Thursday 30 April 2015

Pope Francis says it's 'scandalous' that women earn less than men for the same job

From Fox News Latino,
Pope Francis has added his voice to the feminist anthem of equal pay for equal work, saying it's "scandalous" that women earn less than men for doing the same job.

Francis also lambasted the attitude of some who blame the crisis in families on women getting out of the house to work. He says such attitudes are a form of "machismo" that shows how men "want to dominate women."
Francis says husband and wife must be complementary: "We should support with decisiveness the right to equal pay for equal work. Why is it a given that women must earn less than men?"
Good to see him making a stand. After all if there is one job with complete equality of the sexes its that of being Pope!

Peer review in one picture

We all know how this feels

(HT: Organizations and Markets)

Venezuela powers down

Things just keep on getting worse in Venezuela. From the BBC we get this bit of news,
Venezuela says it will cut the working day for public sector workers to five-and-a-half hours to conserve energy, down from eight to nine hours.

The initiative is part of a nationwide electricity rationing plan.

Vice-President Jorge Arreaza said there had been a surge in energy demand due to extremely hot weather. He said state employees would now work from 07:30-13:00 to save on air conditioning.On Monday, local media reported blackouts across the country.

Mr Arreaza said private companies would be asked to use their own generators to reduce pressure on the national grid.

But he said it was private homeowners who consumed the most energy, and he called for everyone to turn the dial down on their air conditioners.

"We are appealing to everyone's conscience, to use energy efficiently."

Last week the government claimed that energy problems were due to maintenance issues, but the opposition criticised the government for not investing enough in the energy sector, BBC Venezuela correspondent Daniel Pardo reports.

Power outages are common in Venezuela, which is a big oil producer but depends heavily on hydro-electric power.
More evidence that command and control equals chaos when implemented at the macro level. Why not let prices adjust to reflect increased demand? Higher prices would give consumers an incentive to reduce quantity demanded while the revenues generated could help provide funds to invest in the energy sector.

Wednesday 29 April 2015

Harford on inequality

At his blog Tim Harford has been writing on The truth about inequality. He says,
How serious a problem is inequality? And if it is serious, what can be done about it?

Myths abound. Many people seem to believe that Thomas Piketty’s Capital in the Twenty-First Century showed that wealth inequality is at an all-time high; instead, his data show that wealth inequality has risen only slowly since the 1970s, after falling during the 20th century. In Europe we are thankfully nowhere near the wealth inequality of the past.

Another common belief is that the richest 1 per cent of the world’s population own half the world’s wealth (almost true) and that their share is inexorably increasing (not true). The richest 1 per cent had 48.2 per cent of the world’s wealth in the year 2014, according to widely cited research from Credit Suisse, but that share has fallen and risen over the past 15 years. It is lower now than in 2000 and 2001.

Neither is it clear that global inequality is rising. Average incomes in China and India have risen much faster than those in richer countries; this is a powerful push towards equality of income. But inequality within many countries is rising. Research from Branko Milanović, author of The Haves and the Have-Nots, suggests that the two forces have tended to balance out roughly over the past generation.

One final myth is that inequality in the UK has risen since the financial crisis. In fact, it has fallen quite sharply. “Inequality remains significantly lower than in 2007-08,” said the Institute for Fiscal Studies last summer. That conclusion is based on data through April 2013. The IFS did add, though, that “there is good reason to think that the falls in income inequality since 2007-08 are currently being reversed.”
Harford then makes an important point about the need to take income redistribution into account when looking at inequality.
The UK already redistributes income extensively. As Gabriel Zucman of the London School of Economics points out, the UK’s richest fifth had 15 times the pre-tax income of the poorest fifth, but after taxes and benefits they had just four times as much.
I would think that if we were to look at consumption, which to me seems the important thing, the gap between "rich" and "poor" would decrease even more.

Of course there are those who would have the government redistribute even more but my previous post on To eat the rich, first they must stay still should act as a warning as to what could happen when the top income rates are raised.

I would suggest there is one addition question Harford did not ask: Is inequality a problem at all? Only after having answered that question yes should we ask how big the problem is and what can we do about it.

Tuesday 28 April 2015

To eat the rich, first they must stay still

Taxation is always a problematic issue but the taxation of very high income earners is becoming an even more controversial subject in a number of countries. One problem with high tax rates is that it could lead high earners to move abroad. A new column at suggests that top-tier inventors are significantly affected by top tax rates when deciding where to live. It is argued that the loss of such highly skilled agents could entail significant economic costs in terms of lost tax revenues and less overall innovation.

There is much debate, but little evidence, about the effects of high tax rates on high earners. The anti-tax side argue that higher top tax rates will cause an exodus of valuable, high income and highly skilled economic agents. They claim that high tax rates will unavoidably lead to a brain drain and an exodus of the most qualified people, especially as barriers to labour mobility between developed countries are reduced. The pro-tax side maintain that migration decisions are driven by other (possibly non-economic) considerations and would not respond very much to higher taxes.

It is generally acknowledged that non-human capital is highly mobile in a globalised world. This fact is used to justify lower taxation on capital. Much less is known about the mobility of human capital in response to taxation.

In their article, The effects of top tax rates on superstar inventors, Ufuk Akcigit, Salome Baslandze and Stefanie Stantcheva argue that inventors are highly valuable economic agents as creators of innovations and potential drivers of technological progress.
A group of highly valuable economic agents that policymakers perhaps might worry about is inventors, the creators of innovations and potential drivers of technological progress. Inventors may well be important factors for a country’s development and competitiveness – highly skilled migration has been shown to be both beneficial for a receiving country’s economy and to disproportionately contribute to innovation [...].

Consider Alexander G Bell, the inventor of the telephone; James L Kraft, who patented a pasteurisation technique and founded Kraft Foods; Ralph Baer, the inventor of the first home video gaming console that contributed to the expansion of the video gaming industry; or Charles Simonyi, a successful product developer at Microsoft. In addition to being very prolific inventors, they had something else in common: they were all immigrants. This is not very surprising given that migration rates increase in skill [...] and inventors are ranked very highly in the skill distribution.
It’s true, however, that inventors vary vastly in their quality and innovativeness. The big question is to do with the behaviour of the 'superstars': Do 'superstar' inventors respond to top tax rates?
In recent research (Akcigit, Baslandze, and Stantcheva 2015) we study the international migration responses of superstar inventors to top income tax rates for the period 1977-2003 using data from the European and US Patent offices, as well as from the Patent Cooperation Treaty [...]. Our focus is on migration across eight technologically advanced economies: Canada, France, Germany, Great Britain, Italy, Japan, Switzerland, and the US. To abstract from capital and corporate taxes as much as possible, we restrict our attention to inventors who are company employees and are not the owners (‘assignees’) of their patents.

Superstar inventors are those in the top 1% of the distribution of citations-weighted patents in a given year and ‘stars’ are inventors who are just below superstars in terms of quality and are in the top 1-5% of the citations-weighted patent distribution.

From outside survey evidence, we know that superstar inventors are highly likely to be in the top tax bracket and, hence, directly subject to top tax rates. Stars or inventors of lower quality are much less likely to be in the top bracket. The top tax rate, which can also be viewed as a ‘success tax’ can also have either an indirect motivating or discouraging effect on inventors in general, even on those who are not yet in the top bracket.

There has is a strong and significant correlation between top tax rates and those inventors who remain in their home countries. The relation is strongest for superstar inventors. [Results] show that superstar inventors are highly sensitive to top tax rates. The elasticities imply that for a ten percentage point reduction of top tax rates from 50% to 40%, a country would be able to retain on average 3.3% more of its top 1% superstar inventors. This relation weakens as one moves down the quality distribution of inventors – the top 25-50% or the bottom 50% of inventors are no longer sensitive to top tax rates.


At the individual inventor level, we have developed a detailed model for location choice. This wasn’t easy for two reasons. First, location choices are clearly also driven by factors other than taxes – such as language, distance to one’s home country, and career concerns – for which we include controls. Second, inventors may earn different pre-tax wages in different countries. This is a counterfactual we cannot observe and have to control for through a detailed set of proxy measures.

The results highlight that superstar top 1% inventors are significantly affected by top tax rates when deciding where to live. For instance, our results suggest that, given a ten percentage point decrease in top tax rates, the average country would be able to retain 1% more domestic superstar inventors and attract 38% more foreign superstar inventors.


We also consider long-term mobility, defined as a one-way move abroad. It turns out that long-term mobility is still affected by taxes, but to a lesser extent. This seems to imply that there are some adjustment costs to moving that might prevent inventors from moving back once they leave due to higher taxes.
What is the influence of companies on inventors’ migration responses to taxes?
One would expect companies to have an important influence on the inventor’s decision to move abroad. For instance, working for a multinational company might facilitate an international move, both directly within the company and indirectly by providing international exposure. Depending on the bargaining power between employer and employee, the relocation decision might well be driven by the former rather than by the latter. In that case, and if the employer has other considerations than personal income tax, we would observe a dampened migration effect of taxes in the data. Note, nevertheless, that employers should take personal income taxes into account to some extent, if competition for superstar inventors forces them to pay higher wages as a compensation for higher taxes.

