Russ Roberts, Guest Blogger!

We are delighted to have our colleague, Russ Roberts, blogging with us over the next 10 days or so. Russ is the world’s only economist who has written a fable and a romance and a number of papers in top academic journals like the Journal of Political Economy.

What’s an economist doing writing a romance? Well, economics is a romantic science. Don’t believe me? Here is a description of Russ’s book The Invisible Heart.

Sam lives and breathes capitalism. He thinks that most government regulation is unnecessary or even harmful. He believes that success in business is a virtue. He believes that our humanity flourishes under economic freedom. Laura prefers Wordsworth to the Wall Street Journal. Where Sam sees victors, she sees victims. She wants the government to protect consumers and workers from the excesses of Sam’s beloved marketplace. While Sam and Laura argue about how to make the world a better place, a parallel story unfolds across town. Erica Baldwin, the crusading head of a government watchdog agency, tries to bring Charles Krauss, a ruthless CEO, to justice. How are these two dramas connected? Why is Sam under threat of dismissal? Will Erica Baldwin find the evidence she needs? Can Laura love a man with an Adam Smith poster on his wall?

Doesn’t it just make you want to tune in tomorrow?

Stadium Construction and Broken Windows

USA Today reports on a study by University of Dayton economists Marc Poitras and Larry Hadley: privately financed sports stadiums pay for themselves. Tax dollars aren’t necessary to make them viable. Somehow I doubt that the study will slow the pace of publicly financed sports stadiums. While it may make it more embarrassing for franchise owners to ask for public handouts, what’s a little stigma among friends? The success of the begging strategy is mainly due to the threat of exit–owners demand public financing as a way of extracting money from cities fearful that teams will leave. There isn’t free entry into sports leagues–leagues tightly control new entrants–so cities are always vulnerable to the threat of a team leaving.

The claim that sports teams and new stadiums are good for the economy is a classic case of the “broken window fallacy” of Bastiat. The benefits are seen–the jobs building the stadium, the fans who spend money at the restaurants near the stadium. Unseen are the jobs lost elsewhere and the restaurants on the other side of town that lose business. Roger Noll and Andrew Zimbalist found that the net benefit of public stadiums is basically zero–there’s no stimulus to the local economy worth talking about. Their conclusion:

In our forthcoming Brookings book, Sports, Jobs, and Taxes, we and 15 collaborators examine the local economic development argument from all angles: case studies of the effect of specific facilities, as well as comparisons among cities and even neighborhoods that have and have not sunk hundreds of millions of dollars into sports development. In every case, the conclusions are the same. A new sports facility has an extremely small (perhaps even negative) effect on overall economic activity and employment. No recent facility appears to have earned anything approaching a reasonable return on investment. No recent facility has been self-financing in terms of its impact on net tax revenues. Regardless of whether the unit of analysis is a local neighborhood, a city, or an entire metropolitan area, the economic benefits of sports facilities are de minimus.

The U of Dayton study is here.

You can find the entire Noll and Zimbalist book online here.

The IRS’s chosen people?

According to this NYTimes article, a secret 1993 agreement between the IRS and the Church of Scientology lets Scientologists deduct the cost of a religious education as a charitable gift. The secret ruling appeared to come to light when the Sklar’s, who are Jewish, attempted to take a deduction for the religious portion of their children’s education at a Hebrew school. The IRS wrote them back asking for receipts from the Church of Scientology! The Sklar’s provided receipts from the Hebrew school and the IRS denied the deduction. The Sklar’s are now suing on the basis that all religions, or none, should be offered the deduction.

The secret agreement seems to have been leaked but no one knows for sure since the both the IRS and the Scientologists are fighting the subpoena demanding its release.

The world is always more bizarre than I imagine.

Is Russia a normal country?

Conventional wisdom in the West says that post-Cold War Russia has been a disastrous failure. The facts say otherwise. Aspects of Russia’s performance over the last decade may have been disappointing, but the notion that the country has gone through an economic cataclysm and political relapse is wrong–more a comment on overblown expectations than on Russia’s actual experience. Compared to other countries at a similar level of economic and political development, Russia looks more the norm than the exception.

That’s the take of Andrei Shleifer and Daniel Treisman. Here is the full article. Here is a longer unpublished version.

Here is their view on economic performance:

The best estimate is that Russia’s genuine output decline between 1990 and 2001 was small and that it was completely reversed by 2003, following two additional years of rapid growth. Considering the distorted demand, inflated accounting, and uselessness of much of the pre-reform output, it is likely that Russians today are on average better off than they were in 1990.

My take: Mostly I agree. Remember how The New York Times speculated about mass famine, civil war in the streets, or attempted reconquests of the Soviet empire? None of those dire events have come to pass. Parts of the Shleifer piece might be interpreted as Putin apologetics, but put that question aside. For the most part the former Soviet Union has made unexpected progress. If you don’t believe me, read my post from yesterday.

