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Markets in everything
But hey, when you buy bottled water isn’t fluoride what you’re trying to avoid?
Imagine a whole string of products along these lines:
“Organic produce with pesticides“
“Large print books, we fit more on the page than anyone else!”
Remember the old joke about the Soviet Union producing “The world’s largest microchip”?
I discovered the strange water on my second visit to Wegmans. By the way, I need to revise my last post about this super-supermarket. Upon further scrutiny, I can report that the prices are much lower than you will find in the competitors. It is truly a marvel of the modern world.
A comment I would never make on MarginalRevolution
Read Matthew Yglesias on the Endangered Species Act:
Did the president really gut the Endangered Species Act yesterday while no one was paying attention? So I’ve heard, at any rate. If so, good riddance. You’ll all yell at me, I suppose, but really: Who cares? Species die, shit happens, get over it. Clean air, clean water, and lower carbon emissions I’ll get behind that stuff impacts, you know, people.
Here are my more moderate comments from some time ago.
I should link to Matt more often, we share a Best Buy, plus he doesn’t want to worry about Iranian nukes. But when it comes to Dick Gephardt, however…read this.
Eggers vs. Supply and Demand
Dave Eggers, accalimed author of works of genius, has written an article in Mother Jones bemoaning the relatively low pay of teachers (click here). Here’s a representative excerpt:
The first step to creating an education system full of the best teachers we can find is to pay them in line with their importance to their communities. We pay orthodontists an average of $350,000, and no one would say that their impact on the lives of kids is greater than a teacher’s. But it seems difficult for everyone, from parents to politicians, to shake free of a tradition in which teaching was seen as something of a volunteer project for women whose husbands brought home the real money. Today’s teachers need to, but very often can’t, support a family on their salaries. They find it difficult or impossible to buy homes, to save money, to live comfortably, and, in wealthier areas, to live in or near the towns where they teach.
Eggers misses a basic point about work: The salary one makes is determined by supply and demand. A price doesn’t indicate how important the job is, or even if people think it is important. Take a simple example: water – it’s cheap because there is plenty of it, not because we don’t think it is important!
Same goes for work – the price of someone’s labor – their salary – is the result of how badly people want the labor and how many other people do the job. People want education for their kids – they pay thousands of dollars in locals taxes, have significant college savings accounts and the most prestigious colleges can harge over $30,000/year. Seems like the demand is there.
So why the low pay? Teacher’s low pay is due mainly to the fact that there are tons and tons of teachers! There is a huge supply of teachers. Education schools have huge enrollments – and surveys routinely report that education is one of the most popular majors in the country. Click here for a short Yahoo article reporting the most popular intended majors among incoming freshmen in 2002.
Some solutions for low teacher pay are non-starters. For example, simply demanding higher pay for public school teachers isn’t going to cut it because that means shifting money from other public services. There is a political solution – limit by fiat the number of teaching certificates awarded each year. That’s why the orthodontist makes a lot of money – there are few orthodontists relative to the demand for nice teeth. This might have undesirable consequences. Wealthier school districts might employ all the teachers. Perhaps the best response to low teacher pay is to realize that it’s a signal that fewer people should go into teaching. Next time you see someone express a desire to be a teacher, just tell them that we have too many!
Haitian fact of the day
In Haiti’s slums, round swirls of dough can be found baking in the sun. They look almost appetizing until you learn the ingredients: butter, salt, water and dirt…
And the dirt biscuits of Haiti – called “argile,” meaning clay, or “terre,” meaning earth – are not exactly a final cri de coeur against starvation.
Like the mice in Malawi, they are a staple of the very poor, somewhere between a snack and a desperation measure. Making them has been a regular business for years. The clay is trucked in plastic sacks from Hinche, on the central plateau. Blended with margarine or butter, they are flavored with salt, pepper and bouillon cubes and spooned out by the thousands on cotton sheets in sunny courtyards that are kept swept as “bakeries.” They cost about a penny apiece.
