What Does Iraq Cost? Even More Than You Think. - washingtonpost.com

What Does Iraq Cost? Even More Than You Think. - washingtonpost.com: "You may recall that you got rid of your loyal White House economic adviser Lawrence B. Lindsey back in 2002 after, among other sins, he claimed that a war in Iraq might cost as much as $200 billion. At the time, White House staffers sneered that Lindsey was being alarmist. Hardly. One commonly cited estimate of Iraq's cost, based on an August analysis by the nonpartisan Congressional Budget Office, is $1 trillion, and that's probably on the low side. A report released last week by the Democratic staff of Congress's Joint Economic Committee put the war's 2002-08 tab at $1.3 trillion.

But all these figures don't quite get at Iraq's real cost. Indeed, we usually don't even frame the question the right way. We'd do better to recognize what we've lost, rather than focusing only on what we've paid.

We often think of cost simply in terms of dollars spent, but the real cost of a choice -- what economists call its 'opportunity cost' -- consists of the forgone alternatives, of the things we could have had instead. For instance, the cost of seeing a movie is not just the dollars you plunked down for the ticket, but also the subtler cost of missing a dinner at home or a cocktail party at work. This idea sounds simple, but if applied consistently, it requires us to rethink and, yes, raise the costs of the Iraq war."

(Via MR.)

File Sharing Increases Sales P2P users buy more music -- Canadian govt study - Boing Boing

P2P users buy more music -- Canadian govt study

:

* When assessing the P2P downloading population, there was "a strong positive relationship between P2P file sharing and CD purchasing. That is, among Canadians actually engaged in it, P2P file sharing increases CD purchases." The study estimates that one additional P2P download per month increases music purchasing by 0.44 CDs per year.

* When viewed in the aggreggate (ie. the entire Canadian population), there is no direct relationship between P2P file sharing and CD purchases in Canada. According to the study authors, "the analysis of the entire Canadian population does not uncover either a positive or negative relationship between the number of files downloaded from P2P networks and CDs purchased. That is, we find no direct evidence to suggest that the net effect of P2P file sharing on CD purchasing is either positive or negative for Canada as a whole."
"

(Via BoingBoing.)

The economics of Halloween

The economics of Halloween: "A reform proposal from Kevin Hassett: 'So let's do something to reform Halloween. The first step would be for Halloween donors to give kids money instead of candy. Kids could then go to the supermarket the next day and binge on the candies they really like. That solution would get an A-plus in economics.'

Linked here.  But alas, in-kind transfers are often more efficient than cash gifts, and that holds for public policy as well.  (Imagine giving 'money to buy kidney dialysis,' instead of 'kidney dialysis,' and see how many people fake kidney disease.)  The candy transfer insures that a) mostly young kids do the asking, and b) at some point everyone just stops and goes home.  I've long wanted to know how much movie attendance rises on Halloween evening, given that the real cost of going is suddenly and temporarily much lower."

(Via Marginal Revolution.)

Board-game price-fixing Board-game price-fixing - Boing Boing

Board-game price-fixing - Boing Boing
: "A board-game publisher has begun engaging in price fixing, a practice newly liberalized in the US in the wake of a June Supreme Court decision. Yehuda sez,

In June, 2007, the U.S. Supreme court struck down a major 97 year old law on price fixing, which prohibits manufacturers from coercing retailers on how to set their prices.

The new ruling essentially wrote that the old law was too rigid, and each instance of price fixing would now be evaluated on a case by case basis to determine if it harmed or helped the consumer....

But last week, Mayfair Games, US publisher of the popular board game Settlers of Catan as well as other games, sent letters to all of its retailers demanding that they limit any discounts on their games to 20% off the suggested retail price.

This is purportedly to boost struggling brick-and-mortar stores against the spread of deep-discounting online stores which have been stealing their business.

Price fixing typically refers to agreements made between firms selling similar products, such as Honda and Toyota. The decision made last June was to change how retail price maintenance was evaluated by the courts. Rather than being illegal per se, it would now be evaluated on a case-by-case basis. The argument in favor of this ruling is that it encourages retailers to provide high quality sales advice. Without these agreements with manufacturers, online stores can free-ride by letting customers get advice from the brick and mortars and then proceed to purchase at a cheap online alternative. I've done this when buying television sets by getting advice from the sales assistants at a friendly nearby chain, then finding the lowest cost online seller of the product I eventually decided on.