Scarlet Letters (and Numbers)

In Ohio, drivers convicted of drunk driving will be issued special red on yellow license plates. From an economic point of view, fines are the best punishment because they benefit the punisher as they punish the violator and imprisonment is the worst punishment since it punishes the punisher as well as the violator.

Many people don’t like fines, however, because they seem to allow the rich to get away with anything so long as they pay the price (see Tyler on progressive fines). But in theory, if the fine is set equal to the expected cost of the crime, everyone should face the same fine irrespective of wealth and if the benefit of violating the law exceeds the fine then paying the fine and violating the law is the efficient solution. Economists think this argument is obviously correct but it leaves most people cold.

Fines do have another disadvantage if you don’t trust the government (i.e. take this disadvantage seriously). Precisely because the fine is a revenue to the government it encourages them to fine more. And precisely because imprisonment is costly we expect government to be more restrained in its use.

Social sanctions punish the violator, and are perhaps a better signal to others about the costs of crime than are fines, but have neither benefits nor costs to the punisher – thus they lie in-between fines and imprisonment. If fines are thought unfair or too dangerous and imprisonment is too expensive then social sanctions seem ideal. It’s surprising that we don’t see this form of punishment more often.

Addendum: Thanks to early reader William Sjostrom in Ireland (read his Atlantic Blog) and Stephen Laniel at Unspecified Bunker for reminding me about the disadvantages of fines and the signaling quality of social sanctions.

The origins of human intelligence?

Researchers have proposed an answer to the vexing question of how the human brain grew so big. We may owe our superior intelligence to weak jaw muscles, they suggest.

A mutation 2.4 million years ago could have left us unable to produce one of the main proteins in primate jaw muscles, the team reports in this week’s Nature. Lacking the constraints of a bulky chewing apparatus, the human skull may have been free to grow, the researchers say.

The timing of the mutation is consistent with rampant brain growth seen in human fossils from around 2 million years ago, says Nancy Minugh-Purvis of the University of Pennsylvania in Philadelphia, who helped with the study. “Right at the point you lose power in these muscles, brain size evolution accelerates,” she says.

Here is the full story. Here is the original research. Here is another account, which also reports on the critics of the idea. My gut level lay person’s response is not to believe the hypothesis, but hey, try convincing a physicist of the notion of comparative advantage.

Soviet observations

1. Here is the second sentence of Robert Conquest’s The Harvest of Sorrow: Soviet Collectivization and the Terror-Famine: “We may perhaps put this in perspective in the present case by saying that in the actions here recorded about twenty human lives were lost for, not every word, but every letter, in this book.” That sentence represents 3,040 lives. The book is 411 pages long.

2. Joke: Why are the USSR and America the same? A: Because in the USSR you can joke about America and in America you can joke about America.

3. Stalin famously said: “Death solves all problems. No man, no problem.”

4. In the first weeks of the war the Soviet Union lost 30 percent of its ammunition and 50 percent of its reserves of food and fuel. In the first three months the air force lost 96.4 percent of its planes…By the end of 1942, 3.9 million Russian soldiers had been taken prisoner – 65 percent of the Red Army…It would be pat, but also accurate, to say that from 1933 to 1941 the only human being on earth that Stalin trusted was Adolf Hitler.

5. But progress has already been made. The argument, now, is about whether Bolshevik Russia was “better” than Nazi Germany. In the days when the New Left dawned, the argument was about whether Bolshevik Russia was better than America.

From Martin Amis’s excellent Koba the Dread: Laughter and the Twenty Million. The material is quoted directly from Amis, I have added the numbering.

The benefits of no-fault divorce

In the past three decades, liberalized divorce laws have reduced suicides among women, sparked a dramatic reduction in domestic violence and led to a decline in women murdered by their partners, according to economists Betsey Stevenson and Justin Wolfers.

Specifically, they claim, these benefits have resulted from the adoption of so-called “no-fault” divorce laws, in which one partner can end the marriage without the consent of the other.

After states adopted no-fault divorce laws, suicides among women dropped by 20 percent, the rate of domestic abuse fell by a third, and the number of women murdered by their partners dropped by about 10 percent, Stevenson and Wolfers found.

Adoption of unilateral divorce laws didn’t affect the suicide rate of men or the likelihood that they would be murdered by their partners. But domestic violence directed at both men and women declined, the researchers reported in a recent National Bureau of Economic Research working paper.

Here is the link. Here is the original research. Here is the home page of Betsey Stevenson; he is the home page of Justin Wolfers. Here is Wolfers’s summary of the research.

My take: I’m all for family values, but let’s not forget that some families should split up.

Beliefs about welfare

Why does Western Europe spend so much more on welfare payments than does the United States?

Why is the latter system (45% of GDP) bigger than the former system (30% of GDP)?