“They’re not food, really,” said David Gonzalez, a reporter at The Times who has visited Haiti many times. “People with hunger pangs eat them just to fill up their stomachs.”
Here is the full story (NYT); it is sad to even use the “food and drink” category for this entry. Here is a previous installment of “Haitian Fact of the Day.”
Update: I wrote this post a few days ago, before the horrific flood. Flooding is such a severe problem in Haiti because of deforestation, brought on by poorly defined property rights to trees and forest.
What makes a painting more valuable
Many of the results are not surprising. Light colors sell better than dark colors, happy portrait subjects sell better than widows, and horizontal pictures are easier to hang over the fireplace. Here are a few other points of note:
1. Landscapes can as much as triple in value when there are horses or figures in the foreground. Evidence of industry usually lowers a picture’s value.
2. A still life with flowers is worth more than one with fruit. Roses stand at the top of the flower hierarchy, chrysanthemums and lupins (seen as working class) stand at the bottom.
3. There is a hierarchy for animals as well. Purebred dogs help a picture more than mongrels do. Spaniels are worth more than collies. Racehorses are worth more than carthorses. When it comes to gamebirds, the following rule of thumb holds. The more expensive it is to shoot the bird, the more it adds to the value of a painting. A grouse is worth more than a mallard, and you had better show the animal from the front, not the back.
4. Water adds value to a picture, but only if it is calm. Shipwrecks are a no-no.
5. Round and oval works are extremely unpopular with buyers.
6. A Boucher nude sketch of a woman can be worth ten times more than a comparable sketch of a man.
The bottom line: Buyers prefer artworks which in some manner reflect high status.
For the full story, see “Why some Pictures Go For More Than Others,” in the May 2004 issue of The Art Newspaper.
Is the EU a tax cartel?
Germany yesterday threw cold water on the festive mood ahead of this week’s European Union enlargement by telling its eastern neighbours that low corporate tax rates used to attract foreign investment were unacceptable.
Speaking only days before 10 new member states join the EU on May 1, most of them from eastern Europe, Chancellor Gerhard Schröder said tax rates, often less than half those in Germany, were “not the way forward” in a united Europe.
Here is the full story. Here is a good article on the European tax cartel.
Germany does have a valid complaint that it sends subsidies to these lower-tax nations. Would any of you care to guess my vision of “the way forward”?
Markets in everything, the continuing saga
Leading British authors have auctioned off the names of characters in their new books to raise funds for charity.
Successful bidders at the third charity auction for victims of torture included a man who paid £1,000 to see his mother’s name appear in the next novel by the Irish writer Maeve Binchy. Another secured a role in books by two authors, bidding £950 for the children’s writer Philip Pullman and £240 for Sue Townsend, the creator of Adrian Mole.
And one author was also a bidder. Martina Cole, whose own work raised £220, paid £1,000 for her name to appear in the next book by Sarah Waters, who wrote Tipping the Velvet. Tracy Chevalier, whose novel Girl With A Pearl Earring, was adapted into a film, raised £300.
Adi McGowan, a City trader, paid for his mother, Muriel, to appear in the next Binchy book as a surprise birthday present. He said his mother was a fan of the author, whose novel Circle of Friends was adapted into a Hollywood film.
“I usually give a book as a birthday present,” he said. “Maeve’s a favourite. My mother has been waiting eagerly for her next book – now she’s actually going to be in it.”
Here is the full story. Here is a blog post about buying personalized romance novels more generally. Here is a related story of a couple who tried to auction off the naming rights for their baby. No company was willing to pay $500,000, so they named him Zane.
My take: To get mentioned on this blog, all you have to do is send us a useful link, failing that try $100 or more.
Private Militaries
Believe it or not, the private British firm, Global Risk International, “a more bespoke approach to the security industry,” operates the 6th largest military force in Iraq. Overall there are some 15,000 private military contractors in Iraq. In addition to more mundane tasks like feeding the troops they protect convoys and train the Iraqi police, paramilitary and army. The four Americans brutally killed earlier this week were employees of Blackwater Security Consulting who also serve as bodyguards for Paul Bremer.
