Who is to blame for the deadweight loss of Christmas?

The elderly, for a start:

The most inappropriate gifts, costing 50 per cent more than their value to the recipients, come from elderly relatives. Sensibly, many elect to give cash instead. Unsurprisingly, friends and partners give less wasteful gifts. It’s interesting to note that the most wasteful presents are those that cost roughly between Pounds 25 and Pounds 50 – expensive enough to assuage the guilt of a hurried choice, but cheap enough not to require double-checking with those close to the recipient.

Read more here.

Addendum: This year my mother and sister (their idea) stipulated that we would not exchange Christmas presents.  Of course these agreements are easiest to make in exactly those cases where you need them least.

Larry White recommends Bollywood movies

My own choice for best of 2004: Mazbool and Ab Tak Chhappan.  Best of 2003: Bhoot, Waisa Bhi Hota Hai Part IIBhoot is a ghost story, the others are gritty cop/mafia dramas.

All-time favorites:  Sholay, Bombay, Lagaan, Don, The Great Gambler, Mard, Suhaag, Amar Akbar Anthony, Satya, Company, Ganga ki Saugand, Kasam Suhag ki, Nagin, Umrao Jaan, Mera Gaon Mera Desh.  I admit soft spots for gangsters, Amitabh Bachchan, dacoit movies, Rekha, and camp.

Here is Larry’s home page.  Here are his on-line articles.  Here are his links on money and free banking.

Is it easy to start a new private school?

If David wants to start a private school, he must slay four Goliaths [in California]:

The State Environmental Quality Act, which imposes several obstacles to acquiring a piece of land or modifying a structure on that land;

City zoning requirements, which impose restrictions on the location of the private school;

City parking requirements; and

State and local building codes, which deal with the school building itself.

Plus, of course, tuition will not be free.  But we frequently underestimate the role of "micro-regulation" in stifling competition and innovation.  Read the whole thing, courtesy of the Reason Foundation.

The hot new papers in Industrial Organization

Hart, Oliver and Holmstrom, Bengt. “A Theory of Firm Size and Scope,” available at http://econ-www.mit.edu/faculty/download_pdf.php?id=514

Mullainathan, Sendil, and Scharfstein, David. “Do the Boundaries of the Firm Matter?” American Economic Review (May 2002) available at http://econ-www.mit.edu/faculty/download_pdf.php?id=283

Rotemberg, Julio. “Altruism, Reciprocity, and Cooperation in the Workplace,” 2002, available at http://www.people.hbs.edu/jrotemberg/altorgs5.pdf.

Rotemberg, Julio. “Fair Pricing,” available at http://www.people.hbs.edu/jrotemberg/angpri8.pdf

Baker, Malcolm and Wurgler, Jeffrey. “A Catering Theory of Dividends,” Journal of Finance (2004), available at http://pages.stern.nyu.edu/~jwurgler/

Baker, Malcolm and Ruback, Richard. “Behavioral Corporate Finance: A Survey,” found at http://www.wcfia.harvard.edu/seminars/pegroup/BakerRubackWurgler.pdf

Hall, Brian and Murphy, Kevin J, “The Trouble with Stock Options,” Journal of Economic Perspectives, Summer 2003, also at http://www-rcf.usc.edu/~kjmurphy/HMTrouble.pdf

Murphy, Kevin J. and Zaboznik, Jan. “CEO Pay and Appointments,” American Economic Review, May 2004, also at http://www-rcf.usc.edu/~kjmurphy/CEOTrends.pdf

Jense, Michael, Murphy, Kevin J., and Eric Wruck. “Remuneration: Where We’ve Been, How We Got to Here, What are the Problems, and How to Fix Them,” available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=561305#PaperDownload

Crandall, Robert W. “An End to Economic Regulation?” available at http://www.brookings.org/views/papers/crandall/20030721.pdf

Crandall, Robert and Whinston, Clifford, “Does Antitrust Improve Consumer Welfare?: Assessing the Evidence,” Journal of Economic Perspectives (Fall 2003 ), 3-26, available at http://www.brookings.org/views/articles/2003crandallwinston.htm

Happy reading…!

Was there an Industrial Revolution?