Board games in my mind sound like the type of good where its useful to go see them in person at a store. So making sure these stores have incentive to sell these games without losing all sales to the online discount stores could definitely be at the benefit of consumers.

And from the comments on BoingBoing:

Browsing descriptions on Amazon.com is a poor substitute to interacting with a knowledgeable store owner and the 'regulars' who frequent the stores. I know that there are several games I've purchased from a FLGS that, had I only read on online site's description, and some random anonymous internet posts about I never would have bought.

No online retailer has ever sponsored an in-store demo of a board game, nor have they ever provided a place to meet other gamers to actually play these games with.

Classic Watterson Cartoons

more here

Thanks BoingBoing

Larry Lessig on The Corporation

Larry Lessig on The Corporation: "Corporations are not more efficient governments. They are instead increasingly efficient money making machines. And while there's nothing at all wrong with money making machines -- indeed, wealth and growth depends upon them -- there is something fundamentally wrong with trusting these machines to restrain the drive for profits in the name of doing the right thing. The cushion that enabled that in the past (relatively limited competition) is gone. The job of GM is even more now to make money for GM."

(Via Ezra Klein.)

Humor Section in Economic Inquiry

The Economic Inquiry has appointed Yoram Bauman as a co-editor of the humor section. If its as funny as his standup, then it can't be that bad.

link to Yoram's youtube "10 principles" reinterpreted.

Why You Should Care About the 2007 Economic Nobel | The American Prospect

People are having a hard time explaining the significance of the work of this year's economics nobel winners.

Here is another attempt:

Why You Should Care About the 2007 Economic Nobel | The American Prospect:
...'Their research on 'mechanism design theory' broadly, and incentive compatibility and preference revelation specifically, are an important part of several sub-fields including game theory, public economics, and even some social choice theory.'

...I realized that the way to understand the importance of this year's economics Nobel was to take a look at how we debate the usefulness of markets.

A key insight of mechanism design theory is that real-world economic transactions differ from an abstract 'market' where a price falls from heaven and trade happens. When engaging in trade in the real world, economic actors (buyers and sellers), must abide by certain rules and/or norms (e.g. Is it ok to negotiate? Can you make more than one counter offer?). Mechanism design shows that the economic outcomes, including market efficiency, can be dependent upon those rules.

Thus all 'free-markets' are not equal. In fact a marketplace does not exist independently from its rules and norms -- they one and the same. Saying that 'the market works' to allocate resources depends on the specific market design and conditions. Thus (and contrary to much conservative rhetoric) economic theory -- of which mechanism design is a part -- does not say that markets always achieve an efficient outcome. Mechanism design can help us better understand when markets do perform well. And when markets no not reach an efficient outcome, mechanism design theory can suggest mechanisms that might work better.

The theory also points out that economic actors have an incentive to hide their true feelings about the product. So, if you walk onto a used car lot, you would be foolish to let the salesman know exactly how much you like that '67 Chevy. And the seller would be foolish to let you know that he has not gotten a single offer on the car in the six months it’s been on the lot. But at some point, either you or the salesman will have to make an offer to the other -- and in doing so, reveal some, but perhaps not all, of your true preferences.

The fact that people have an incentive to not reveal their true preferences has obvious important consequences for public policy. If people are asked if they want a new highway built, they might rightly worry that they will be asked to pick up some of the expense, and so might not fully reveal their true preference, opting instead to try to game the system as a free-rider. Economic research building from the Nobel winners’ work analyzed ways to get around this -- to provide a mechanism by which people would volunteer their true valuation of the highway, and thus better evaluate the merits of a project that would benefit an entire community. (The key of this particular mechanism is to link an individual’s valuation response to the decision to build or not, but to de-link the exact amount they would pay).

