Interesting blog bits

1. Dan Klein asks A Milton Friedman on the Horizon? I think not.
2. Gary Becker points out that More Regulation of Mortgages would Likely Hurt Consumers.
3. Brad Taylor on Minority Rights are Anti-Democratic. Robert Dahl knows his democratic theory, so we should take notice when he argues that the protection of minority interests conflicts with democratic ideals.
4. Al Roth has a list of Misc. organ transplant links. All have something interesting to say about transplantation.
5. Eric Crampton on Strategic incompetence. For the mafia, signalling incompetence at running a business credibly shows the subject of the protection racket that the mafia just wants to keep extracting money that way rather than take over the business fully. In academia, at least in Italy, something similar happens.
6. Ann Harrison on International trade, offshoring, and US wages. This column revisits the heated debate over international trade, offshoring, and US wages using new data. It says that increased international exchange with low-income countries has depressed US wages. That effect only arose during the 1990s, suggesting a different conclusion about trade, offshoring, and income inequality than the previous round of debate.

The long-term impact of hurricanes

A version of the Broken Window Fallacy is that while natural disasters, such as hurricanes, create havoc and impose large costs in the short run, they also simulate economic activity and thus are good for the economy. From the Economic Logic blog comes this counter to such thinking:

Makena Coffman and Ilan Noy study the case of the Hawaiian island of Kauai that was affected by hurricane Iniki in 1992, while neighboring Maui was not. Comparing the two islands, it appears clearly that while externally there are few signs of the hurricane seventeen years ago, Kauai is still suffering, mostly because its labor market still has not recovered, despite massive transfers right after the storm. Population took a permanent hit, at least partly as a consequence of a sudden drop in the housing stock and a spike in unemployment, and never recovered compared to the neighboring island.

Yes people natural disasters really are bad.

Sautet on Kennedy

Over at the Austrian Economists blog Frederic Sautet writes on Senator Edward Kennedy. He says,

Instead of worshiping politicians, we should wake up to the current situation. Since the fall of the Roman Empire, nations and civilizations have fallen because of two things: fiscal recklessness and inflation. This is because bad policies are rarely reversed. Instead, politicians attempt to mitigate the consequences of their stupidity through fiscal expansion and inflation. The U.S. was born under the “Old Time Fiscal Religion,” as Richard Wagner and James Buchanan put it. For decades, fiscal prudence and low inflation were the mantra. Not anymore. So let’s be honest, while Senator Kennedy may have been well-intentioned (and I leave that to God to judge), he has promoted the expansion of government and the establishment of socialist policies in the United States. With others, he has pushed ideas that have made fiscal and individual irresponsibility acceptable. Is this what being a true American hero is about?

It may not be what a true American (or New Zealand) hero is about, but it is, sadly, what being a politician is all about.

The least surprising correlation of all time (updated)

One wonders what Marty G from the Standard would make of this graph.

The New York Times Economix blog offers us the above graph, showing that kids from higher income families get higher average SAT scores. Clearly it's another example of the unfair advantages that the wealthy get in our society. Just because their parents are wealthy kids get higher SAT scores. It is obvious that government intervention is needed to equalise incomes and SAT scores at the same time.

(HT: Greg Mankiw)

Update: For more on this issue see here and here.

The irony of it

Weather supercomputer used to predict climate change is one of Britain's worst polluters

Scale and scope of government

There are at least two ways of dealing with failing banks. 1. bail them out 2. let those banks go through the normal bankruptcy and reorganization process. To me the second option seems the best. In the world of the second best, it seems preferable to have a known, predictable process of bankruptcy rather than a new, uncertain, largely political, processes of the bailout. Steven Horwitz writes on this topic,

I think that's exactly right. One can make a Higgsian point here about regime uncertainty: we're always better off (in the world of the second best) by operating under the known and predictable set of government rules than adopting new ones that have never been used before, or giving purely discretionary power to government agencies.

But Horwitz goes further to make a second, Higgsian, point,

We also know from Higgs and public choice theory more generally that once powers are given to government during a crisis, they never totally disappear when the crisis is over. So even if one thinks there was something unique about the situation last fall, it's naive to think that the powers the Fed and other agencies grabbed to fight it would go away in the long run. From a libertarian perspective then, the bailouts look like a really bad idea in the longer view.