…the best estimates now available suggest no acceleration in the rate of growth of national product per head in the later eighteenth and early nineteenth centuries, and that one of the implications of this revision of the previous orthodoxy is that the English economy…was much more productive in the middle of the eighteenth century than was once supposed…it is unlikely that England enjoyed any advantage over her neighbours in this regard in the sixteenth century.  It would be a major surprise, therefore, if the revised view of the situation c.1750 did not imply that the rate of growth of national product per head for a century or more before 1750 was as high as, or higher than, it was in the century next following.

This turns the spotlight on agriculture, whose centrality to all organic economies is clear by definition.  It must figure prominently in any quest for the industrial revolution, despite its apparent exclusion by the oddities of nomenclature.

There are more shocks.  Between 1600 and 1800 English per capita income rose by no more than 0.35 percent a year.  (At the same time population was roughly doubling, from about 4.2 to 8.7 million.)  Such a measured growth rate may sound low but by the standards of the time it was miraculously high.  Other economies tended to hold steady or shrink in per capita income, especially in light of growing population.

Could it be that England’s ability to manage per capita growth above zero percent, for an extended period of time, is what give birth to the modern world?  Was the Netherlands, with its earlier period of growth and urbanization, in fact the true leader?

On all these issues, and many others, read the new and fascinating collection of essays by E.A. Wrigley, Poverty, Progress, and Population.

Are two-income families the result of economic desperation?


The big increase of women in the workforce can be traced back to an increasing number of wives of well-to-do men pushing into the labor market.  These women typically earn high hourly wages.

Meanwhile, among women whose husbands earned hourly wages in the bottom fifth of the distribution, the growth in labor market participation slowed down — contrary to the overall trend.

In 1969 the annual incomes of working wives showed no correlation with the wages of their husbands.  Wives of high-income earners earned above average wages, but they worked fewer hours than average.  In the late 1980s, however, wives of high-income earners worked almost the same amount as wives of husbands with lower incomes.

That is from the new and excellent Cowboy Capitalism: European Myths, American Reality.  Here is my previous post on the book.

Netherlands fact of the day

In the Netherlands…half the nation’s [drug] users are now over 40, and many are in their 60s.

The Dutch government is now setting up old folks’ home for addicts

I have been using drugs most of my adult life, and I can’t stop now," says Gert-Jan, a 62-year-old resident… "Being old doesn’t mean your addiction just goes away." 

"We do not deal drugs to the residents, but we don’t forbid them to use them either," said Alexander Hogendoorn, the home’s manager…One resident, for instance, has a set of needles for her knitting and another for injecting heroin.

Thanks to Prestopundit for the pointer.

Derivatives on housing prices

Macro Securities Research, a company affiliated with Robert J. Shiller,
the Yale economist, has reached an agreement with the Chicago
Mercantile Exchange to list pairs of derivative instruments that are
essentially index funds linked to home prices in certain markets. One
instrument in each pair will rise as its market index rises; the other
will rise as the same index falls. That will let investors bet on the
direction of housing prices. Similar, but less sensitive, vehicles are
being offered by HedgeStreet, a firm in San Mateo, Calif., that offers
small-scale derivatives speculation online.

Here is the full story; note that economists still lack a good explanation why such markets are not more common or met with greater enthusiasm.

Blogroll turnover

You will notice some turnover in our blogroll as of late.  Our software accommodates twenty entries, yet I can think of at least sixty blogs I would like to list.  The growth in recent economics blogs has been especially rapid.  Our apologies if you have been "defrocked."  And if you haven’t yet, perhaps you will be, apologies in advance.  I think of blogrolling as a (temporary) free advertisement for somebody else.  But the maximum service to our readers is to have some turnover and expose them to new blogs.  We haven’t stopped loving you.  Perhaps you have become too famous to need the publicity, or perhaps you will reemerge on our blogroll once again.  But we like and read your blog as much as ever.

Brad DeLong defends Adam Smith

My favorite part:

In The Wealth of Nations, at least, Smith believes that he has
an extraordinarily penetrating and largely new insight: that the market
economy–the "system of natural liberty," he calls it–as an immensely
powerful and benevolent social mechanism for promoting general
prosperity. This is, Smith believes, cause for a revolution in how we
should think about Political Oeconomy. The power and benevolence of the
market is not the only important consideration to take into account in
thinking about questions of Political Oeconomy, but it is the most
important consideration–as important, relatively speaking, as is the
gravity of the sun in calculating the motions of the planets. Just as
you cannot ignore the influence of Jupiter or even the Earth when
calculating the orbit of Mars, so you cannot ignore considerations of
civic humanism or employer collusion or monopoly in thinking about
Political Oeconomy. But to not give pride of place to Smith’s love of
the "system of natural liberty" is to be false to Smith’s thought. And
the guy deserves more respect than that.