We find that inventors who have worked for a multinational company are more sensitive to tax differentials in their location choice. On the other hand, inventors whose company has a significant share of its innovative activity in a given country are less sensitive to the tax rate in that country. This seems to suggest that career concerns can outweigh tax considerations. It could also signal that companies with very geographically localised research and development activities will strongly prefer to keep their superstar inventors at the main research location and dissuade them from moving to lower tax countries.
The upshot of all of this is that labour, like capital, might be internationally mobile and respond to tax incentives. The loss of highly skilled agents such as inventors might entail significant economic costs, not just in terms of tax revenues lost but also in terms of reduced positive spillovers from inventors and, ultimately, less innovation in a country.

  • Akcigit, U, S Baslandze and S Stantcheva (2015), “Taxation and the International Mobility of Inventors”, Working Paper 21024, National Bureau of Economic Research.

EconTalk this week

Leonard Wong of the Strategic Studies Institute at the U.S. Army War College talks with EconTalk host Russ Roberts about honesty in the military. Based on a recent co-authored paper, Wong argues that the paperwork and training burden on U.S. military officers requires dishonesty--it is simply impossible to comply with all the requirements. This creates a tension for an institution that prides itself on honesty, trust, and integrity. The conversation closes with suggestions for how the military might reform the compliance and requirement process.

A direct link to the audio is available here.

Monday 27 April 2015

Real wage inequality

Inequality is the trendy topic of the moment. Wage inequality being part of the story. We hear about differences in wage between males and females, skilled and unskilled workers, different racial groups, age groups etc. One point to keep in mind when looking at such results it that they normally involve looking at nominal wages of some kind: hourly, weekly, annual or whatever. But our well being is dependent not on nominal wages but on real wages. What we can buy with our wage is what is important. So what has happened to real wages?

Enrico Moretti has a 2013 paper ("Real Wage Inequality", American Economic Journal: Applied Economics, 5(1): 65-103) that looks at real wage inequality between skilled and unskilled workers. Where you live and the housing costs that come with your city of choice are a large factor in determining just how much a dollar of wages will buy. While nominal wage differences between skilled and unskilled workers have increased since 1980, skilled workers have trended to be employed in cities with high housing costs. This fact means that the increase in real wages between skilled and unskilled works is significantly less than the increases in nominal wages. Thus the differences in well being of the two groups is much less than nominal wages would suggest. It would be interesting to see such an analysis done for New Zealand, in particular with regard to housing costs in Auckland.

The abstract for the paper reads:
While nominal wage differences between skilled and unskilled workers have increased since 1980, college graduates have experienced larger increases in cost of living because they have increasingly concentrated in cities with high cost of housing. Using a city-specific CPI, I find that real wage differences between college and high school graduates have grown significantly less than nominal differences. Changes in the geographical location of different skill groups are to a significant degree driven by city-specific shifts in relative demand. I conclude that the increase in utility differences between skilled and unskilled workers since 1980 is smaller than previously thought based on nominal wage differences.

The machines are coming, do we care?

Man has been inventing labour saving technology ever since, well, man has been man. And it has yet to lead to long-term mass unemployment. And yet the Luddite type fear that machines will take over all the jobs in the economy is making something of a come back.

Economist Donald J. Boudreaux has written a letter to the editor of the New York Times to make the point that all known examples of labour-saving technology have lead to greater well being for the masses, not mass suffering. So why do people think this time will be different?
Warning that modern labor-saving technology is making humans expendable, Zeynep Tufekci writes that “[o]ptimists insist that we’ve been here before, during the Industrial Revolution, when machinery replaced manual labor, and all we need is a little more education and better skills. But that is not a sufficient answer. One historical example is no guarantee of future events, and we won’t be able to compete by trying to stay one step ahead in a losing battle” (“The Machines are Coming,” April 19).

Ms. Tufekci is mistaken to insist that the Industrial Revolution is the lone historical example of humans having had to adjust to labor-saving technology. As the economic historian Deirdre McCloskey notes, while the introduction of such technological improvements greatly accelerated since the Industrial Revolution, these have occurred throughout all of human history.

Examples of labor-saving technology that were created before the Industrial Revolution include the wheel, the lever, the pulley, the bucket, the barrel, the knife, the domesticated ox and horse, the fishing net, and moveable type. Examples of such technology created after that revolution are even more numerous; they include the harnessing of electricity, the internal-combustion engine, the assembly line, chemical fertilizers and pesticides, refrigeration, and, of course, today’s many IT marvels. Yet history knows no example of the introduction of labor-saving technology that caused permanent and widespread increases in involuntary human idleness. And at least since the dawn of the Industrial Revolution, all advances in such technology in market economies have been followed by improvements in the living standards of the masses - including (contrary to Ms. Tufekci’s suggestion) those advances introduced during the past few decades.

Sunday 26 April 2015

Yes economists do agree

And one topic on which they do agree is the case for free trade. As Gregory Mankiw has recently written in The New York Times,
Among economists, the issue is a no-brainer. Last month, I signed an open letter to John Boehner, Mitch McConnell, Nancy Pelosi and Harry Reid. I was joined by 13 other economists who have led the President’s Council of Economic Advisers, a post I held from 2003 to 2005. The group spanned every administration from Gerald Ford’s to Barack Obama’s.

We wrote, “International trade is fundamentally good for the U.S. economy, beneficial to American families over time, and consonant with our domestic priorities. That is why we support the renewal of Trade Promotion Authority (TPA) to make it possible for the United States to reach international agreements with our economic partners in Asia through the Trans-Pacific Partnership (TPP) and in Europe through the Trans-Atlantic Trade and Investment Partnership (TTIP).”
Mankiw also notes that
Politicians and pundits often recoil at imports because they destroy domestic jobs, while they applaud exports because they create jobs.

Economists respond that full employment is possible with any pattern of trade. The main issue is not the number of jobs, but which jobs. Americans should work in those industries in which we have an advantage compared with other nations, and we should import from abroad those goods that can be produced more cheaply there.
Even Paul Krugman is on board with this one,
It should be possible to emphasize to students that the level of employment is a macroeconomic issue, depending in the short run on aggregate demand and depending in the long run on the natural rate of unemployment, with microeconomic policies like tariffs having little net effect. Trade policy should be debated in terms of its impact on efficiency, not in terms of phony numbers about jobs created or lost.
Trade economist Douglas Irwin has put it
The claim that trade should be limited because imports destroy jobs has been around at least since the sixteenth century. And imports do indeed destroy jobs in certain industries: [...]

But just because imports destroy some jobs does not mean that trade reduces overall employment or harms the economy. [...]

Since trade both creates and destroys jobs, a frequently asked question is whether trade has any effect on overall employment. Unfortunately, attempts to quantify the overall employment effect of trade are I exercises in futility. This is because the impact of trade on the total number of jobs in an economy is best approximated as zero.
But perhaps Laura LaHaye puts it best
Of the false tenants of mercantilism that remain today, the most pernicious is the idea that imports reduce domestic employment. This argument is most often made by American automobile manufacturers in their claim for protection against Japanese imports. But the revenue that the exporter receives must be ultimately spent on American exports, either immediately or subsequently when American investments are liquidated.
So, one may wonder, why is it that, if economists are so much in agreement, the public and their elected representatives often so skeptical? Mankiw notes Bryan Caplan's answer,
In the case of international trade, three biases that he identifies are most salient.

The first is an anti-foreign bias. People tend to view their own country in competition with other nations and underestimate the benefits of dealing with foreigners. Yet economics teaches that international trade is not like war but can be win-win.

The second is an anti-market bias. People tend to underestimate the benefits of the market mechanism as a guide to allocating resources. Yet history has taught repeatedly that the alternative — a planned economy — works poorly.

The third is a make-work bias. People tend to underestimate the benefit from conserving on labor and thus worry that imports will destroy jobs in import-competing industries. Yet long-run economic progress comes from finding ways to reduce labor input and redeploying workers to new, growing industries.
The reaction by politicians and many commentators to international trade is an excellent case in point of Blinder's Law:
"Economists have the least influence on policy where they know the most and are most agreed; they have the most influence on policy where they know the least and disagree most vehemently.”

Things just keep on getting worse in Venezuela

From the Financial Times,
Mr Maduro’s escalating nationalist agitprop — including the unveiling of Venezuela’s longest flag — comes as he faces accusations of mishandling the economy. Two years since he took office, even former officials call the country “a laughing stock”.

