think they are more transparent than they truly are. They believe that their negotiating partners can discern their thoughts, and negotiating positions, when in fact the partners are clueless. See the experimental evidence from this recent paper by Leaf van Boven, Thomas Gilovich, and Victoria Medvec. There is good evidence that we send involuntary signals of our own trustworthiness. Still, we do not always have a good sense of how those signals are interpreted by others.

The basic result may stem from a kind of excess sympathy. The negotiator tries to put herself in the position of the “other mind,” but cannot eradicate the knowledge of her own bargaining position. So the model of the other mind contains more self-knowledge than is rationally justifiable. Related results have been found in other areas. Individuals overestimate how much others pick up on the cues from their facial expressions. Similarly, individuals who are laughing think they appear more expressive than they do to others. As for bloggers, well, they probably think that readers pick up more of the nuances of their writing than is the case.

The return of Horatio Alger

Paul Krugman published a December article in The Nation called “The Death of Horatio Alger.” He argued “America actually is more of a caste society than we like to think. And the caste lines have lately become a lot more rigid.”

Recent research by Kerwin Kofi Charles and Erik Hurst looks at intergenerational mobility in more detail. Here is a brief summary of the article, and here is a pdf of an earlier version of the paper.

The published version, “The Correlation of Wealth Across Generations,” in the December 2003 Journal of Political Economy, tells us the following:

1. “Age-adjusted parental wealth, by itself, explains less than 10 percent of the variation in age-adjusted child wealth.”

2. 20 percent of parents in the lowest quintile of the parent’s wealth distribution have children who end up in the top two quintiles of their generation. One-quarter of the parents in the highest wealth quintile end up with kids in the two lowest quintiles.

3. The age-adjusted intergenerational wealth elasticity is 0.37. What does this mean? If parents have wealth 50 percent over the mean in their generation, the wealth of their children will be 18 percent above the mean in the childrens’ generation.

4. Income levels account for about one-half of the parent-child wealth relationship. In other words, high income parents tend to produce high income children, to some extent. The children earn much of their wealth. Education and financial gifts account for very little of the correlation across parents and children.

5. Parents and children allocate their financial portfolios similarly, whether for reasons of genes or learned behavior. These common patterns of investment and savings are the second biggest factor behind the intergenerational wealth correlations we observe.

Note that the figures above do not include income from bequests. In this regard they underestimate some of the intergenerational correlation. On the other hand, large numbers of individuals do not receive bequests until they are at least in the 50s, so the figures measure the opportunities open to them in the earlier stages of their lives. And note that the data are recent, the wealth of the children is measured in 1999.

So what is the bottom line? Yes, there is some correlation in wealth across the generations. But most of that correlation (almost seventy percent) comes from continued hard work and savings. The authors do not examine Krugman’s claim that mobility once was greater, but it seems premature to suggest that the American dream is gone.

Addendum: Cardinalcollective.com offers some useful discussion and links, here is Daniel Drezner’s treatment, again replete with links.

Arthur Miller fails the test

On his recent visit to Cuba a group of writers practically begs Arthur Miller for help, for words of support, for some protection against their oppressive government and Miller is stumped. He’s so enthralled with Castro and his “fantastic shrimp” and “spectacular pork” that he is clueless to their plight. Morality does not require that we risk our lives, as some Cuban writers do, to speak truth to power but it does require that we honor those who do. What then to think of someone who laughs off their plight while enjoying wine with their oppressor? No Brad, it’s not just you, what Miller did was despicable.

A meeting had been arranged the previous afternoon, no doubt through the writers union, with some fifty or so Cuban writers. Initially the organizers had expected only a few dozen on such short notice, but they had had to find a larger space when this crowd showed up. We encountered a rather barren auditorium, a speaker’s platform and an odd quietness for so large a crowd. What to make of their silence? I couldn’t help being reminded of the fifties, when the question hanging over any such gathering was whether it was being observed and recorded by the FBI.

It was hard to tell whether Styron’s or my work was known to this audience, almost all of them men. In any case, with the introductions finished, Styron briefly described his novels as I did my plays, and questions were invited. One man stood and asked, “Why have you come here?”

Put so candidly, the question threw my mind back to Eastern Europe decades ago; there too it was inconceivable that such a meeting could have no political purpose. Styron and I were both rather stumped. I finally said that we were simply curious about Cuba and were opposed to her isolation and thought a short visit might teach us something. “But what is your message?” the man persisted. We had none, we were now embarrassed to admit. Still, as we broke up a number of them came up to shake hands and wordlessly express a sort of solidarity with us, or so I supposed. But in some of them there was also suspicion, I thought, if not outright, if suppressed, hostility to us for failing to bring a message that would offer some hope against their isolation. But back to the dinner with Fidel…

There were fantastic shrimp and spectacular pork, dream pork, Cubans being famous for their pork….

Why do Japan and China keep on buying dollars?

The dollar has fallen about twenty percent against the Euro in the last year but China and Japan continue to accumulate large dollar surpluses. At the same time, many economists worry that they will dump their holdings, sending the dollar into a free fall.

Michael Dooley, Peter Garber, and David Folkerts-Landau suggest that this financial policy is no accident. They view the Chinese and Japanese as pursuing deliberate full employment policies. They buy and hold dollars, not as an investment, but rather to subsidize their own exports. Read this summary of the argument, or buy an NBER working paper here. Garber puts the point bluntly:

“The fundamental global imbalance is not in the exchange rate,” Garber told the IMF forum in November. “The fundamental global imbalance is in the enormous excess supply of labor in Asia now waiting to enter the modern global economy.”

Garber estimates that there are 200 million underemployed Chinese who must be integrated into the global economy over the next 20 years. “This is an entire continent worth of people, a new labor force equivalent to the labor force of the EU or North America,” he explains. “The speed of employment of this group is what will in the end determine the real exchange rate.”

Garber likens the global labor imbalance to the collision of two previously independent planets — one capitalist and one socialist. “Suddenly they were pushed together to form one large market,” he says. The best way to restore equilibrium is for the former socialist economies to pursue export-led growth — and for the United States to act as a buffer and absorb the world’s exports.

Brad DeLong says he doesn’t believe the argument because the U.S. trade deficit is too large relative to the American economy. Brad predicts a revaluation of the Asian currencies within three years. Garber predicts that the new arrangement can last until another 200 million migrating Chinese find jobs. Either scenario would be better for the U.S. economy than some of the scare stories suggest. A weaker dollar in Asia would help correct the U.S. trade imbalance and it is unlikely that the Chinese would allow the yuan to rise so rapidly that the dollar would plummet. And if the current arrangement can continue, so much the better. The bottom line is this: the world economy, in real terms, is drawing on a massive “free lunch,” namely migrating Chinese labor.