The Nobel prize in economics was awarded not so much for the particular insights noted above, but rather for working out all the implications for economic thinking in various situations -- for example, deriving conditions under which there are efficient equilibriums (an exercise only an economist would love). More generally however, the insights from the theory help to explain how we can better design markets and public policy to reach an outcome that works for more people.

This brings us to global warming and cap-and-trade policy. If we -- and by 'we' I mean the entire planet -- ever take global warming seriously, we will have to adopt some mechanism for reducing carbon emissions. A real program will require nations to implement some form of regulation and/or market mechanism to reduce carbon. But what kind of mechanism? How do we design a program that reduces carbon across nations? Some nations will be harmed significantly by global warming, while others will be better able to adapt, but in a negotiation, countries will have incentives to hide their true valuations, just like in the used car example above. Can we design a mechanism that is more likely to get nations to commit to reducing global greenhouse gases?

Now some of this analysis of global warming problem is pretty much standard economics of externalities (a la fellow Nobelists A.C. Pigou and Paul Samuelson), where the abatement of carbon pollution is seen to be a public good. But I suspect that the information asymmetries across nations will make the problem more complicated at the international level than a simple analysis would suggest. And the research by this year’s Nobel prize winners may prove to be very valuable indeed."...

(Via Ezra Klein.)

Marginal Revolution: Mechanism Design for Grandma

Marginal Revolution: Mechanism Design for Grandma: "Mechanism Design for Grandma

Ok, Grandma may still have some difficulty but in honor of today's Nobelists, Hurwicz, Maskin and Myerson let's give it a go.  Suppose that you are selling a rare painting for which you want to raise the maximum revenue.  There are two potential buyers, Tyler, who values the painting at $100,000, and Alex who values it at $20,000.  The problem would be simple if you knew this information - you would then set the price at $99,999 and Tyler would buy maximizing your revenue.  But how much Tyler and Alex value the painting is their own private information.  How then should sell the painting?

One possibility that springs quickly to mind is an auction.  In a standard English open-cry auction Alex and Tyler will bid for the painting and the bids will keep rising until Alex is forced to drop out at $20,001.  Thus the auction earns you $20,001.  Not bad but is this the maximum revenue possible?  Remember that Tyler values the painting at $100,000 so you could be leaving a lot of money on the table.

What else can you do?  Well, how about an auction with a reserve price, say $50,000 - think of a reserve price as a secret bidder who calls in his bids on the phone.  A reserve price of $50,000 works well in this case as Tyler will pay $50,001.  But note that you just got lucky, if Tyler had valued the good at $30,000 you would have earned nothing at all.  Thus you would like to know whether a reserve is always optimal and how to set it.  (Riley and Samuelson, and much more generally Myerson both show that a reserve price is always optimal and how to set it).

But why stop at a reserve price?  How about a reserve price and an entry fee?  But why stop at reserve prices and entry fees?  You can add any kind of requirement to the auction that you want but will these requirements help you to raise revenue?  Lets boil the problem down to its essence.  Think about an auction as a mechanism - bidders put information into the mechanism, their bids, and the mechanism tells them the outcome.  (Hurwicz was the first to really start thinking about mechanisms in these very general terms.)

You want to design the mechanism to achieve a certain outcome.  The mechanism can be as complicated as you want but it must satisfy certain conditions.  First, the bidders must participate voluntarily - you can't boil them in oil - so there is a participation constraint.  At the end of the day the bidders must expect to be at least as well off as if they did not play the mechanism game (at least on average).

Second, there is an incentive compatability constraint.  You don't know how much Alex and Tyler truly value the painting so suppose that Tyler mimics whatever Alex does - Tyler can do this since he values the painting at least as much as Alex does.  It follows that whatever outcome the mechanism assigns to Alex, Tyler must get at least as much.  This is a significant constraint because it means that if you want Tyler to do something different than Alex, and you do, you want Tyler to bid more, then you must give Tyler something in return.  Thus, even in the optimal mechanism you, the seller, are not going to get everything.  Tyler is going to walk away with some surplus.