“It’s as if we have the Midas touch in reverse,” said former finance and planning minister Jorge Giordani earlier this year. The country, which sits on the largest oil reserves in the world, suffers from “fiscal nymphomania”.

Venezuela’s economy is forecast to shrink by 7 per cent this year. Inflation is expected to top 150 per cent, fuelled by printing money to fund a fiscal deficit estimated at 20 per cent of gross domestic product.

Asdrúbal Oliveros, head economist at local consultancy Ecoanalítica, estimates the drop in government revenues caused by the collapse in oil prices squeezed imports by 22 per cent last year and will slice another 31 per cent off imports this year, crushing supplies of essential goods. “It is going to be a very tough year,” said Mr Oliveros. “The crisis is hitting all social classes.”
A large reason behind Venezuela’s topsy-turvy economy is its system of parallel markets and multiple exchange rates.

The minimum wage, for example, is 5,620 bolívars a month — worth $892 at the main official exchange rate, or just $21 at black market rates. Government stores sell food at regulated prices, but shortages mean many consumers must turn to the black market.

“Everyone is hustling,” said Luis Vicente León of Datanálisis, a local pollster. “Some 70 per cent of people queueing at state stores simply resell their goods on the black market. There are arbitrages everywhere.”
Yes price controls do drive black markets since people see the obvious arbitrage opportunities and take them. No amount of enforcement of price regulations will stop this. Deregulating and allowing the law of one price to take effect will. Such adjustments will, in the short term, be painful but the longer reform is delayed the more painful the adjustment be.

Is competition policy outdated?

As the economy changes so should competition policy. But does it? The "new economy" or the "information economy" or the "knowledge economy" or whatever you want to call it has altered the way the economy works. Changes in technology, in particular information and communication technology (ICT), have become the major drivers of change in the economy and of economic growth. But has competition policy kept up with this change? May be not.

The European Commission’s antitrust case against Google is the latest in a series of attempts to prevent tech giants from "monopolising" EU markets, or so we are told. But it can be argued that past cases against Intel and Microsoft demonstrate the need review what may be an outdated competition policy in the EU. And not only in the EU.

The European Commission has formally charged Google with anti-competitive practices, the latest twist in a case that was first launched way back in 2010. The EU’s competition watchdog accuses the US tech giant of systematically favouring results from its own specialist search engine, Google Shopping, over competitors like Amazon and eBay. And this, it is alleged, has had an adverse impact on competition and consumer well-being.

Diego Zuluaga has been looking at the case and argues, in an article at, that,
Superficially, it would indeed seem that Google holds a dominant position online, with a 92 per cent share of the EU market for general (known as ‘organic’ or ‘horizontal’) search. Google has also been expanding its offering of specialist (a.k.a. ‘vertical’) search engines for items like flights and consumer products. Does this mean that competition online is being undermined, and that regulatory authorities should intervene to put it right?
It could of course be that they are dominant simply because they are better than the competition.

Zuluaga goes on to say that the answer to his question is, Not necessarily.
The test for any antitrust investigation must be whether competition, not individual competitors, are being harmed. And by any available measure, competition and specialisation in online search services is thriving. New players focusing on specific market niches, from SkyScanner for flights to DuckDuckGo for greater privacy, have emerged in recent years. In the specific case of comparison shopping which the Commission is worried about, it does not look like Google Shopping is catching on, despite the tech giant’s best efforts: In three key EU markets – Germany, France and the UK – Google’s own product search engine is a marginal player, with Amazon, eBay and local competitors (Idealo in Germany, Fnac in France) boasting multiple times the number of user visits of Google Shopping. What is more, the gap between Google’s own service and its leading competitors is growing, if anything.

Intuitively, this makes sense. If I want to purchase Malcolm Gladwell’s latest bestseller, I am much more likely to browse for it on Amazon, as the latter is reputed for its excellent catalogue, user reviews and related recommendations. Rather than search for it on Google and then look for the best result, I will go to the Amazon website directly. The same goes for flights, hotels, restaurants and any other topic where there is a wealth of specialist search services. Even for those who tend to go through Google, competing options are still there – one only need scroll down to see them. This makes it hard for Google to divert large amounts of traffic to its own services – and it helps explain why Google Shopping has not taken off, as we might have expected it to.
A question one could ask is, Have past actions by competition authorities in previous digital cases been appropriate? May be not, just think of the Intel and Microsoft cases.
In 2009, the Commission fined chip-maker Intel more than €1bn for offering ‘predatory discounts’ to computer manufacturers, which allegedly harmed Intel’s competitors. Yet, by all measures, competition in the chip sector was fierce during the period of Intel’s anti-competitive behaviour. Chip prices declined by up to 75 per cent, while performance grew tenfold. Far from increasing at the expense of competitors, Intel’s market share remained stuck at 80 per cent, and the fluctuations in its share are strongly correlated with new product launches, both by itself and by rivals like AMD.

How about the other previous high profile digital probe, the 2004 ruling against Microsoft? Commission officials worried at the time that the company founded by Bill Gates was strengthening its grip on all PC-related products and services, thanks to its dominance of computer software. Barely a decade later, it is astonishing how things have changed: Microsoft still provides software for a lot of the world’s PCs, but the rise of smartphones – where Google’s Android and Apple’s iOS prevail – has made its share of the overall software market (for smartphones, tablets as well as PCs) shrink to as low as 20 per cent, according to Goldman Sachs research from 2012. Innovation killed the software star.

Both the Intel and Microsoft cases illustrate the shortcomings of EU competition policy when it comes to the digital sector: Despite Intel’s large market share in the chip market, competition was no less aggressive, and consumers still benefited from steadily dropping prices and ever better performance. And even though Windows was the dominant player in software in 2004, innovation outside the PC market – which no one, least of all Microsoft, foresaw – has turned it into one among several competitors in a much larger market.
Aa obvious point is that competition policy rulings should be grounded in sound economic analysis. It is not clear that they have been.
DG Competition has enormous powers to intervene in the internal market, acting as judge, jury and enforcer of antitrust proceedings in the EU. This makes it imperative that its rulings be rooted in sound, convincing economic analysis. Such analysis seems to be lacking in the case of Google Shopping, as it was in the Intel and Microsoft rulings. The digital economy lies at the heart of economic growth in the 21st century, so getting antitrust wrong in this sector will have a longstanding negative impact on innovation and growth in Europe.
A lesson from this is that the new technology underlying the new economy has changed the way companies do business in all sorts of sectors, and competition policy, in all countries, must evolve with it. Is not clear that it has in many countries, including New Zealand.

Saturday 25 April 2015

Interesting blog bits

Some weekend reading:
  1. Chris Dillow on Bonuses and productivity
    Big bonuses for bosses can have adverse effects upon productivity
  2. Jérémie Cohen-Setton comments on The critique of modern macro
    Do modern macroeconomic tools developed in the stable macroeconomic environment still make sense?
  3. Tim Worstall comments that Greek Debt Deal Looks Further Away Than Ever
    Various European finance ministers and the like are meeting in Riga today. And the Greek financial markets are up a bit on hopes that everyone will get closer to an agreement on how to deal with the Greek debt crisis. No one actually expects a deal to get done today but the hopes are that some baby steps toward one might be made.
  4. Eric Crampton notes that All your health is belong to us
    If the one paying the piper calls the tune, be careful who you let pay for dinner. Britain's NHS is considering rationing healthcare by a measure of deservingness
  5. Timothy Taylor on Americans, Led by Democrats, Get Friendlier With Free Trade
    A working hypothesis would be that countries with lower incomes and/or more exposure to foreign trade are more likely to see it in overall positive terms.
  6. Tim Harford on Paying to Get Inside the Restaurant: Is it worth it to fork over cash for a table?
    The next time you’re fortunate enough to have dinner at a high-end restaurant, take a moment to enjoy not only the food and wine, but the frisson of a really good puzzle: Why do restaurants price things the way they do?
  7. John Taylor on A Monetary Policy for the Future
    Should forward guidance be part of a monetary policy for the future? My answer is yes, but only if it is consistent with the rules-based strategy of the central bank, and then it is simply a way to be transparent. If forward guidance is used to make promises for the future that will not be appropriate in the future, then it is time-inconsistent and should not be part of monetary policy. For all these reasons monetary policy in the future should be centered on a rule or strategy for the policy instruments designed to achieve stated goals with consistent forward guidance but without cyclical macroprudential actions or quantitative easing.
  8. Joshua Gans on The last two digits of a price can signal your desperation to sell
    Competitive options for buyers and sellers can define a limit beyond which they will not go, but there is still a range of prices that fall within those limits. Within that range, clearly sellers would like a higher price, while buyers would like a lower one, so each has an incentive to signal to the other their willingness to be a tough negotiator. Sometimes, however, you might want to send a signal that you might be willing to be less tough. Why?
  9. Chris Dillow on The Knowledge Problem
    Was Hayek merely a Cold Warrior who is irrelevant today, or does he still have something to teach us? I ask because of two things that have happened to me this morning.
  10. Jason Brennan on Philosophy Departments, Cost-Benefit Analysis, and the Seen and Unseen
    In the past few days, philosophy bloggers have been writing with concern about how more philosophy departments around the country are closing

Friday 24 April 2015

Should cities pay for sports facilities?

