Exchange rates
Imagine living in a world where you had to have yen to buy a TV, renminbi to buy toys, and dollars to buy food. Think how complicated life would be.
Surprise. That’s the world we live in. Most TV’s we buy are manufactured in Japan, most toys come from China, and most of our food is produced in the United States. And by and large, the workers who produce those goods want to be paid in their domestic currency.
Luckily, this complexity is hidden from consumers; those nice currency traders handle all the grungy details.
That’s the introduction to an admirably clear introduction to exchange rates by Hal Varian writing in the Times.
Econometrics and New Yorker fiction
What kind of stories get published?
Ms. [Katherine] Milkman, who has a minor in American studies, read 442 stories printed in The New Yorker from Oct. 5, 1992, to Sept. 17, 2001, and built a substantial database. She then constructed a series of rococo mathematical tests to discern, among other things, whether certain fiction editors at the magazine had a specific impact on the type of fiction that was published, the sex of authors and the race of characters. The study was long on statistics…the thesis segues to the “Kolmogorov-Smirnov Two-Sample Goodness of Fit Test” and the “Pearson Correlation Coefficient Test.”
And what is the main conclusion?
…male editors generally publish male authors who write about male characters who are supported by female characters
More generally:
Under both [fiction] editors the fiction in the magazine took as its major preoccupations sex, relationships, death, family and travel.
Are you surprised? And what does the magazine say?
“I was personally riveted by the whole thing,” said Roger Angell, a writer at The New Yorker who worked as a fiction editor during part of the period scrutinized by Ms. Milkman. He spent a significant amount of time talking to Ms. Milkman and helped connect her with other people at the magazine. He was charmed by the results but worries they may sow confusion.
“Some unpublished writers are going to read this and say, `I now know what I have to do to get published in The New Yorker,’ and it’s not helpful in that way,” he said. “In the end we published what we liked.”
Here is the New York Times story.
The bottom line: Expect to see more of this kind of analysis in the future. In the longer run I expect all of the humanities disciplines to have a quantitative branch.
College Admissions in California
A few months ago, administrators at the University of California asked about 7,000 students who had been admitted to the prestigious UC Berkeley and UCLA campuses to defer enrollment. To save money, students were asked to enroll at a California community college for 2 years and then apply for a guaranteed transfer to the Berkeley or UCLA campuses.
The San Francisco Gate news site reports (click here) that only about 1,000 students took the offer. I don’t know whether this is good or bad, except to note that the students are probably the best judges of whether it’s better to immediately attend another college or take the UC offer. The Gate article notes that many went to very expensive private schools, suggesting that budget shortfalls could have been recouped with a price increase.
The problem this incident highlights is how the political process interferes with market mechanisms. Once the political decision to educate a certain segment of the population has been made, administrators should view a surplus of customers as a signal that the market can bear some price increases. Instead, California legislators tend to fight tuition increases because they might exclude low income students. This is truly a bad tactic because one can simply lower the price for low income students through grants and financial aid, which is what happens at many universities. Price hikes for the wealthy and subsidies for the needy is surely a better policy than arbitrary price ceilings and the exclusion of many who are able and willing to pay.
Starting out as a Professor
Alex and Tyler like to post advice to graduate students (click here), which is usually on the mark. Here are some reflections from someone who has just finished the first year as a professor. I hope non-academic readers will enjoy knowing what this job is about.
1. Being a professor is all about time management. It’s important to spend time preparing classes and completing research but you have to be efficient. Unlike graduate school, you can’t spend years on a single dissertation chapter. It has to go to review soon, so you had better learn to write well and quickly.
2. This is really a cool job, but it is not for everybody. Although I am at a research university, I am expected to teach a fair amount – large undergraduate classes and doctoral students – and I must do a fair amount of administrative work. Anybody who is allergic to either activity should seek other employment. But if you like teaching, and you can thrive when you are expected to produce a lot in an unstructured environment, then it can be very satisfying.
3. Success in the academy is about writing skill – even in technical areas. Tyler might be interested in knowing that I learned this from him. Having brilliant ideas and doing the research to prove you are right is only half the battle. You must work very, very hard to clearly express your ideas and persuade skeptical readers.
While I consider myself to be a happy person, I still advise people not to go into academia – it is very competitive, smart people can make much more money elsewhere, there is little security pre-tenure and you can enjoy great ideas without getting a Ph.D. by reading Marginal Revolution every day.
A serious health care proposal
Brad DeLong argues that the government should pick up all health care costs above $50,000. Among other things, this would diminish the incentive for HMOs to neglect sick patients or try to push them off the books. It also would provide comprehensive catastrophic insurance. By lowering the cost of private insurance, it will lead more people to be insured, which will lower governmental costs elsewhere in the system. Being on the run in Poland, I don’t have the ability to offer a full analysis. But it’s one of the best economics posts I’ve read in the blogosphere in a long time.