Now a possible response to this argument is to say "if you did all of this through the bankruptcy courts, wouldn't that be enlarging government's size as well?" Yes, but with a difference. As Horwitz puts it,

Giving more cases to bankruptcy courts would be an increase in the scale of government, but not in its scope. This scale vs. scope distinction is one Higgs makes at the beginning of Crisis and Leviathan but is often overlooked in quick discussions of its main arguments.

Here "scale" means that government grows not by adding new powers but by having to do more with the powers it already has. Such expansion may be due ot factors like growth in the population or the economy or in other things that would draw more heavily on existing processes. "Scope,"refers to the size of the set of powers governments have. Growth in scope means acquiring new powers. Horwitz notes,

In Higgs's theory of crises and government growth, the key point is that crises lead to expansions of the scope of government that do not ever completely disappear.

Returning to the issue of bailouts Horwitz writes,

[...] the bailouts gave government new powers it never had before, expanding its scope, but using the bankruptcy process would have only expanded the scale of powers it already had. Forced to make that choice, a libertarian perspective would see increasing the scale as the notably lesser of two evils.

The state will be involved in whatever process is used to resolve the problems of the banking system in the US. But it seems better to rely a known and predictable process that only expands government's scale rather than turn to an unknown, unpredictable process that expands the scope of government by granting to it powers it did not previously have. Horwitz concludes,

From a libertarian perspective neither is ideal, but I would argue growth in scale is much less damaging than growth in scope, in the short run and especially the long run.

This may be an unacknowledged benefit of New Zealand's more low key approach to the economic crisis, we have expanded the scope of government less than has been the case in other countries.

Complexity and central planning

This from Philip Booth at the IEA blog:

The Pythagorean Theorem has 24 words. The ten commandments (English version) contain 138 words. US regulations about cabbages contain about 26,000.

Not to be outdone, the Department for Education in this country [UK] over a 12 month period sent to schools thousands of pages of “guidance” documents, containing almost 1.3 million words - one and a half times as many as in the King James Bible. Schools even received a 90-page document advising head teachers how to cut down on bureaucracy.

So it takes 90 pages to cut down on bureaucracy?!!! I hate to think what it would take if the wanted to increase it!

Competition builds trust

Patrick Francoi, Thomas Fujiwara and Tanguy van Ypersele have an article over at VoxEU.org on Competition builds trust

Recent research argues that culture affects economic outcomes. Do markets instil cultural values that support good outcomes? This column provides evidence that more competitive markets raise employees’ trust levels. That suggests that competitive markets build the values that support them.

So competitive markets are economically and morally good.

EconTalk this week

David Brady of Stanford University talks with EconTalk host Russ Roberts about American public opinion on changing the health care system. Brady discusses the impact of taxation on public opinion toward health care reform--if the poll includes a measure of the likely increase in taxes necessary to pay for expanding coverage, support for expanding coverage drops dramatically compared to generic polls that ignore costs. He also discusses the role of the party system and partisanship for the health care issue and more generally, how partisanship has changed over time. The conversation concludes with Brady's views on how much science there is in political science.

Boettke v. Cowen (updated)

Over at Marginal Revolution Tyler Cowen asks Were the bailouts a good idea? Cowen argues that in hindsight, we should consider the bailout to have been successful in averting a financial meltdown of the US economy. Specifically he asks whether Peter Boettke, of the Austrian Economists blog, can bring myself to admit this. Boettke has now replied. Boettke writes,

The basic point I would like to make is that those long-run negative consequences that Tyler admits in his post might cause problems (perhaps even serious ones) are in fact problems. The cycle of deficits, debt, debasement doesn't just cause economic disturbances against a long-term growth trend, it has historically destroyed the economies of nations. If what the bailout and shift in both the traditional role of the Fed and Treasury perform have done is unleash this cycle of deficits, debt and debasement rather than constrain it (as it obviously has done!), then we have sent our national economic policies on a path of ruin that may well set us back for decades.

But there is more to my hesitation than just this issue of short-run and long-run consequences as can be gleaned by following the commentary I have made throughout the history of the debates over the financial crisis. I have been consistently against the bailout, and critical of Fed and Treasury behavior in general. Government activism isn't the cure for the crisis, it is the cause.