We still haven't solved for optimal mechanism, however.  And here is where the magic comes.  Not magic as in something wonderful but magic as in hand-waving.  Maskin and Myerson proved something very useful about mechanisms with these types of constraints.  It turns out that if you follow the constraints then you can restrict attention to mechanisms in which Tyler and Alex always tell the truth about their values, this is called the revelation principle.  (In a sense, this is obvious for imagine that we find the optimal mechanism given that Tyler and Alex submit whatever bids/information they want.  Then you tell Tyler and Alex - next time why don't you tell the truth about your values and we promise to give you exactly the outcome that we would have given you under the previous mechanism.)

In the case of auctions the direct mechanism is well known, a second price auction.  In a second price auction the high bidder wins but pays the second highest-bid.  In this auction it makes sense for every bidder to bid his true value - see if you can work out why - and it turns out that as the revelation principle says, revenues in this direct auction are the same as in say a regular English auction (under certain conditions, of course).

Ok, I have gone on for a while.  Here's the bottom line.  The basic set-up of agents with private information submitting 'bids' which are then fed into a mechanism resulting in outcomes is very general.  How to raise taxes, regulate a monopolist, fund a public good (here's my own contribution to mechanism design), allocate organs, assign interns to hospitals, split common costs, allocate electricity across a grid - all can be thought of as mechanism design problems.   The tools that Hurwicz, Maskin and Myerson developed and their methods of paying attention to participation and incentive compatability constraints and using the revelation principle helps us to design, at least in principle, the best solutions to all of these problems."

(Via .)

Roger Myerson, Nobel Laureate

My favorite contract theory paper discussed on MR blog:

Roger Myerson, Nobel Laureate: "Here is a very important paper, with David Baron, on how to regulate a monopolist with unknown costs.  Strict marginal cost pricing is no longer possible.  Under some assumptions, allow the monopolist to charge a relatively high price, but design penalties to elicit an honest reporting of costs.  The key point of course is that monopolists won't always report their costs truthfully.  This is one of the most important papers in regulatory economics in the last thirty years and it has helped disillusion many economists with a narrow ideal of marginal cost pricing."

(Via Marginal Revolution.)

3 Americans to Share Nobel Prize in Economics - New York Times

Its for mechanism design!

3 Americans to Share Nobel Prize in Economics - New York Times: "The Nobel Prize in economics was awarded today to three Americans for their work in mechanism design theory, a branch of economics that looks at the design of institutions in situations where markets do not work properly.

Leonid Hurwicz of the University of Minnesota, Eric S. Maskin of the Institute for Advanced Study in Princeton, New Jersey, and Roger B. Myerson of the University of Chicago shared the award for ‘having laid the foundations of mechanism design theory,’ the Royal Swedish Academy of Sciences said.

Their work addresses situations in which markets work imperfectly, such as when competition is not completely free, consumers are not fully informed or people hold back private information. In such cases — for example, when people refuse to divulge how much they are willing to pay for a good — trade can break down.

Their work also addresses cases where transactions do not take place openly in public markets, but within companies, in private bargaining between individuals or between interest groups.

The prize winners’ groundbreaking work has been pivotal in assessing how institutions perform under such conditions, and in designing the best mechanism to make sure that goals, such as optimal social welfare or maximum private profit, are reached, the academy said. The winners’ work has helped determine whether government regulation may sometimes be necessary.

Mechanism design theory today plays a central role in many areas of economics and parts of political science, the academy said.

‘The theory allows us to distinguish situations in which markets work well from those in which they do not,’ the academy said in a statement. ‘It has helped economists identify efficient trading mechanisms, regulation schemes and voting procedures.’

The three economists will share the prize of 10 million Swedish krona, or $1.56 million.

Last week, former Vice President Al Gore and the Intergovernmental Panel on Climate Change, a United Nations network of scientists, were awarded the 2007 Nobel Peace Prize, for their work on man-made climate change.

Also last week, Doris Lessing, the Persian-born, Rhodesian-raised, and London-residing novelist, won the 2007 Nobel Prize in Literature.

Mr. Hurwicz, 90, who was born in Moscow, is Regents Professor Emeritus of Economics at the University of Minnesota. He pioneered the development of the field, and was followed later by Mr. Maskin and Mr. Myerson.