One question I have is how many of these expenditures are worth subsidizing at all. A big chunk of our health care bill is spent in the last year or two of life, without always bringing much of a payoff. A second question is what would happen to cost control at these higher levels of expenditure. In particular what would happen to cost care as we approached the $50,000 threshold?
The proposal can be viewed in one of two lights. From one perspective, it will bring catastrophic care to many who are otherwise uninsured. From another perspective, we already have too much catastrophic care, at the expense of prevention and healthy lifestyle habits. Government catastrophic insurance will lead to price controls, either explicit or implicit, and rationing. Catastrophic care will decline, but in a way that might be beneficial. This latter alternative is not politically appealing, but we cannot rule it out as the relevant scenario.
But read Brad’s post and make up your own mind. Health care reform is an area where no one (i.e., you, the reader, and me, the writer) should feel they already have a pat or satisfactory answer.
Academic Freedom
Earlier Tyler posted the story of Daniel Sumner, the agricultural economist at the University of California at Davis who has been accused of “treason” for analyzing US cotton subsidies for Brazil in a WTO case. One of the most troubling aspects of the case is that instead of backing him to the hilt, Sumner’s dean bowed to King Cotton and questioned his judgment.
Michael Ward a professor of economics at the University of Texas at Arlington (and a regular MR reader, I might add) has authored a Petition in Support of Academic Freedom stating in part:
To the extent that it is within their expertise and terms of employment:
1. It is appropriate for scholars to engage in public policy debates regardless of the comments’ effects on US producers or consumers.
2. It is appropriate for scholars to consult with interested parties in policy-making or judicial matters even when the adversary is the US government or US interests.
You can express your support here.
The myth of free trade Britain?
Was nineteenth century Britain really a free trade wonder? Just how entrenched is protectionism in French national history?
John Nye offers some provocative answers:
Britain preached the gospel of free trade and France was cast in the role of the sinner, but there was little truth in this stereotype. France did have more protected products than England did but the average level of French tariffs (measured as total value of duties divided by total value of imports, cf. Figure 1) was actually lower than in Britain for three-quarters of the nineteenth century.2 In other words, tariffs had a smaller impact on French trade than British duties had on Britain’s trade. The French, while eschewing free trade, and openly rejecting the Anglo doctrine of open markets, actually succeeded in making their trade more liberal and more open than that of the more vocal British. The master of this was Napoleon III–Bonaparte’s nephew–who throughout the 1850s promoted the most radical liberalizing reforms of the French economy, all the while insisting that France was only interested in moderate reform.
The revisionism continues:
Indeed, it was not British unilateral tariff reduction that moved the world to freer trade. Despite the belief that is still common today that British exhortation opened the doors to European free trade in the late 19th century, it was the 1860 Treaty of Commerce, promoted by the Napoleon III and concluded between Britain and France, that really ushered in the age of nineteenth century “globalization”. British demands for unilateral tariff reduction usually fell on deaf ears.
Might this advantage of bilateralism be true more generally? If so, it would mean that a serious U.S. free trade agreement with Japan would be the best outcome imaginable for promoting free trade.
Read the whole thing, and don’t miss the illustrative chart.
Beauty and Brains
Last week, Alex wrote about how smart people live longer. Today, we learn that smart people may be better looking too!
Satoshi Kanazawa of the London School of Economics and his colleague, Jody L. Kovar, assert that beautiful people also tend to be smart people — and vice versa.
In the July issue of Intelligence, the sociologists offer a theory to explain the confluence of beauty and brains. Their argument, in a nutshell: Intelligent men achieve higher status and marry beautiful women, who pass their genes on to their disproportionately attractive and smart kids, who win mates who are good-looking or brainy, and so on. Or at least that’s what they put forth in the journal article, “Why Beautiful People are More Intelligent.”
Here is the full story. Here is a home page for one of the researchers. But wait…he’s the same guy who says that marriage ruins male productivity.
Addendum: I just stumbled upon Randall Parker’s treatment of the same study.
Retail gas pricing
“Zone pricing,” is what the gasoline industry calls price discrimination – wholesalers charge less to stations in zones with many stations and more to stations in zones with few stations. Legislators take one look at “zone pricing” and assume that they can lower prices by requiring wholesalers to sell to everyone at the same, “non-discriminatory,” price.
Let’s assume that the legislators are succesful in lowering prices in high-price zones. Do you think that the retailers in these zones will pass the price reductions on to their customers? Of course, not. The reason prices are high in zones with few stations is that stations in these zones have greater market power. It’s this fundamental fact that makes prices higher in these zones – all price discrimination at the wholesale level does is change who gets the profits. With price discrimination the wholesalers get the profits, with uniform pricing the retailers get the profits.