In the United States, private military firms (PMFs) are similarly pervasive. Over the past 10 years the US has spent more than 300 billion on private forces including a contract for the operation of the computer and communications systems at NORAD’s Cheyenne Mountain base, where the U.S. nuclear response is coordinated. Brookings’s Peter Singer notes:
PMFs now provide the logistics for every major U.S. military deployment, and have even taken over the Reserve Officer Training Corps (“ROTC”) programs at over two hundred U.S. universities; that is, private company employees now train the U.S. military leaders of tomorrow.
I have drawn from Peter Singer’s book Corporate Warriors: The Rise of the Privatized Military Industry as well as several of his papers at the Brookings Institution. If you are in need of a small island nation, here is list of private military firms.
The French can compete
When the barricades that France’s protectionist auctioneers had erected to prevent the reform of their art market were finally stormed in late 2001, it seemed as though revolution was in the air. Many people believed that “les Anglo-Saxons”, as the French refer to Sotheby’s and Christie’s, were about to sweep their smaller, local competitors aside.
The logic was simple. The 456 licensed French auctioneers (commissaires-priseurs), who had been legally protected against foreign competition since 1556, would be no match for the two international giants now that the latter were allowed to hold sales in France for the first time. However, the reality has proved very different and in less than two and a half years Paris has evolved into the world’s most unpredictable and fiercely competitive art market centre.
And how can the French possibly compete?
The local auctioneers have survived by using their contacts, particularly among lawyers who arrange estate sales, and in some cases by reorganising and bringing in outside investors, which the law reforming the market allowed them to do for the first time. ArtCurial is a new creation, an alliance of three well-known French auctioneers – Francis Briest, Hervé Poulain and Remy Le Fur – with the Dassault aviation and newspaper dynasty and the Monaco real estate millionaire and art collector Michel Pastor. Its main specialities are modern art and vintage cars, and last year it came in third behind Christie’s and Tajan [another French firm] with sales of £41.7 million.
My take: European culture isn’t dead, it is simply oversubsidized and overprotected. Here is the full story. Here is an article about how the French have an unjustified fear of being bought out by foreigners.
Note also that Coca-Cola has postponed and possibly shelved its plans to compete with the leading French mineral waters. The British version of the product, Fasani (a terrible name, no?), turned out to be purified tap water. It is now an open question whether the French release will ever see the light of day.
Addendum: Daniel Drezner points out that McDonald’s is more popular in France than elsewhere in Europe. I blame expensive French food, high labor costs through regulation, and bizarre opening hours (i.e., your favorite place is usually closed). But if you think that French haute cuisine has been harmed, you haven’t eaten in Helene Darroze, where last night I had one of the finest meals of my life.
Was Nietzsche right?
In recent weeks there’s been a furor in the Washington D.C. area over lead in the District’s water supply. Today, the Washington Post (registration required) looks at why lead is bad for you and covers some of the science and public policy. That lead is bad for you is open and shut. Too much lead kills you and for kids, too much is not that much. But I am skeptical of recent studies that find that the worst effects of lead happen at the lowest levels of exposure.
Here‘s a typical newspaper account of one of those studies and a quote from a leading researcher on the topic:
“There is no safe level of blood lead,” said Dr. Bruce Lanphear, lead author of the lead study presented Monday at the Pediatric Academic Societies annual meeting.
Edward Calabrese would not agree. Calabrese is a toxicologist at UMass-Amherst and a leading scholar of hormesis, the phenomenon that most if not all toxins are actually good for you at sufficiently low doses. This does not imply that you should start adding mercury to your eggs or lead back into your pots. But the impact of toxins appears to be U-shaped–good for you at sufficiently low levels then bad as exposure increases. Whatever doesn’t kill you makes you stronger.
Hormesis also implies that linear models or threshold models of toxic impact are misspecified and understate the impact of toxins over some ranges of exposure.