He ends by saying

But expediency tends to defeat principle in political discourse, because of the focus on direct and immediate effects whereas principle tends to focus on indirect and long-run effects. Was it expedient to pursue the bailout? Of course. But was it a policy move that followed a working principle of public policy? Of course not. And once we include those indirect and long-run negative consequences the assessment of the effectivenss of the bailout on averting disaster is not as easy as Tyler suggests.

In the comments to the Boettke post Steve Horwitz writes

[...] but I've never, ever suggested that "bailing out" the banks was even the right second-best policy. Banks should have been allowed to fail if they made bad investments. Adding reserves into the system to prevent the money supply from falling and leading to more, economically unjustified, bank failures is a different matter.

So I have no problem at all saying "banks shouldn't have been bailed out," but I think that's a different idea from "the Fed should have done nothing."

I feel Horwitz is right, there is a difference between saying the Fed should have done nothing and saying bank shouldn't have been bailed out. The bailouts were not a good idea, just think of the moral hazard problem this has created, while there may have been more justification for the Fed acting to prevent the money supply from falling.

Update: Matt Nolan writes on Bailouts, moral hazard, and the money supply.

Jeffrey Miron blogging again

Economist Jeffrey Miron is blogging again at Libertarianism, from A to Z : A Small Government Perspective from Jeffrey Miron. This will be a blog well worth adding to your blog list.

A Nobel for the theory of the firm?

Peter Klein at the Organizations and Markets blog argues,

Josh Wright makes a good case for an economics prize honoring the UCLA tradition in the theory of the firm, property rights, and transaction costs. Josh himself is an excellent representative of that tradition.

and

Williamson is still my favorite dark horse candidate, for obvious personal reasons, but I’d be delighted to see Klein, Alchian, Demsetz, or even Barzel and Cheung recognized for their contributions.

Personally my beat for a theory of the firm Nobel, if there is to be one, would be Willaimson, Holmstrom and Hart together. Which does leave the UCLA boys out in the cold. My view is, however, that there is so little interest in the theory of the firm these days that it is highly unlikely that the Nobel committee would award in this area.

Why peak oil is wrong

In this New York Times Op-Ed, Michael Lynch explains,why the "peak oil" concept is so wrong.

Like many Malthusian beliefs, peak oil theory has been promoted by a motivated group of scientists and laymen who base their conclusions on poor analyses of data and misinterpretations of technical material. But because the news media and prominent figures like James Schlesinger, a former secretary of energy, and the oilman T. Boone Pickens have taken peak oil seriously, the public is understandably alarmed.

A careful examination of the facts shows that most arguments about peak oil are based on anecdotal information, vague references and ignorance of how the oil industry goes about finding fields and extracting petroleum.

Worth a read.

The Economist on predatory pricing (updated)

Most industrial organisation economists will agree that so-called "predatory pricing" is a rare phenomenon. This doesn't stop the courts from finding predatory pricing almost everywhere as the recent EU Intel case shows. The Economist magazine has a article in which it discusses predatory pricing in light of the Intel judgement. It says

Allegations of predatory pricing have a long history. The Sherman Antitrust Act of 1890, the foundation of America’s competition policy, was partly a response to complaints by small firms that larger rivals wanted to drive them out of business. Trustbusters need to be wary of such claims. Low prices are one of the fruits of competition: penalising business giants for price cuts would be perverse.

The Standard Oil case of 1911 is a landmark in the development of anti-trust law. But in his famous paper "Predatory Price Cutting: The Standard Oil (N. J.) Case", John S. McGee showed that the predatory pricing case against Standard Oil didn't make economic sense.

The Economist continues

Establishing that a firm is guilty of predation is difficult. If rivals stumble or fail, that may be down to their own inefficiency or poor products, and not because they were preyed upon. Proving that a firm is pricing below its costs is tricky in practice. Even where a reliable price-cost or profit-sacrifice test is feasible, failing it need not imply sinister intent. There are often pro-competitive reasons to forgo short-term profits. Firms with a new product, or a new version of an existing one, may wish to pick a lossmaking price to defray the cost to consumers of switching, or because they expect their own costs to fall as they perfect the production process (video-game consoles are a classic example). Losses would then be a licit investment in future profits.