Over at the Offsetting Behaviour blog Eric Crampton comments on how bad the business plan for a new $156 million cycleway for Christchurch is. But here in the People's Republic of Christchurch there are plans afoot not just for cycleways but also for other big ticket items such as a big new, super-sized stadium. Sports stadiums are a favourite of cities all over the world, not just in New Zealand. And you can be sure that they all come with (bad) business plans or economic assessment reports to show how great they are.

As Adam M. Zaretsky says when writing about the building of stadiums in the U. S.,
[...] cities with home teams are often willing to go to great lengths to ensure they stay home. And cities without home teams are often willing to dangle many carrots to entice teams to move. In either case, the most visible way cities do this is by building new stadiums and arenas.
But should cities pay for sports facilities? This is the question Zaretsky looks at in an article in the The Regional Economist, a publication of the Federal Reserve Bank of St. Louis,.

Zaretsky writes,
Between 1987 and 1999, 55 stadiums and arenas were refurbished or built in the United States at a cost of more than $8.7 billion. This figure, however, includes only the direct costs involved in the construction or refurbishment of the facilities, not the indirect costs—such as money cities might spend on improving or adding to the infrastructure needed to support the facilities. Of the $8.7 billion in direct costs, about 57 percent—around $5 billion—was financed with taxpayer money. Since 1999, other stadiums have been constructed or are in the pipeline [...], much of the cost of which will also be supported with tax dollars. Between $14 billion and $16 billion is expected to be spent on these post-'99 stadiums and arenas, with somewhere between $9 billion and $11 billion of this amount coming from public coffers. The use of public funds to lure or keep teams begs several questions, the foremost of which is, "Are these good investments for cities?"
The short answer to this question is "No." If you are a 'just read the executive summary' kind of guy then you can stop reading here since what follows just makes the case for the answer already given.

Zaretsky goes on to say,
When studying this issue, almost all economists and development specialists (at least those who work independently and not for a chamber of commerce or similar organization) conclude that the rate of return a city or metropolitan area receives for its investment is generally below that of alternative projects. In addition, evidence suggests that cities and metro areas that have invested heavily in sports stadiums and arenas have, on average, experienced slower income growth than those that have not.
When stadiums are build with ratepayers money, Are they worth it?
The dollars being invested in sports facilities are quite substantial considering the overall contribution the industry makes to the economy. In testimony before the U.S. Congress, economist Robert Baade said that Chicago's professional sports industry—which includes five teams—accounted for less than one-tenth of 1 percent of Chicago's 1995 personal income. Baade further commented that even when compared with the revenue of other industries, professional sports teams contribute small amounts to the economy. He noted, for example, that "the sales revenue of Fruit of the Loom exceed[ed] that for all of Major League Baseball (MLB), while the sales revenue of Sears [was] about thirty times larger than that of all MLB revenues."

Still, cities are driven by the idea that playing host to professional sports teams builds civic pride and increases local tax receipts from the team-related sales and salaries. When it comes to salaries, however, economist Mark Rosentraub noted in a 1997 article that there is no U.S. county where professional sports accounts for more than 1 percent of the county's private-sector payroll.

Although sports facilities certainly generate tax revenues from their sales, the pertinent question is whether these revenues are above and beyond what would have occurred in the region anyway. To address this question, city proposals to use taxpayer money to finance sports facilities are routinely accompanied by "economic impact studies." These studies, which are often commissioned by franchise owners and conducted by an accounting firm or local chamber of commerce, generally use spurious economic techniques to demonstrate the number of new jobs and additional tax revenues that will be generated by the project. The assumptions that are made in these studies—such as how much of the newly generated income will stay in the region and how many "secondary" jobs will be created—often cannot be substantiated by economic theory.

Estimates of income that will be generated and, hence, spent in the region are often overstated. Most of the "big" money in sports goes to the owners and players, who may or may not spend the money in the hometown since many live in other cities. And because athletic careers are usually short-lived, much of the players' income is invested. Moreover, league rules often require ticket revenues be shared with franchise owners in other cities as a way to subsidize teams in smaller markets. In the case of the National Football League, every visiting team leaves town with 34 percent of the gate receipts from each game.

On top of all this, the value of the subsidy a team receives when a city foots the bill for a new stadium or arena often shows up as a higher team resale price, which then ends up in the owner's pocket. For example, Eli Jacobs bought the Baltimore Orioles for $70 million in 1989, just after the team had convinced the state of Maryland to build it a new $200 million ballpark from lottery revenues. The enormously popular Oriole Park at Camden Yards opened in 1992. The following year, Jacobs sold the Orioles for $173 million. The sale netted Jacobs an almost 150 percent return, with no money out-of-pocket for the new ballpark.
But what about the economic impact studies that show tax revenue increases from a stadium.
Economic impact studies also tend to focus on the increased tax revenues cities expect to receive in return for their investments. The studies, however, often gloss over, or outright ignore, that these facilities usually do not bring new revenues into a city or metropolitan area. Instead, the revenues raised are usually just substitutes for those that would have been raised by other activities. Any student of economics knows that households have budget constraints that are binding, which means that families have only so much money to spend, particularly on entertainment. If the family chooses to spend the money at the ballpark, for example, then those funds cannot be spent on other activities. Thus, no new revenues are actually being generated.

Public funds used for a stadium or arena can generate new revenues for a city only if one of the following situations occurs: 1) the funds generate new spending by people from outside the area who otherwise would not have come to town; 2) the funds cause area residents to spend money locally that would not have been spent there otherwise; or 3) the funds keep turning over locally, thereby "creating" new spending.

Very little evidence exists to suggest that sporting events are better at attracting tourism dollars to a city than other activities. More often than not, tourists who attend a baseball or hockey game, for example, are in town on business or are visiting family and would have spent the money on another activity if the sports outlet were not available.

Economists Roger Noll and Andrew Zimbalist have examined the issue in depth and argued that, as a general rule, sports facilities attract neither tourists nor new industry. A good example, once again, is Oriole Park at Camden Yards. This ballpark is probably the most successful at attracting outsiders since it is only 40 miles from the nation's capital, where there is no major league baseball team. About a third of the crowd at every game comes from outside the Baltimore area. Noll and Zimbalist point out that, "Even so, the net gain to Baltimore's economy in terms of new jobs and incremental tax revenues is only about $3 million a year—not much of a return on a $200 million investment."

The claim that sporting facilities cause residents to spend more money in town than they would otherwise is harder to substantiate. To prove such a claim, the agency performing the analysis would need for its report both detailed information about the spending patterns of households and the ability to ferret out the information about their spending in other regions, which, at best, is extremely difficult and may even be impossible. Without such information, the report's authors could back into this claim only with some fancy footwork and shaky assertions. That is, they would have to contend that residents are spending more in town because of higher incomes that enable households to devote more of their entertainment budgets toward local sporting events. Then, the authors would have to demonstrate that incomes are up because money was spent on the stadium. If they can't, the argument falls apart since the only conclusion is that incomes rose for unrelated reasons; throwing tax dollars at the stadium did not affect households' spending patterns.
The most spurious economic concept applied to stadiums is the "multiplier".
Of the three circumstances described that purportedly generate new revenues, the third—funds keep turning over locally, thereby "creating" new spending—is probably the most spurious from an economist's viewpoint. Such a claim relies on what are called multipliers. Multipliers are factors that are used as a way of predicting the "total" effect the creation of an additional job or the spending of an additional dollar will have on a community's economy. It works something like this: A stadium is built, which creates new jobs in the region. Because more people are working, they spend money in the area (for lunch, parking, etc.), which in turn requires local businesses to hire additional workers to support the increased demand. These extra workers further increase demand for goods and services in the area, requiring more new jobs...and so on. That is, the dollars keep turning over locally. The story is the same for fans spending money at the arena, which provides income for arena workers, who then spend the money, generating incomes for other workers...and so on.

On their faces, these are compelling arguments. Some researchers have even attempted to quantify these effects, developing precise multipliers that tell analysts how much the new spending or job creation should be "multiplied" by to arrive at the "total effect" the spending or job creation will have on the local economy. These multipliers are often specific enough to distinguish between various industries, occupations and locations. Thus, economic development specialists and planners will generally latch onto multipliers and confidently proclaim that the 1,000 new jobs created by this industry will actually create 4,355 new jobs and generate $5.5 million in new revenue in the community when all is said and done. Makes for great headlines, but are such outcomes believable?