Here’s a Scientific American article on Calabrese and hormesis.
Here’s my take on the economics and policy implications of hormesis.
Public choice theory and Haiti
Why is Haiti such a mess? How might a public choice economist think about the Haitian system of government?
Before Papa Doc Duvalier, Haitian leaders were lucky to last a few years. Look at this list of constitutions. Hegel suggested that voodoo religion would not lead to political liberty; so far Haiti has not disproved this thesis. Here is a comprehensive page on Haitian history, replete with useful links.
Haitian government appears to have no “core,” to use the economist’s term for instability. Most of the population is illiterate but extremely smart and distrusting of their governments. The distrust is so strong as to become a self-fulfilling prophecy. No leader can command lasting popular support or form a stable political coalition. One alternative is to rule with complete tyranny; alternatively, you can be more moderate and govern with a shorter-term perspective. In other words, you loot the country, while telling yourself, correctly, that the people who will follow your reign will be even worse.
The Haitian voodoo gods are intransitive in their power relations, and so has been the Haitian government, at least in the absence of massive oppression or outside interference.
The Duvalier years represented a watershed in the ongoing 150-year collapse that we call Haitian politics. At first it seemed like an acceptable bargain for the elites. Accept a charismatic dictator in return for public order and protection of investments. But it turned out that Papa Doc was crazy and he waged an ongoing campaign to destroy Haitian intermediary institutions. Soon there were more Haitian nurses in Montreal than in Haiti. By the time the reign of his son Baby Doc ended in the mid-1980s, the country was in tatters.
According to one account, Haitian politics is run by about ten families, many of them of Lebanese descent. In this view no leader can challenge their commercial interests. The only question is how oppressive that leader must be to rule the country and constrain a potential coup d’etat. But I view this account as too simplistic. Haiti is not a story of “the poor get poorer, the rich get richer.” The rich get poorer too. Perhaps Haitian “social capital” is a wasting asset, and we are in an equilibrium where everyone is willing to erode it further, knowing that a downward spiral cannot be prevented. The collective result of this behavior is to hasten the corrosion of order.
Drug money has been the big story for the last fifteen to twenty years. The poverty, corruption, and coastline of Haiti make it easy prey for drug smugglers. And of course it is close to the United States. As the older wealthy families lose ground, drug money has become the dominant political force. It can be argued how directly Aristide has been linked to the drug trade. But ultimately a Haitian politician must at least acquiesce in massive drug smuggling. A leading Haitian politician with no links to the drug trade would be like a Saudi prince with no connection to oil money — in other words, don’t believe it.
The other key player, of course, is the United States government. Aristide returned because Clinton reinstalled him. Aristide left when Bush told him to get lost. The U.S. can use force, withhold foreign aid, or use proclamations to make a leader focal or not. You might recall that Aristide did not allow legitimate elections to occur, which led to a crippling freeze on foreign aid. Aristide also proved no friend of democracy. In his “defense,” probably no Haitian incumbent could have survived fair elections, which brings us back to either tyranny or ever-circulating regime, short-time horizons, and political looting. Aristide chose a mix of these options.
So let’s say I was the president of Haiti. I have to keep the leading families happy or at least on board. I have to stop the drug smugglers from killing me or mobilizing opposition. I have to acquiesce in the drug trade, recognizing that most of those around me are on the take. I have to deal with the warlords who rule the local neighborhoods. I have to keep the U.S. President happy or at least neutralize him. I have to keep the population from starving. I have no resources and no tax base. Most of my public servants live from corruption. My country has virtually no foreign investment or infrastructure. I don’t even rule or physically control most of the country. In case of a revolt, I have only a few thousand policeman to draw upon.
Get the picture?
The bottom line: Don’t expect things to get better.
The economics of low-cost carriers
The nation’s low-cost carriers are profitable even as the venerable “legacy” airlines barely tread water. How can they make money while offering fares that are 40 to 70 percent lower? The reasons are many — cost of labor is a big one — but here are 10 major differences between the cheeky upstarts and the big boys.