So consumers in high-price zones don’t benefit from ending zone pricing but what about consumers in the low-price areas? If forced to charge a single price do you think that wholesalers will charge the lowest of their zone prices? Of course not – they will charge an average of their zone prices. As a result, consumers in highly competitive zones will face higher prices under uniform pricing.
Thus uniform pricing makes retailers better off at the expense of wholesalers and consumers.
Not sure if the analysis is right? Our colleague, Bart Wilson, is the author (with Cary Deck) of an excellent new paper on retail gasoline pricing. Wilson and Deck setup an experimental market with retailers, refiners and gasoline customers (the latter are computer agents) and find exactly these results. The Wilson and Deck paper is powerful evidence because an experimental market is a real market – it just happens to be a real market under the careful control of an experimenter.
Wilson and Deck also analyze divorcement (requiring wholesalers to divest themselves of retail stations – very bad for consumers because of the double monopoly problem) and the puzzling phenomena called “rockets and feathers” – the tendency of prices to rise faster with costs than to fall with costs. The full paper is here but they have also published a very good “executive summary” in Regulation, one of my favourite journals.
The largest known prime number
We just found a new one, and it has seven million digits. Here is the bottom line:
Mersenne primes are an especially rare type that take the form 2^p-1, where p is also a prime number. They are named after a 17th Century French monk who first came up with an important conjecture about which values of p would yield a prime. The new number can be represented as 2^(24,036,583)-1. It is the 41st Mersenne prime to have been found.
Here is the full story.
Note also that the number was found by a consortium of private computers, designed to exchange spare computing power:
GIMPS volunteers download a piece of software that runs in the background on their computer. A central server distributes different prime number candidates to each machine, which use spare processing power to test whether it is a genuine prime or not.
Here is more information, plus how to volunteer. Or perhaps you would prefer to search for alien lifeforms.
Blogging from Poland
My time in Paris is over and I’ve arrived safely in Poland. I’ve found exactly what I’d expected. It is a modestly bustling economy, but not setting the world on fire. The slowdown of the last two years appears to be over. Corruption is low for a transition economy, social capital appears to be high, and there is an emerging middle class. The government has serious fiscal problems, but then again they probably should be running deficits, though not at 51 percent of gdp as they are doing. Overall it is hard to see them not turning the corner. If you would like an illustrative lesson as to how the world is a better place than it was twenty years ago, Poland is exhibit B after China as exhibit A.
I might add that Warsaw has excellent food, arguably the best in Eastern Europe after Budapest.
I’m blogging just across from the famous statue of Copernicus. Did you know that he offered one of the earliest statements of the Quantity Theory of Money?
Media Bias
Discussions of media bias are a sort of political Rorschach test – what you see depends on what you already believe. Despite this, I think the evidence is consistent on a few points.
1. Journalists tend to be more liberal than the average American. A recent Pew poll confirms previous studies of journalists. In this study, journalists did not describe themselves as liberal (which previous studies did find to be very common) but their attitudes tended to be very liberal. For example, 51% of Americans thought homosexuality should be accepted, while 88% of journalists in the national media thought so.
2. Very few journalists describe themselves as conservative. In the same Pew poll, 33% of Americans described themselves as conservative while 7% of journalists said they were conservative. Previous studies have found that journalists overwhelmingly vote for Democrats, except during the 1950’s – probably because Eisenhower was the most liberal of recent GOP presidents, when compared to the competition.
3. Analysis of American news consistently shows biases. In the 1990’s, for example, numerous studies found that it was relatively rare for ex-GOP leader Newt Gingrich to get positive press coverage. I found it interesting that one study found Bob Dole’s coverage was about 50% positive/50% negative. I wonder what it was about the future Viagra spokesman that made him lovable by the media?
Those who see the media as dominated by conservatives probably focus on Rush Limbaugh, the Fox network and some other high profile conservatives. They could also justly point out that media is big business, and owners probably favor legislation that benefits them (a la Rupert Murdoch), even though some media entrepreneurs such as Ted Turner are quite liberal.
So here’s my analysis of media bias: the journalism profession, on the average, is quite liberal and they also believe in the ethic of objective reporting. This creates a situation where much reporting is probably informed by liberal values, but presented in a “manner of fact” way. As a result, there are a lot of angry conservative readers and viewers who are flustered by this type of reporting.
Since the whole journalism profession is pretty much liberal, it’s probably hard for more conservative owners to impose their will on the newsroom – although they try quite hard sometimes. The end result – an untapped market of conservative viewers that can be catered to by the likes of Limbaugh and the Fox network. The Al Frankens of the world probably focus on the high-profile conservatives (like Rush) and ignore the average news reporter, while the Limbaugh’s obsess over the New York Times – a model for much of the journalism profession – and ignore successful niche players such as Fox.