In a conference call with reporters today, Mr. Maskin was quoted by The Associated Press as saying of Mr. Hurwicz: ‘Many of us had hoped for many years that he would win. He is 90 years old now, and we thought time was running out. It is a tremendous honor to have the opportunity to share the prize with him and with Roger Myerson.'

Mr. Maskin, 56, was born in New York City. He has been the Albert O. Hirschman Professor of Social Science at the Institute for Advanced Study in Princeton since 2000. Mr. Myerson, 56, was born in Boston. He is the Glen A. Lloyd Distinguished Service Professor at the University of Chicago.

'There were a lot of us working in this area in the late 1970s,' Mr. Myerson told the A.P., describing his work as investigating ‘How does information get used in society to allocate resources.’

Last year, the Nobel Memorial Prize in Economic Science was won by Edmund S. Phelps, a Columbia University professor, for his contribution to macroeconomics, in particular his sophisticated explanation of how wages, unemployment and inflation interact with one another. His explanation held, in essence, that wages and inflation tend to rise in tandem, one pushing up the other, until the unemployment rate reaches an ‘equilibrium’ or ‘natural’ level at which prices no longer rise."

(Via .)

Radiohead’s Warm Glow

Radiohead’s Warm Glow - New York Times: "I didn’t pay anything to download Radiohead’s ‘In Rainbows’ last Wednesday. When the checkout page on the band’s Web site allowed me to type in whatever price I wanted, I put 0.00, the lowest I could go. My economist friends say this makes me a rational being.

Apparently not everybody is this lucid, at least not in matters related to their favorite British rock band. After Radiohead announced it would allow fans to download its album for whatever price they chose, about a third of the first million or so downloads paid nothing, according to a British survey. But many paid more than $20. The average price was about $8. That is, people paid for something they could get for free.

This phenomenon is not new. It’s called tipping. We do it when we go to the restaurant or the barber, or when we ride in a taxi. Though one could argue there are real tangible reasons for this payment — like not losing an ear the next time we get a haircut — the practice of paying more money than we are legally bound to do is still mystifying in an economic sense. For instance, why tip a cabdriver you will probably never see again?

‘Since we economists don’t understand tipping, we can’t really say whether this new scheme will work,’ Greg Mankiw, a Harvard professor of economics, said in an entry on his blog. He is not the only economist who is fascinated by the phenomenon. His Harvard colleague, Dani Rodrik, asked his blog readers, ‘Has Radiohead gone bonkers?’ He concluded, ‘Not at all.’ Radiohead will make money. But those who are paying for the download may truly be nuts.

One could argue that rationality isn’t everything. Radiohead fans might just be altruistic beings who out of the goodness of their hearts would like to give some money to a spectacularly successful and probably stinking rich rock band. But somehow, that doesn’t work as an explanation.

Or does it? Some economists suspect that what is going on is that people get a kick from the act of giving the band money for the album rather than taking it for free. It could take many forms, like pleasure at being able to bypass the record labels, which many see as only slightly worse than the military-industrial complex. It could come from the notion that the $8 helps keep Radiohead in business. Or it could make fans feel that they are helping create a new art form — or a new economy. People who study philanthropy call it the ‘warm glow’ that comes from doing something that we, and others, believe to be good.

Mr. Rodrik tested some of this with an experiment of his own. He offered his blog readers the opportunity to get a copy of his new book on globalization and economic growth for whatever price they wanted to pay, and said proceeds would go to the charity Save the Children.

The response suggested that ‘warm glow’ is in demand. A third of the people offered nothing. But the average bid was $21, and he received bids for as much as $145, more than four times the list price. The most interesting part was to hear bidders explain themselves. Those who bid little felt it necessary to provide a reason, like being a poor student. But those who bid high justified it too: many said they liked saving children.

This is all good news for Radiohead, which has boosted its indie credibility, while all the attention might actually boost its revenues. The band also offered online a package of two CDs, two vinyl records and a booklet for about $80, and it plans to release ‘In Rainbows’ as a single CD in January for fans who would rather hear the music with a better resolution than the medium-quality MP3 file available for download.

It is also potentially comforting news for the recording business. The industry has been struggling to find a business plan that will work in an online market in which — despite billions invested in antipiracy measures — fans can pretty much get their music for free if they want to.