Predation is even trickier to uncover when goods are sold together. A firm that enjoys fat profits on one good may “bundle” it with another on which margins are lower. If the discount on the bundle is hefty enough, other firms may struggle to offer as enticing a deal. In 2001 the EU blocked a proposed tie-up between GE and Honeywell for fear that the merged firm might use bundled discounts to squeeze rival suppliers. In 2007 a committee of antitrust experts appointed by the American government proposed a test for whether bundling is predatory. First, assume the discount applies solely to the low-margin good. So if each good sells for $10 separately and $16 as a bundle, allocate the $4 discount to the more “competitive” product. Next, apply a price-cost test: if the product costs over $6 to make, the bundle is predatory.

That check seems neat but sound business practices may still fall foul of it. It may be cheaper for a firm to sell the two goods together, because of cost savings on distribution. Firms also often use bundling as a way of charging high-demand users more. Thin margins on sales of printers, for example, can be made up by bundling in more profitable toners. This kind of “metering” is an efficient way of recovering fixed costs such as research.

Another ambiguous tactic is to offer rebates to customers that reach certain sales targets. Bulk buyers generally pay lower unit prices to reflect suppliers’ economies of scale. Rebates can also help align incentives. Suppliers want retailers to promote their products, offer in-store information and keep plentiful stocks. The trouble is, retailers bear all the costs of such sales efforts but reap only some of the benefits. Rebates provide incentives for retailers to drive sales, as profits are bigger once the target is met.

Louis Phlips suggests that the necessary conditions for predatory pricing are

To sum up, economic theory suggests that predatory pricing is a real possibility only when the following five conditions are simultaneously met:
1 The aggressor is a multimarket firm (possibly a multiproduct firm).
2 The predator attacks after entry has occurred in one of its markets.
3 The attack takes the form of a price cut in one of the predator's markets, which brings this price below a current non-cooperative Nash equilibrium price at which the entry value is positive for the entrant (possibly below a discriminatory current Nash equilibrium price with the same property).
4 The price cut makes the entry value negative (in present value terms) in the market in which predation occurs.
5 Yet the victim is not sure that the price cut is predatory. The price cut could be interpreted by the entrant as implying that its entry value is negative under normal competition. In other words, the victim entertains the possibility that there is no room for it in the market under competitive conditions.

It seems unlikely that such conditions are ever met in the real world and such conditions also mean that it is unlikely that competition agencies will find a robust and simple rule to use to detect predatory pricing. Most just seem to fall back on the old presumption that firms with market power are always suspect. William Landes tells the story about why Ronald Coase gave up antitrust,

“Ronald [Coase] said he had gotten tired of antitrust because when the prices went up the judges said it was monopoly, when the prices went down they said it was predatory pricing, and when they stayed the same they said it was tacit collusion.”

–William Landes, “The Fire of Truth: A Remembrance of Law and Econ at Chicago”, JLE (1981) p. 193.

A rule that says everything is illegal is at least simple.

Update: In the comments to this post John Lott makes the important point that

If predatory pricing is going to occur any place, it seems much more likely to be done by government enterprises.

For more on anticompetitive behaviour by public enterprises see John Lott Jr., "Predation by Public Enterprises", Journal of Public Economics 43 (2) November: 237-51 and "Competing with the Government: Anticompetitive Behavior and Public Enterprises", edited by R. Richard Geddes, Standford: Hoover Institution Press, 2004. For an empirical analysis of predatory pricing see Lott's book "Are Predatory Commitments Credible?: Who Should the Courts Believe?", Chicago: University Of Chicago Press, 1999.

Asymmetric information: banking version (updated)

Peter Klein over at the Organization and Markets blog writes

At least one major US bank is advertising the fact that it refused TARP funds. Bernanke and Co. must be unhappy, as they insisted that all large banks take the money to avoid tainting those that actually needed it

In other words, markets are finding way to undo the government's attempt at preventing the truth about the financial conditions of banks from coming out.

If you are a strong bank, you can signal this to people by pointing out that you didn't need or take TARP funds. As Klein writes,

The irony in all this is that government intervention in financial markets is usually justified by claims about asymmetric information: consumers can’t distinguish reliable from unreliable banks, insurers can’t tell healthy from unhealthy people, and so on, leading to a rash of adverse-selection problems that market mechanisms cannot solve. Actually the reverse is true: low-quality but politically connected financial institutions rely on government intervention to enforce a pooling equilibrium, preventing the market signaling and screening that would otherwise take place.