How to choose a restaurant
Where oh where should we eat?
Perhaps the common social choice problem that any of us face in practice is when we find ourselves in a group that must choose one restaurant at which all of us will eat. We propose a method where, similar to the I-choose-you-cut rule for dividing a cake, individuals in the group take turns restricting the set of choices for the group. Specifically, under our method the first person restricts the set of restaurants to a certain number the second person restricts the set to a smaller number and so on until the last person in the group selects one restaurant. We derive a formula for choosing these numbers such that – under a natural assumption about individual preferences.the probability that the group will choose any individual’s favorite restaurant is equal for each individual.
That’s from an interesting recent working paper by Tim Groseclose and Jeff Milyo.
My recipe is simpler: “Go Where I Say,” though I am less likely to use it in repeated game settings. And I am willing to defer to Randall Kroszner and John Nye, among others.
I do wonder why collective choices are not made in more efficient ways. Overall there is not enough deference to expertise and too much interest in finding a “lowest common denominator” of taste within the group. The real problem is to allow those who know to exert their influence, but without appearing like bullies. Yes I know the group cares more about harmony but that is precisely the problem: outlier tastes in the group end up frustrated. Maybe we should sever food decisions from all others, if this is possible. Then people could cede to the food expert, but without fear of future bullying in all other areas. As is sometimes the case in politics, the question is not “what is the proper social welfare function?” but rather “how do we get the right thing done?”
Who has the highest tax burden?
Number one is France, Belgium and Sweden are right behind. I am shocked to see China come in fourth, and to see the U.S. (New York State at least) beat out Canada.
The relevant metrics do not measure tax burden fully. Instead the rankings measure a weighted average of various marginal rates; average tax rates do not seem to enter into the calculation. Nor do they seem to consider how much of the tax is actually paid, or what you get for your taxes.
Since 2000, the tax burden, as measured in this fashion, has dropped in 22 countries, risen in 13, and held steady in 15.
The least taxed country is now United Arab Emirates, pushing long-time winner Hong Kong into second place. Next in line for low marginal rates are Singapore, India, South Africa, and Indonesia, an odd mix of countries. Then comes Ireland.
Here are extensive links to the data.
Note that economic theory says that marginal rates should be of primary importance. But often in the data it is the average tax rate that matters. Why is this? Could it be that liquidity effects are paramount? High average rates then suck away cash and end up affecting decisions at the margin. Or consider another channel. The tax system is very complex and full of loopholes and deductions. The average rate might in fact be the best measure of the true marginal rate we have.
Postscript: I know this is a market-oriented economics blog, but hey, I am also a contrarian at heart. I cannot help asking: which countries would you rather live in? Visit?
One view is “France is great, but it would be even better with lower taxes.” Another is: “France is great, and for reasons which bring both its wonders and its high taxes.” I am perpetually torn between these two views, often co-blogger Alex tries to push me more toward the former.
Punitive damages
California Governor Arnold Schwarzenegger is proposing to tax punitive awards at a 75% rate. The idea has some merit, punitive awards are intended to punish the defendant but to serve that purpose it is not necessary that they should flow to the plaintiff. Moreover, punitive awards often have more to do with the defendant’s deep pockets or other arbitrary factors like whether the plaintiff is headquartered in or out-of-state than with proof of malice. Giving punitive awards to the plaintiff, therefore, may over incentivize plaintiff’s and their lawyers (under the plan contingency fees would be calculated on the compensatory portion of the award only).
Schwarzenegger, however, is putting forward the proposal as a revenue source and calculating revenues under the assumption that punitive damages will not decline after the tax. On the contrary, as with any tax we can expect fewer punitive damages after the tax than before. In this case, that’s a benefit of the tax.
But tort reformers shouldn’t be too happy, however, because there are ways around the tax. In particular, the tax will encourage settlements. Suppose the plaintiff and defendant estimate that there is a good chance of a 10 million dollar punitive award only 2.5 million of which will go the plaintiff. See the gains from trade? The plaintiff and defendant can agree to settle at say $5 million, making both of them better off. In this way, punitive awards decline but “compensatory” awards increase. Increasing the incentive to settle is not necessarily a bad idea but it doesn’t help revenues.
Of ocourse, the Governor is being disingenuous when he claims this is tax policy not tort reform. Just like bad ideas, good ideas usually don’t get passed on the merits but need some otherwise irrelevant impetus (like a big budget deficit).
Addendum: Glen Whitman says we should burn the money – which is not as crazy as you might think!