Probably not. As Mark Twain once said: "It's not what we don't know that hurts. It's what we know that just ain't true." For one thing, these new jobs most likely just lure workers away from other jobs in town and do not actually lead to a net change in jobs in the area. For another, many of the jobs are low-paying, part-time and needed only on game days. Moreover, authors of these economic impact studies often choose multipliers arbitrarily or with clients' wishes in mind to get the desired outcome. As economist William Hunter has pointed out, multiplier analysis can be used to justify any public works project because "even the smallest multiplier will guarantee community income growth in excess of public expenditures."

Even if economic impact studies are taken at face value, however, the cost of creating these jobs is usually out of the ballpark. In Cincinnati, for example, when two new stadiums were proposed to keep the NFL Bengals and the MLB Reds in town, the economic impact study claimed that 7,645 jobs would be created or saved because of the stadium investment. Since the project was estimated at $520 million, each new or saved job was reported to cost about $68,000.

When economists John Blair and David Swindell examined the $68,000 figure a bit closer, though, they discovered it was too low because the study's estimate of 7,645 new or saved jobs was too high. Blair and Swindell then re-evaluated the report, corrected for double-counting and other problems, and concluded that only 3,530 jobs would be created or saved if the stadium proposal passed. Thus, the cost per job was actually going to run more than $147,000. In contrast, state economic development programs spend about $6,250 per job to create new jobs.
And let us not forget "opportunity cost" .... but most impact studies do in fact forget it.
Another glaring omission from these economic impact studies is the value of the next-best investment alternative—what economists call the opportunity cost. "There's no such thing as a free lunch" is a favorite economist expression because it sums up exactly what opportunity cost means: When making a choice, something always has to be given up. The value of the "losing" choice must be considered when making the decision and when calculating the value, or return, of the "winning" choice. In other words, when a city chooses to use taxpayer dollars to finance a sports stadium, the city's leaders must consider not only what the alternative uses of those funds could be—such as schools, police, roads, etc.—but they must also figure what return the city would receive from these other ventures. Then, the return from the city's next-best alternative (for example, schools) must be subtracted from the total return of the "winning" choice to arrive at the "actual" return of the stadium investment. This adjusted calculation, though, is almost always missing from sports stadium impact studies. Why? Because in just about every case, the adjusted calculation would show that the next-best alternative was actually the better alternative.

Has financing sports stadiums ever been the best alternative? Research shows "No." In their book, Noll and Zimbalist—along with 15 other collaborators—examined the local economic development argument from a wide variety of angles. In every case, the conclusions were the same. "A new sports facility had an extremely small (perhaps even negative) effect on overall economic activity and employment. No recent facility appears to have earned anything approaching a reasonable rate of 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.

In fact, research has shown that subsidizing sports facilities usually does not affect a city's growth and, in some cases, may even hurt growth since funds are being diverted from alternatives with higher returns. In a 1994 study that examined economic growth over a 30-year period in 48 metropolitan areas, Robert Baade found that of the 32 metro areas that had a change in the number of sports teams, only two showed a significant relationship between the presence of a sports team and real per-capita personal income growth. These cities were Indianapolis, which saw a positive relationship, and Baltimore, which had a negative relationship.

Moreover, Baade found that of the 30 metro areas where the stadium or arena was built or refurbished in the previous 10 years, only three areas showed a significant relationship between the presence of a stadium and real per-capita personal income growth. And in all three cases—St. Louis, San Francisco/Oakland and Washington, D.C.—the relationship was negative.
So what is the overall conclusion? The weight of economic evidence shows us that ratepayers end up spending a lot of money and ultimately don't get much back for their forced investment. And when this paltry return is compared with other potential uses of the funds, the investment, almost always, seems uneconomic.

Interestingly, a pamphlet from The Greens turned up at home last week arguing that Christchurch should reassess its spending on "big ticket" items, such as the super-sized stadium. A good proposal as far as it goes. What would be better is to say we should abandon the stadium idea (and a number of other projects) altogether.

Thursday 23 April 2015

An argument for “selling” babies

One new and growing area of modern economics is what is commonly referred to as "repugnant markets". This area is most often associated with the work of Nobel prize winner Alvin Roth. Repugnant markets are markets where even when there are willing suppliers and demanders of certain transactions, repugnance to those transactions by others may constrain the market or even prevent the transactions from taking place at all.

The table below, which is from Roth (2007: 39), details a number of markets and their associated transactions which are , or have been, "repugnant".

One market, not mentioned by Roth, which I'm sure many people would find repugnant is the market for babies. Many, but not all. At the blog of The Independent Institute Abigail Hall makes An Argument for “Selling” Babies. Hall starts by making clear what she is, and isn't, talking about,
I am not advocating human trafficking or the idea of kidnapping babies in order to sell them to desperate parents. What I am suggesting is a general deregulation of the market for adoption. Allow birth mothers to enter into contracts with adoptive parents for the rights to parent their child for profit. It’s presently illegal for such transactions to take place. Birth mothers cannot receive payment for agreeing to adopt out their children (though they can have their medical expenses related to the pregnancy covered).
Hall knows that most people would find the idea of "selling babies" repugnant but asks that before we let our moral outrage kill off even discussing the idea we stop and consider the potential for very significant, very positive outcomes for all parties involved. Allowing birth mothers to profit from an adoption transaction fundamentally changes the costs and benefits of a variety of transactions.

Hall then goes on to outline seven likely effects from such a profit-driven market. These seven outcomes are drawn from a 1995 paper, "A Modest Proposal to Deregulate Infant Adoptions" by GMU economist Professor Donald J. Boudreaux,
They include:
  1. The “baby shortage” will diminish or be eliminated as women enter the market to sell the rights to parent their children. The “supply” of infants to be adopted is more likely to meet current demand.
  2. Birth mothers will experience greater wealth as they may profit from the sale of their parental rights.
  3. There will be fewer abortions. As women experiencing unplanned and unwanted pregnancies look at their options, the potential for financial gain means fewer women are likely to terminate. Stated differently, the cost of abortion for women is higher in that they are forgoing the potential income they could receive from an adoption.
  4. Infant health will improve. Since healthy children are likely to command a higher purchase price than ill ones, birth mothers would face strong incentives to receive proper prenatal care and stop behaviors that could damage the fetus.
  5. Child abuse would decline. The current welfare system incentivizes women to keep their children, rather than give them up or abort them. “Marginally wanted” children, as Boudreaux calls them, are more likely to be abused or mistreated. Allowing women to profit from selling their parental rights would mean these children would be more likely to be adopted into loving homes.
  6. Fewer children will be placed in the notoriously dysfunctional and disastrous foster care system (see #5).
  7. The price of fertility treatments will fall. Since adoption and fertility treatments are what economists call “substitute goods,” or goods that can be used for the same purpose, an increase in adoption would decrease the demand for fertility treatments. As demand falls, the price of treatments would fall as well.
Hall ends by explaining that as individuals and groups raise awareness about fertility issues, many people will offer money, thoughts, and prayers to those struggling to have children and expand their families. But
[a]s the above suggests, however, there is something else we can do. That is, we can suggest some serious changes to current adoption laws. Not only would such changes benefit countless couples experiencing fertility issues, but would decrease the number of abortions, increase the income of many women, and benefit children by placing more of them into loving, caring homes.

“I’ll sell you,” though said most often in jest, may be the best words some new babies could hear. They could also be the words allowing millions of couples struggling with infertility to achieve the families they so desperately desire.
  • Roth, Alvin E. (2007). "Repugnance as a Constraint on Markets", Journal of Economic Perspectives, 21(3) Summer: 37-58 .

Wednesday 22 April 2015

Are welfare payments a subsidy to employers?

Over at the Forbes website Tim Worstall writes an interesting article making the basic point that Welfare Payments Really Are Not Subsidies To The Profits Of Walmart And McDonald's
A week back we had the shocking news that of the various welfare payments made in the US some $153 billion of them went to families in which there was at least one person working. This is true by the way, those do look to be about the right numbers. However, this was immediately leapt upon as evidence that this means that the welfare system subsidises the profits of those companies that employ low wage workers. Make the capitalist plutocrats pay up fair wages and that bill will fall, meaning that we’re no longer subsidising said capitalist plutocrats. And that’s the part of the argument that fails. As I’ve said several times around here. Such welfare payments are indeed subsidies but they’re subsidies to the low wage workers, not to their employers. Not that many people believed me but there you have it. And interestingly enough I gain support from Arindrajit Dube on this very point. The EITC is in fact a subsidy to employers but as that’s what it is designed to be that’s fine. Other welfare payments like food stamps and so on are not subsidies to employers: far from it they actually raise the wages that employers must offer.
Another way, I think, to see Tim's point would be to think in terms of bargaining theory. In particular the Nash bargaining solution. In a Nash bargaining problem we have a set of possible outcomes that the players of the game can agree on, we have the preferences of the players over these outcomes and, importantly, we have what is sometimes called the disagreement point. The disagreement point is the outcome is what will happen if the parties can not reach an agreement.