While 29% of Americans believe that poor people are trapped in poverty, 60% of Europeans share this belief.

While 30% of Americans believe that luck determines income, 54% of Europeans share this belief.

While 60% of Americans believe that poor people are lazy, 24% of Europeans share this belief.

Robert Tagorda continues with the following:

These statistics come from the Economist, which has a fascinating review of Fighting Poverty in the US and Europe: A World of Difference. Authored by Harvard scholars Alberto Alesina and Edward Glaeser, this forthcoming book argues that institutional and political differences lead to contrasting American and European approaches.

More provocatively [we now move to Tagorda citing The Economist]:

The other half of the explanation lies in America’s racial diversity. In spite of 20 years of unprecedented immigration, European countries, particularly smaller ones like Portugal and those of Scandinavia, are still highly racially homogenous. America, by contrast, has great diversity, which is especially wide in some states. In addition, the poor in America are disproportionately non-white. Non-Hispanic whites are 71% of America’s population but only 46% of the poor.

Racial diversity in individual states is correlated with the generosity of welfare. For instance, the authors find that in 1990 Aid to Families with Dependent Children ranged from over $800 per family per month in mainly white Alaska to less than $150 in Alabama and Mississippi, where almost one-third of the population is black. Even after adjustment for inter-state differences in average incomes, the correlation with race remained strong. Across countries, too, racial diversity goes with low government spending on poverty relief.

The reason, argue the authors, is that “race matters”, and they marshal statistical evidence, much of it from opinion surveys, to back this up. People are likely to support welfare if they live close to recipients of their own race; but are antipathetic if they live near recipients from another race. The divergent attitudes of Europeans and Americans to the poor are underwritten by the fact that the poor in Europe tend to be ethnically the same as most other folk. In America, their skin is often a different colour. [Emphasis added by Tagorda.]

My take: I buy the basic results. The sorry truth is that a fully cosmopolitan society is an impossible ideal. Furthermore the proffered questions don’t fully get at the real beliefs of many Americans, which is that most poor people deserve their status. (I think some of the poor are lazy, but being a determinist I don’t assign fault.) That being said, it is such false beliefs that keep American welfare spending at reasonable, non-European levels. By the way, here is a related paper by the authors.

How does sadness affect market behavior?

Sadness makes you more eager to both buy and sell. It lowers the reservation price of sellers. Not surprisingly, feelings of disgust make you more eager to sell, but less eager to buy. Here is the home page of the one of the researchers. Here is some press coverage.

Randall Parker suggests: “Avoid shopping or selling things when you are sad.”

An alternative interpretation is that retail therapy is exactly what you need. That being said, I suspect that consummating a transaction is what makes you happy, not buying something expensive per se. Your vulnerability may suck you into spending more money than you ought to, but just sitting at home is a mistake as well. And contrary to what anti-market critics might suggest, loft insulation is unlikely to cheer you up. So what is the real lesson? When you are sad, go visit your local public library. They are almost sure to have something you want, and at the right price.

Thanks to Paul Barriere for the pointer.

Senators tell their favorite jokes

Imagine writing all the senators and asking them to relate their favorite jokes.

Here is one of the least funny responses, though the competition is stiff for this honor.

Here is the worst pun, don’t miss the accompanying photo.

Here is John Kerry’s joke.

Olympia Snowe won the vote for funniest joke.

I found Rick Santorum to have the funniest response, this is a PG-13 blog but for extra perspective read Dan Savage on the Senator, and no I won’t give you the link.

Thanks to Geekpress.com for the pointer.

Good economics makes for strange company

As you may recall, I showed that the CEA’s employment forecast, wrong as it has been, was simply a prediction of a return to trend and that Paul Krugman’s charges that the CEA has become corrupt are irresponsible and unjustified. (Sadly, Brad Delong has also signed on to these charges.)

I find myself in surprising company. In Salon, the left-leaning James K. Galbraith presents almost the same graph and the same conclusion.

Was Economic Team Bush getting its job targets, as many suspect, from Karl Rove? Did the professionals turn prostitute, as Krugman charges in no uncertain words?….Our new chart shows that the Bush forecast did not imply unusually rapid job growth for an economic expansion. …the failure of the jobs forecast did not occur because economic recovery forecasts were abnormal. They were not. So far as we can tell, it did not occur because someone cooked the books, under instruction or otherwise.

Shouldn’t DeLong and Krugman be worried when they fall to the left of Galbraith?

See also Econopundit who writes, “every economist who, like me, runs models with new quarterly data giving alternate (and possibly less-optimistic) employment forecasts is owed an apology. I have falsified nothing, but my results have been similar to those shown in the chart. I have reported the numbers that resulted from running a known model openly available to any and all (including Paul Krugman) who are competent to use it.”

Thanks to The Big Picture for the Galbraith link.