The list runs as follows:
1. Low cost carriers generally serve cities of 1.3 million or greater.
2. Southwest has 84.6 employees per aircraft, United has 116.
3. JetBlue sells 2 percent of its tickets through travel agents, US Airways sells 61 percent through agents.
4. The low-cost carriers have more point-to-point flights. 40 percent of American passengers have connecting flights, it is only 10 percent for Southwest. Connecting passengers cost more money to serve.
5. Low-cost carriers generally avoid costly foreign flights.
6. A Delta captain earns $215,000 a year, an AirTran captain earns $135,000.
7. The low-cost airlines have cheaper pension plans.
8. Southwest, JetBlue, and AirTran have no downtown ticket offices. US Airways has 13.
9. US Airways pays its telephone reservation agents $21 an hour. JetBlue pays them $8.25 an hour and has them work from home, saving on office costs.
10. JetBlue flies one kind of plane, Delta flies 16 different kinds of aircraft.
Here is the full story. Obviously many of these cost savings can cut into long-run profitability, but that is how the low-cost airlines have penetrated the market.
If air genius Gary Leff offers commentary, I’ll write an addendum.
Addendum: Here’s Gary, he says “It’s the labor costs, stupid”.
Tom Friedman on outsourcing
…when I came to the 24/7 Customer call center in Bangalore to observe hundreds of Indian young people doing service jobs via long distance – answering the phones for U.S. firms, providing technical support for U.S. computer giants or selling credit cards for global banks – I was prepared to denounce the whole thing. “How can it be good for America to have all these Indians doing our white-collar jobs?” I asked 24/7’s founder, S. Nagarajan.
Well, he answered patiently, “look around this office.” All the computers are from Compaq. The basic software is from Microsoft. The phones are from Lucent. The air-conditioning is by Carrier, and even the bottled water is by Coke, because when it comes to drinking water in India, people want a trusted brand. On top of all this, says Mr. Nagarajan, 90 percent of the shares in 24/7 are owned by U.S. investors. This explains why, although the U.S. has lost some service jobs to India, total exports from U.S. companies to India have grown from $2.5 billion in 1990 to $4.1 billion in 2002. What goes around comes around, and also benefits Americans.
Read the whole column.
Addendum: Here is Virginia Postrel’s latest piece on trade.
Second addendum: How about this press release, India awarding a big contract to Hewlett-Packard, thanks to Kevin Bone for the pointer.
The Ricardo effect in Haiti
The civil war in Haiti is intensifying, to the detriment of virtually everyone. Many American observers do not understand how poor Haiti is, how few good institutions it has, and how much it is currently hovering on the brink of a true disaster. The new blog HaitiPundit.com offers regular updates.
One of the most memorable accounts I read of Haiti concerned the time when a ferry sank off the coast, leading to hundreds of deaths (this has happened more than once, I might add). Oddly enough, a large number of employees were on hand to help bring in the bodies. Normally when a boat comes to shore it stops at a dock. Haiti could not afford the dock, so a large number of people are hired to wade out into the water and carry the passengers back to shore on their shoulders.
No, flying around the island isn’t safe either, nor is driving. Here is a short explanation (scroll down a bit) of the Ricardo Effect, which notes that capital is substituted for labor at higher wage rates.
Food for thought
In case you were getting too bullish about the prospect of a Comcast buyout of Disney, Variety magazine (Feb.16-22, p.67) throws some cold water on the idea:
A hefty 34% of Disney’s operating income is derived from its Theme Parks & Resorts division, a business which is struggling against a range of cyclical economic woes. Theme Parks is slated to eat up nearly 70% of Disney’s total capital expenditure ($900 million) next year. And Comcast has no expertise in this area.
The Disney retail stores have been on the sales block for some time, with no potential buyer identified. Plus Disney just lost its deal with Pixar, the source of its big animated hits, and much of Disney’s income comes from overseas. Comcast has virtually no experience in the international arena. Well, there is always ESPN…