Read more here.

Small ideas for a much better world

…participants [at a retreat for autistics]…can wear color-coded badges that indicate whether they are willing to be approached for conversation.

I will be very happy if this ever becomes socially acceptable practice for non-autistics, or for that matter in mixed autistic and non-autistic company.

Here is the New York Times story, fascinating in its own right, about how many autistics do not wish to be "cured."

How to induce more savings

…it could be that Americans’ failure to save is caused by mechanics,
not morals. At least that is one conclusion of a recent paper by four
economists: David Laibson and James J. Choi of Harvard and Brigitte C.
Madrian and Andrew Metrick of the University of Pennsylvania.

scholars examined what happened at four companies that switched the way
they pitched 401(k)’s to employees. When employees were offered the
option of signing up for a 401(k) upon hiring, participation rates
after six months ranged from 25 percent to 43 percent. Not bad. But
when the same companies instituted default enrollment – people were
automatically enrolled in the plan when hired but could opt out –
participation rates after six months were 86 to 90 percent. In other
words, changing the position of the on-off switch essentially doubled
the rate…

Professor Laibson suggests other possible uses of default mechanisms
to increase national savings. For example, what if income tax rebates
were automatically channeled into individual retirement accounts,
unless people chose to opt out?

So even if the bad news is that
we don’t save enough, even with all the vehicles and tax breaks,
there’s still some good news. To increase savings, we don’t have to
engineer a fundamental transformation of the American character.
Instead, we may just have to tweak the institutional levers that have
the effect of channeling cash in different directions.

As Professor Laibson said: "People will save if it’s on the path of least resistance."

Here is the full New York Times story.  Here is the original research.  On the other hand, this paper says that eighty percent of Americans are saving an optimal amount, Arnold Kling offers useful commentary and critique.

Iraq Economic Policy

Just what Iraq needs, more angry people.  From The Economist:

THE queue of
angry motorists stretches for miles. Baghdad’s petrol stations are
drier this month than they have been since just after the American-led
invasion of Iraq in 2003. Some drivers wait for as much as 24 hours,
sleeping in their vehicles. When told that there is no petrol, some
have lost their tempers and started shooting. How, asks a furious
driver, can an oil-producing country run out of fuel?

Ask an
insurgent, and he will assure you that the American army steals the oil
for its tanks. Others might blame the lack of capacity at Iraqi oil
refineries or the fact that the insurgents keep blowing up the
pipelines. But the most important reason is that the government has
fixed the price of petrol at approximately zero–barely one American
cent a litre.

ShortageOfficials and
petrol-station owners with access to subsidised petrol have a choice.
They can do the proper, legal thing and give the stuff away. Or they
can let it leak onto the black market, where prices are between ten and
100 times higher. Or they can smuggle it out of the country where,
global oil prices being rather steep at the moment, it sells for a tidy
sum. Many have chosen the more lucrative options.

Iraqis may
imagine that their situation is unique, but it is not. Other oil-rich
nations, such as Nigeria, also have governments that try to keep petrol
artificially cheap and therefore suffer chronic shortages. Iraq has
additional supply constraints, however, in the form of fanatical

Thanks to David Theroux for the pointer.

Read my lips

Two of President Bush’s top advisers refused on Sunday to rule out
the possibility that wealthy people might have to pay more to help
cover the cost of his move to partially privatize Social Security.

Neither Treasury Secretary John Snow nor Andrew Card, the White
House chief of staff, would say whether Bush’s ideas about overhauling
the federal retirement program would include raising the limit on
incomes subject to Social Security taxes.

People currently pay those taxes on income up to $87,900. That
level will climb to $90,000 next year. One proposal to help compensate
for the private accounts would raise or eliminate the tax cutoff, which
would mean that wealthier people would pay more.

Or should I have titled this post — "Be careful what you wish for…"?