To apply this to the welfare as a subsidy argument note that what what welfare payments do increase the disagreement point for (would be) workers. Assuming that without welfare the disagreement for workers is to get nothing then having welfare increases the disagreement point to whatever the welfare payment is. This can increases the bargaining power of the worker thereby forcing the employer to increase his wage offer. In effect the employer has to make an offer over and above the disagreement point for the worker to get the worker to agree to the outcome and thus the higher this point, the higher the offer from the employer must be.

See, you can make the simple complicated if you put in just a little effort.

If you want the really complicated stuff try William Thomson, "Monotonicity of Bargaining Solutions with Respect to the Disagreement Point", Journal of Economic Theory, 42: 50-58, 1987.

Tuesday 21 April 2015

7 reasons to end the war on drugs

Of all the government policy ideas that have been implemented over the last 40 years or so "the war on drugs" may well rank as one of, if not the, worst. Bonnie Kristian, a columnist at Rare, gives us 7 reasons for ending this policy:
1. Expensive. I’m always amazed that fiscal conservatives aren’t the loudest advocates of ending the drug war, because it has been one pricey failure. Government has spent more than $1.5 trillion since 1970 trying to prevent people from doing drugs—at this point, we’re dropping as much as $51 billion each year (split among all federal, state, and local government). That’s no small chunk of change, but it might be a little less ridiculous if it weren’t so…

2. Ineffective. The war on drugs does many things (more on that below), but the one thing it doesn’t do is stop people from using drugs. After more than four decades of prohibition, the U.S. has the highest rate of illegal drug use worldwide. In fact, even as drug war spending ballooned, addiction rates have stayed steady at about 1.3 percent. By historical and international standards, the drug war simply doesn’t work. Unfortunately, the drug war isn’t only ineffective, it’s also…

3. Counter-productive. Beyond failing to make people stop using drugs, America’s drug laws actually make abuse more likely. In Portugal—a wealthy, Western country with a culture and government close enough to our own to make this comparison fair—decriminalizing drugs resulted in abuse rates dropping by half. The Netherlands, which likewise has far more lenient drug laws than the U.S., has significantly lower rates of drug abuse than America because people are more likely to seek help for their addictions if they don’t risk jail in the process. But jailing addicts is just one way the drug war is…

4. Inhumane. While just over half of Americans now support legalizing marijuana for recreational use, eight out of ten support legalizing medical marijuana. That’s good news, because it can be cruel to deny medical marijuana to people who are sick or dying when it is the only thing which will ease their pain. Yet, forcing people to die painfully rather than letting them eat a special brownie isn’t the only way the drug war is…

5. Anti-family. The Washington Post’s Radley Balko covered a story recently in which the state of Kansas arrested a little boy’s mom after he argued in favor of legalizing medical marijuana in a school presentation. Caught with cannabis oil she’d used to alleviate her Crohn’s disease, now this single mother must fight to retain custody of her son. This is just one of many cases of the drug war breaking up families over nonviolent “crimes”—and the traumatizing consequences these children experience are just one more way the drug war is…

6. Dangerous. For our neighbors in Mexico, the drug war has produced tens of thousands of brutal murders, with some victims beheaded, dismembered or assaulted with ice picks. Here in the U.S., scarce prison space and police efforts are often devoted to non-violent drug violations while real criminals walk free. Meanwhile, just as alcohol prohibition caused violent crime to increase by criminalizing a high-demand industry, so the drug war increases violent crime rates. But even if none of these practical reasons to end the drug war existed, this state control over what we put in our own bodies would still be…

7. Inappropriate. As Thomas Jefferson said in his first inaugural address, “a wise and frugal Government [shall] restrain men from injuring one another [and] shall leave them otherwise free to regulate their own pursuits of industry and improvement.”

The drug war embodies the opposite of this philosophy: It is the epitome of a busybody state determined to regulate our most basic choices. There are many good reasons not to do drugs, but it’s a decision that shouldn’t involve Washington.
These ideas are of course based on the U.S. experience but versions, be they less extreme, of these 7 reasons will likely apply to most countries around the world which in some form or anther have their own war on drugs.

EconTalk this week

Scott Sumner, of Bentley University talks with EconTalk host Russ Roberts about interest rates. Sumner suggests that professional economists sometimes confuse cause and effect with respect to prices and quantities. Low interest rates need not encourage investment for example, if interest rates are low because of a decrease in demand. Sumner also talk about possible explanations for the historically low real rates of interest in today's economy along with other aspects of monetary policy, interest rates, and investment.

A direct link to the audio is available here.

Monday 20 April 2015

Mathematical Austrian economics

The idea of "mathematical Austrian economics" would seem to many Austrian economists, especially those of the older generation, to be an oxymoron. One of the things Austrians hate about the neoclassicals is the use of mathematics. For many mathematics has no place in economics. But is this view changing?

Today my copy of the recently published book "The Next Generation of Austrian Economics: Essays in Hono[u]r of Joseph T. Soalerno" (edited by Per Bylund and David Howden, Auburn: Mises Institute, 2015) turned up and chapter 7 defends the indefensible: it argues for a mathematical Austrian economics. The chapter is ""Mises and Hayek Mathematized": Toward Mathematical Austrian Economics" by Marek Hudik.

Hudik argues that
At first glance, mathematization of Austrian economics may seem to be contradiction in terms. Yet, at a closer inspection, the idea turns out to be not paradoxical at all [...].
Hudik makes the point that there is a communication gap between Austrian economists and the rest of the economics profession. This gap can be narrowed if Austrian economics were to become more mathematised. There are clearly dangers to mathematisation but it must be remembered that maths is just a tool and whether it is good or bad depends not on the tool but on the use of the tool.

While there are dangers to the (over)use of maths, it must also be remembered that there are benefits to the proper use of it as well. Often times people concentrate on the negatives and ignore the positives.

So lets look at the Hudik's plus side. Mathematics can act as a common language helping communication between economists of different "schools". It is a language that most economists speak and thus coordinating on it as a language will help reduce the communication problems between Austrian and other economists. Maths is also a more precise language. Its use forces us to formulate our ideas precise thereby helping reduce any misunderstanding that the verbal presentation of ideas could give rise to. Maths can act as a more efficient language. If is often more efficient than verbal language for both the "producers" of economic ideas and the "consumers" of those ideas. For producers it economises on effort, laborious thought processes can be "embodied' in simple rules for manipulation of mathematical symbols. One can see maths as a "capital good" increasing the productivity of the economist's "labour". As consumers of economics ideas maths can help us economise on time and effort. There is much to be said for condensing wordy volumes into a few precise and understandable pages.

Kenneth Arrow talking about future directions of research in the Coasean tradition

This video is of the Nobel Prize winner Professor Kenneth Arrow talking on the topic of "Future Directions of Research in the Coasean Tradition". This discussion emphasises Coase's first famous paper "The Nature of the Firm".

To some, who see Arrow purely as a general equilibrium (GE) theorist, it may seem odd that he was asked to talk on research in the Coasean tradition. After all GE would be considered "blackboard economics" and thus largely uninteresting, by Coase. But Arrow's work is wider than just GE theory and aspects of it are relevant to the issue under consideration. For example, Arrow's has made contributions to the new institutional economics, which Coase's work founded. Such achievements are discussed in a paper by Oliver Williamson entitled, not too imaginatively, "Kenneth Arrow and the New Institutional Economics" (This paper appears in George Feiwel, ed., Arrow and the Foundations of the Theory of Economic Policy, New York, 1987, pp. 584-99). Thus Arrow's work makes him more suited to discussing the topic at hand than it may at first appear.

Sam Peltzman talking about future directions of research in the Coasean tradition

Thanks to Jim Rose at the Utopia - you are standing in it blog our attention is drawn to this video of Professor Sam Peltzman talking on the topic of "Future Directions of Research in the Coasean Tradition".

I should point out that the first editor of the Journal of Law and Economics was Milton Friedman's brother in law Aaron Director. Director died at the age of 102 while the second editor, Ronald Coase, also died at the age of 102. I conclude that to live long you need to be the editor of the journal!!

Sunday 19 April 2015

From the comments: Surely this can't be right 2

Eric's response to my response to his response to me.
I'm going to disagree with a few points here.

First off, the way of making tv excludable is by using scrambled signals, like Sky does, not by bundling it with the physical TV. Bundling it with the TV is what yields things like the BBC TV tax.