The moral of the story, markets can deal with asymmetric information.

Update: At TVHE the Hand talks about Bank runs and TARP.

Risk taking and the menstrual cycle

From the Economic Logic blog comes this piece on Risk taking and the menstrual cycle:

Matthew Pearson and Burkhard Schipper asked an unusual question to the female participants in an otherwise standard auction experiment: what stage of your menstrual cycle are you in? It turns out the answer can explain bidding behavior: while otherwise indistinguishable from men, women in their menstrual and premenstrual phase bid significantly higher, thus exhibiting more risk taking.

If correct, there is an obvious question, Why such behaviour?

Pearson and Schipper argue this can be explained by biology and evolution. This is when women are most likely to be fertile and take risks to increase the probability to procreate.

An alternative Big Mac index

From the Economist magazine comes a new Big Mac index. The size of your pay packet may be important, but so is its purchasing power. Helpfully, a UBS report published this week offers a handy guide to how long it takes a worker on the average net wage to earn the price of a Big Mac in 73 cities.

It turns out that fast-food junkies are best off in Chicago, Toronto and Tokyo, where it takes a mere 12 minutes at work to afford a Big Mac. By contrast, employees must toil for over two hours to earn enough for a burger fix in Mexico City, Jakarta and Nairobi.

Incentives matter: fires file

Incentives matter, but you have to get the incentives right. This from David Henderson at the EconLog blog:

This last winter, our house smelled like an ashtray much of the time. Our neighbors upwind insisted on burning. We told them of the discomfort we felt and, while the lady of the household was sympathetic, the adult sons were not and, at one point, one of them got quite nasty when I tried to press the point. I even offered to pay $50 a month for every month they didn't burn. The lady of the household returned the check uncashed. You might say that I didn't offer enough. I sensed, though, that that wasn't it.

[...]

One day, my wife made banana bread and took half of it next door. The lady of the house was delighted. Then we noticed something else: the frequency of the fires went from almost every day, which had been driving us wild, to about once a week or less. Shortly after, one of the sons, out mowing his lawn, waved and smiled at my wife as she was pulling out of the driveway. She was so shocked that she almost sideswiped our house. I thought we were on to something, so the next time I made my brownies full of chocolate chips, I took half of them over. A few days after that, one of the sons brought over some cantaloupes. Then about a month ago, I took over some brownies. Then Sunday evening, one of the sons brought over some home-grown tomatoes and onions. Summer in Pacific Grove, where I live, is almost as cold as winter. Yet they have hardly burned a fire at all.

Montary incentives aren't always the best incentives.

Robert Lucas argues in defence of the dismal science

Over at the Economist Robert Lucas argues In defence of the dismal science. One interesting point he makes is with regard to the efficient-market hypothesis (EMH). The EMH tells us that the price of a financial asset reflects all relevant, generally available information. Lucas explains,

If an economist had a formula that could reliably forecast crises a week in advance, say, then that formula would become part of generally available information and prices would fall a week earlier. (The term “efficient” as used here means that individuals use information in their own private interest. It has nothing to do with socially desirable pricing; people often confuse the two.)

He continues,

Mr Fama arrived at the EMH through some simple theoretical examples. This simplicity was criticised in The Economist’s briefing, as though the EMH applied only to these hypothetical cases. But Mr Fama tested the predictions of the EMH on the behaviour of actual prices. These tests could have come out either way, but they came out very favourably. His empirical work was novel and carefully executed. It has been thoroughly challenged by a flood of criticism which has served mainly to confirm the accuracy of the hypothesis. Over the years exceptions and “anomalies” have been discovered (even tiny departures are interesting if you are managing enough money) but for the purposes of macroeconomic analysis and forecasting these departures are too small to matter. The main lesson we should take away from the EMH for policymaking purposes is the futility of trying to deal with crises and recessions by finding central bankers and regulators who can identify and puncture bubbles. If these people exist, we will not be able to afford them.

So for policy purposes, it is best to assume the EMH holds. You can't, over the long term, beat the market.

If you want to be a academic ..... (updated)

then read this. You really won't believe it.

As Greg Mankiw puts it,

If you are thinking about being a professor, read this (unless it is too late to turn back).

Actually I have had a couple of comments published without the problems this poor guy had.

Update: Eric Crampton suggests that Professor Trebino should Get a blog!