Second, and again, the public good that's being debated is the improvements in policy you get with a more informed polity and the improvements in governance you get with more vigilance. Those effects are nonrivalrous and non-excludable.

How do you distinguish neighbourhood effects from public goods? I'd think of neighbourhood effects as being nonrivalrous and nonexcludable within a small area. The public good here in question apparently applies to the whole polity.

The better critique, I think, is that it's ambiguous whether some of this is public good or public bad - Campbell Live is responsible, in part, for wrecking the legal highs framework through populist drumbeating, for example.
As to point 2. To get the effects you note, people must have a tv. You can have as many transmissions as you like but they will have no effect, good or bad, if on one can view them. So the bundling of transmissions with a tv is important.

As to point 3, I'm thinking more along the lines of an externality. As Milton Friedman put in "Capitalism and Freedom":
[...] and from "neighorhood effects" - effects on third parties for which it is not feasible to charge or recompense them (p.14).

How the fed ended up fueling a subprime boom

Many people have argued that Fed fuelled the sub-prime boom by holding interest rates too low for too long after the dot-com crash. John Taylor, for example, has been saying "too low for too long" for a long time now. One question few, if anyone, has asked however is why the Fed did so.

Now George Selgin, David Beckworth and Berrak Bahadir have a paper in the Journal of Policy Modeling that offers an answer to this question. Fortunately George Selgin gives a brief discussion of their argument at the Alt-M blog. Selgin wites,
Our argument, in brief, is that the Fed blew it by treating the exceptionally high post-2001 productivity growth rate, not as warranting an upward revision of the Fed’s interest-rate target, as neoclassical theory would suggest, but as an opportunity to maintain a below-natural interest rate target without risking a corresponding increase in inflation.

We supply lots of evidence supporting our interpretation and, thereby, supporting the view that excessively easy Fed policy did indeed contribute substantially to the subprime boom. We also show how NGDP targeting would have prevented this outcome–and that it would have done so to an even greater extent than strict adherence to a Taylor Rule.

Readers familiar with my arguments favoring a “productivity norm,” as presented in Less Than Zero and elsewhere, will understand the claims made here here as a specific application of those more general arguments.
The "Less Than Zero" book referred to above is worth reading for its own sake not just because of its use in the above argument. The full tile is Less Than Zero: The Case for a Falling Price Level in a Growing Economy (pdf) and is written by George Selgin and published by the Institute for Economic Affairs in London. In it Selgin argues that
1. Most economists now accept that monetary policy should not aim at 'full employment': central banks should aim instead at limiting movements in the general price level.

2. Zero inflation is often viewed as an ideal. But there is a case for allowing the price level to vary so as to reflect changes in unit production costs.

3. Under such a 'productivity norm', monetary policy would allow 'permanent improvements in lower prices permanently' and adverse supply shocks (such as wars and failed harvests) to bring about temporary price increases. The overall result would be '... secular deflation interrupted by occasional negative supply shocks'.

4.United States consumer prices would have halved in the 30 years after the Second World War (instead of almost tripling), had a productivity norm policy been in operation.

5. In an economy with rising productivity a constant price level cannot be relied upon to avoid '..."unnatural" fluctuations in output and employment'.

6. A productivity norm should involve lower 'menu' costs of price adjustment, minimise 'monetary misperception' effects, achieve more efficient outcomes using fixed money contracts and keep the real money stock closer to its 'optimum'.

7. The theory supporting the productivity norm runs counter to conventional macro-economic wisdom. For example, it suggests that a falling price level is not synonymous with depression. The 'Great Depression' of 1873-1896 was actually a period of '... unprecedented advances in factor productivity'.

8. In practice, implementing a productivity norm would mean choosing between a labour productivity and a total factor productivity norm. Using the latter might be preferable and would involve setting the growth rate of nominal income equal to a weighted average of labour and capital input growth rates.

9. Achieving a predetermined growth rate of nominal income would be easier under a free banking regime which tends automatically to stabilise nominal income.

10. Many countries now have inflation rates not too far from zero. But zero inflation should be recognised not as the ideal but '... as the stepping-stone towards something even better'.
This argument makes the point that not all deflation is necessarily bad. It would be interesting to know what effect a productivity norm would have on New Zealand's inflation history given its somewhat dismal post-WW2 productivity experience.

Saturday 18 April 2015

Chicago's best ideas: "contract law, transaction costs, and the boundary of the firm"

If you have an hour free this weekend one way to spend it would be to watch this video by Anup Malani, professor at the University of Chicago Law School, talking about "Contract Law, Transaction Costs, and the Boundary of the Firm".

[...] describes a number of surprising contract provisions that can be used to tackle the holdup problem, where a buyer and seller agree on a price for a future date, but the seller later demands a higher price. He also discusses how contract law can affect the scope and ownership of firms.

In 1937, Ronald Coase asked: if markets are so efficient at allocating resources, why are so many resources allocated within firms? His answer was that market allocation entailed transactions costs and, when these were very high, transactions will take place within firms.

Oliver Hart, with Sanford Grossman and John Moore, suggested the holdup problem could be overcome if the buyer owns a key asset of the seller or the seller's whole firm, which can prevent the seller from holding up the buyer. Hart, Grossman, and Moore transformed Coase's theory of how large firms were into a theory of who owns firms. Since then, there have been numerous efforts to demonstrate that asset ownership or integration is not necessary to overcome the holdup problem.

Friday 17 April 2015

From the comments: Surely this can't be right

Eric Crampton left the following comment on the Surely this can not be right post:
I'm likely to credit or blame for that particular part. I'll walk it through more slowly.

1. Goods that are nonrivalrous in consumption may still be underconsumed relative to an unattainable blackboard optimum even if they are excludable.
2. The good in question here, the improved performance of the polity when there's better vigilance against rorts, corruption and the like, is non-rivalrous and is also non-excludable.
3. Journalism is one way of producing that vigilance.
4. Viewers of Campbell Live believe that his show is one of the more important sources of that watchdog role; others note that there are still many alternatives, and that the merits of this particular show are more debatable.
5. Where the high demanders for the programme each only count as one viewer under the current funding model that ties advertising to the provision of the non-rivalrous but potentially excludable tv programming, and where the high demanders aren't sufficiently valuable to advertisers relative to the viewership that might watch alternatives, the programme will fail absent alternative funding.
6. High demanders can and should use mechanisms like PledgeMe to fund the programme directly.
My response would be to deal with points 2 and 3 to argue that journalism as a useful consumable end product is not a public good - my point is the previous post. Let me use an example to make my point. Take a free-to-air television transmission. This you could argue is a public good but even if it is, its a pretty useless one without a tv on which to watch it. So to get a useful end product you need to bundle the transmission with a tv. TVs are private goods which effectively makes the transmission a private good.

I would argue the same for journalism in general. Whether journalism in conveyed to the public via tv or newspapers or radio or whatever, for the journalism to become a consumable good you need to bundle it with some other good, eg, a tv, a radio etc. These other goods are private goods and thus the need to bundle the journalism with these goods effectively makes the journalism a private good as well.

This is not to say that journalism doesn't have neighbourhood effects, its just too say it isn't a public good.

For those of you who think Campbell Live should be saved take note of point 6.

Surely this can not be right

In an article "Helping journalism can harm it" in The New Zealand Initiative's Insights Newsletter (Insights 13: 17 April 2015) Jason Krupp writes,
Regardless, they may have a point. Journalism has public good aspects to it – the threat that an investigative journalist uncovers a rort or corruption helps to discipline politicians, which provides benefits even to those who do not help to pay for it by watching or reading. Many people might free-ride rather than contribute.
This can not be right. What Krupp is describing isn't a public good but a good with neighbourhood effects. That is, there are positive (in this case) externalities to journalism but this is not enough to make journalism a public good.

If journalism really is a public good then how is it that newspapers, for example, can generate income by selling their papers or putting material behind paywalls. Paywalls and selling papers mean that journalism is excludable. These things wouldn't generate income otherwise. The important point here is that the journalism and the newspaper/website are bundled, you need both to get a useful product and you can exclude by using the newspaper/website.

Natural disasters: insurance costs vs. deaths

In a posting with the above title at the Conversable Economist blog Timothy Taylor writes,
The natural disasters that cause the highest levels of insurance losses are only rarely the same as the natural disasters that cause the greatest loss of life. Why should that be?
This doesn't seem that odd to me. Insurance claims are large when you get a lot of expensive, well insured property being damaged. But one reason for things like buildings being expensive is that they are well built and can withstand, to a large enough degree, the effects of a disaster without killing the people inside them. Cheap poorly build buildings give rise to less expensive insurance claims but suffer greater damage in a disaster and thus kill a great number of people as a result.

Taylor then gives two lists:
The first list shows the 40 disasters that caused the highest insurance losses from 1970 to 2014 (where the size of losses has been adjusted for inflation and converted into 2014 US dollars). The top four items on the list are: Hurricane Katrina that hit the New Orleans area in 2005 (by far the largest in terms of insurance losses), the 2011 Japanese earthquake and tsunami; Hurricane Sandy that hit the New York City area in 2012; and Hurricane Andrew that blasted Florida in 1992. The fifth item is the only disaster on the list that wasn't natural: the terrorist attacks of September 11, 2001. 
The Christchurch quake comes in 8th on this list,

The second list is
[...] a list of the top 40 disasters over the same time period from 1970 to 2014, but this time they are ranked by the number of dead and missing victims. The top five on this list are the Bangladesh storm and flood of 1970 (300,000 dead and missing); China's 1976 earthquake (255,000 dead and missing), Haiti's 2010 earthquake (222,570 dead and missing), the 2004 earthquake and tsunami that hit Indonesia and Thailand (220,000 dead and missing), and the 2008 tropical cyclone Nargis that hit the area around Myanmar (138,300 dead and missing). 
Taylor notes that there is little overlap between the two lists.
Only two disasters make the top 40 on both lists: the 2011 Japanese earthquake and tsunami, and Japan's Great Hanshin earthquake of 1995.
His reasoning for the lack of overlap is a more sophisticated version of the argument I gave above.
[...] the effects of a given natural disaster on people and property will depend to a substantial extent on what happens before and after the event. Are most of the people living in structures that comply with an appropriate building code? Have civil engineers thought about issues like flood protection? Is there an early warning system so that people have as much advance warning of the disaster as possible? How resilient is the infrastucture for electricity, communications, and transportation in the face of the disaster? Was there an advance plan before the disaster on how support services would be mobilized?

In countries with high levels of per capita income, many of these investments are already in place, and so natural disasters have the highest costs in terms of property, but relatively lower costs in terms of life. In countries with low levels of per capita income, these investments in health and safety are often not in place, and much of the property that is in place is uninsured. Thus, a 7.0 earthquake hits Haiti in 2010, and 225,000 die. A 9.0 earthquake/tsunami combination hits Japan in 2011--and remember, earthquakes are measured on a base-10 exponential scale, so a 9.0 earthquake has 100 times the shaking power of a 7.0 quake--and less than one-tenth as many people die as in Haiti.
In other words being a high income country which can afford good building codes, resilient infrastructure and a quick and quality disaster response is big factor is reducing deaths from natural disasters. In short, being rich saves lives. Another plus for the effects of economic growth.

Is history is more or less bunk? 3

I ended the post Is history is more or less bunk? 2 with two questions to do with why Gary Becker's argument that competitive labour markets would force employers to keep their prejudices out of their business decisions does not work in this case and what social mechanisms could be at work to perpetuate the discrimination we see in the labour markets. I emailed these questions to the author of the paper, Cornelius Christian, and he has kindly given his permission for me to reproduce his answers below:
Gary Becker's model, I think, is only part of the story. I am quoting from Gavin Wright's Sharing the Prize (p. 76-77), which is about the Civil Rights movement:

"segregation in such facilities as lunch counters, restaurants, and hotels was rarely required by law, and when statutes or municipal ordinances did exist, enforcement was generally at the discretion of proprietors... Businessmen feared that serving blacks, particularly in socially sensitive activities such as eating and sleeping, would result in the loss of white customers."

In the conclusion of the chapter, Wright says the following:

"The interpretation advanced in this chapter is that southern businessmen were locked into a low-level equilibrium, the stability of which was bolstered by the fact that they did not see it that way themselves. Both as firms and as downtown collectivities, businesses balanced the loss of black consumer spending against anticipated losses of white patronage."

Now, regarding present-day labour market outcomes, there is possibly a similar mechanism operating.

Regarding your question on a social mechanism, I am currently in the process of developing a model, and then subjecting it to empirical tests. I hope to have that done very soon!

Thursday 16 April 2015

In which I agree with Paul Krugman

No, seriously!

I have in the past argued that the benefits that flow from trade are not due to what we export but rather from what we import. I have argued, for example, that Imports good; exports bad and have asked Looking for new tools to help exporters: Why? and have noted that Protectionists are to economics what astrologers are to astrophysics, and so on. This, it seems, is not a view shared by many commentators. How often do we see calls to do things to help exports but not things to help importers? When the exchange rate is "high" we are told something must be done since it hurts our exports. No mention is made of help it gives to those of us who import.

Now thanks to Jim Rose at the Utopia – You Are Standing In It! blog I see I am not the only economist who thinks like this. It turns out that Paul Krugman, of all people, takes the same view.

The following comes from Krugman's paper "What Do Undergrads Need to Know About Trade?", 'The American Economic Review', Vol. 83, No. 2, Papers and Proceedings of the Hundred and Fifth Annual Meeting of the American Economic Association, (May, 1993), pp. 23-26:
Even more fundamentally, we should be able to teach students that imports, not exports, are the purpose of trade. That is, what a country gains from trade is the ability to import things it wants. Exports are not an objective in and of themselves: the need to export is a burden that a country must bear because its import suppliers are crass enough to demand payment. (p. 24)
We need to be able to teach this seemingly simple point not only to students but also the likes of commentators, journalists and politicians etc.

Is history is more or less bunk? 2

Further to my previous post I have now found a copy of the paper The Economist was talking about, “Lynchings, Labour and Cotton in the US South” (pdf) by Cornelius Christian.

In the paper Christian notes that in the short term the advantage of lynchings to whites was via the labour market. The evidence presented by Christian demonstrates that lynchings prevented black workers from fully participating in the labour market to the advantage of white workers. Lynchings cause blacks to migrate away, not too surprising, lowering labour supply and increasing wages for white labourers.
Using the fact that world cotton prices are exogenous from a single county’s perspective, I find that cotton price shocks strongly predict lynchings. More precisely, one standard deviation decrease in the world cotton price results in a 0.095 to 0.16 standard deviation increase in lynchings within a cotton-producing county. The findings are robust to the inclusion of controls, and to the use of tests with white-on-white lynchings and California lynchings. Cotton price shocks also do not predict legal executions of blacks, suggesting motives for lynching were different. These ffects are more pronounced in counties that had railroads in 1890, suggesting that links to world markets and greater local labour demand had an impact on lynchings. Disenfranchisement attempts such as the poll tax and literacy tests do not strengthen this effect, suggesting the substitutability of informal violence with formal institutions as a way to control workers. All this is indicative that greater numbers of lynchings served, at least in part, as a way of controlling black workers.

Using these observations as a guide, I claim that lynchings had labour market effects that benefitted white workers. During years of low cotton prices, wages are low. When whites lynch blacks, this causes other blacks to migrate out of a county, thus reducing labour supply and increasing wages. I show in my data that lynchings predict greater black out-migration, and higher state-level agricultural wages. A one standard deviation increase in lynchings within a county leads to 6.5 to 8 % more black out-migration, and a 1.2 % increase in state-level wages.
Given these short-run effects what are the long-run outcomes?
I then turn to the long-term effects of lynchings, starting with the Civil Rights era. Although lynchings became very rare in the 1930s, discrimination against blacks continued. I focus on the 1964 Mississippi Summer project, a campaign to register African Americans to vote - the campaign’s organisers encountered violence and discrimination throughout the summer. I show that Mississippi counties with more 1964 violence also had more lynchings in the past. Using datafrom the 2008-2012 American Community Survey, I also show that lynchings in the past predict white-black wage and income gaps today. This is robust to the inclusion of various controls and state fixed effects. Furthermore, I test the sensitivity of the coefficient estimates to control variables using Altonji, Elder, and Taber (2005) statistics. My results are shown to be robust to these tests, strongly suggesting that labour market discrimination has persisted from lynchings to the present day.
The modern-day and Mississippi Summer results suggest that the effects of lynchings persist up until the present day. This is consistent with a mechanism in which discrimination continues to affect African Americans. Such prejudice starts with lynchings of African Americans, and subsequently manifests in violence when Civil Rights community organisers went to Mississippi in 1964. It continues to affect contemporary black incomes, relative to their white neighbours.
If labour market discrimination today, driven by prejudice from the past,  is the cause of the income gap between blacks and whites then there are a couple of questions to ask. First is there some social mechanism at work to perpetuate the discrimination? and second what is preventing Becker type effects from reducing the gap? Gary Becker pointed out many years ago a competitive labour market provides strong incentives to keep our prejudices out of our business decisions. The force of competition will make even the most racist/sexist/homophobic/ employer see that by hiring only heterosexual men of Anglo-Saxon descent, they limit the talent pool accessible to them, which is not good business. What market imperfections are preventing such competitive forces working in the South?

An interesting paper which shows history is not bunk and has relevance even today.