Today, music lovers are left but two options: pay list price for an album, or perform what a fan might call a free download and a record company would call theft. Radiohead’s experiment suggests a third way out: let fans pay what they want and give them lots of touchy-feely reasons to want to give as much money as they can."

(Via .)

Is our sense of fairness genetic?

Is our sense of fairness genetic?: "Chapter 22 of my favorite economics textbook introduces students to the ultimatum game as part of a unit on behavioral economics. Users of the book might be interested in this new research out of MIT, which suggests that how people play the ultimatum game has a genetic component:

An international team of researchers including an MIT graduate student has demonstrated for the first time that genes exert influence on people's behavior in a very common experimental economic game.

Traditionally, social scientists have been quite hesitant to acknowledge a role for genes in explaining economic behavior. But a study by David Cesarini, a Ph.D. student in MIT's Department of Economics, and by colleagues in Sweden indicates that there is a genetic component to people's perception of what is fair and what is unfair.

The paper, published in the Oct. 1 advanced online issue of the Proceedings of the National Academy of Sciences, looked at the ultimatum game, in which a proposer makes an offer to a responder on how to divide a sum of money. This offer is an ultimatum; if the responder rejects it, both parties receive nothing.

Because rejections in the game entail a zero payoff for both parties, theories of narrow self-interest predict that any positive amount will be accepted by a responder. The intriguing finding in the laboratory is that responders routinely reject free money, presumably in order to punish proposers for offers perceived as unfair.

To study genetic influence in the game, Cesarini and colleagues took the unusual step of recruiting twins from the Swedish Twin Registry, and had them play the game under controlled circumstances. Because identical twins share the same genes but fraternal twins do not, the researchers were able to detect genetic influences by comparing the similarity with which identical and fraternal twins played the game.

The researchers' findings suggest that genetic influences account for as much as 40 percent of the variation in how people respond to unfair offers. In other words, identical twins were more likely to play with the same strategy than fraternal twins.

Thanks to Mark Thoma for pointing out the source article.

Meanwhile, over at his blog, George Borjas points us to a related article about chimps playing the ultimatum game:

German researchers have demonstrated chimpanzees make choices that protect their self-interest more consistently than do humans.Researchers from the Max Planck Institute of Evolutionary Anthropology in Leipzig studied the chimp's choices by using an economic game with two players.

In the game, a human or chimpanzee who receives something of value can offer to share it with another.If the proposed share is rejected, neither player gets anything.Humans typically make offers close to 50 percent of the reward. They also reject as unfair offers of significantly less than half of the reward, even though this choice means they get nothing.

The study, however, showed chimpanzees reliably made offers of substantially less than 50 percent, and accepted offers of any size, no matter how small. The researchers concluded chimpanzees do not show a willingness to make fair offers and reject unfair ones. In this way, they protect their self interest and are unwilling to pay a cost to punish someone they perceive as unfair.

The study appeared in the Oct. 5 issue of the journal Science.

(Via Greg Mankiw's Blog.)

Chimps choose more rationally than humans

LEIPZIG, Germany, Oct. 8 (UPI) -- German researchers have demonstrated chimpanzees make choices that protect their self-interest more consistently than do humans.

Researchers from the Max Planck Institute of Evolutionary Anthropology in Leipzig studied the chimp's choices by using an economic game with two players. In the game, a human or chimpanzee who receives something of value can offer to share it with another.

If the proposed share is rejected, neither player gets anything.

Humans typically make offers close to 50 percent of the reward. They also reject as unfair offers of significantly less than half of the reward, even though this choice means they get nothing.

The study, however, showed chimpanzees reliably made offers of substantially less than 50 percent, and accepted offers of any size, no matter how small.

The researchers concluded chimpanzees do not show a willingness to make fair offers and reject unfair ones. In this way, they protect their self interest and are unwilling to pay a cost to punish someone they perceive as unfair.

The study appeared in the Oct. 5 issue of the journal Science.

[RA]

Marginal Revolution: Pay what you want for the new Radiohead album

Marginal Revolution: Pay what you want for the new Radiohead album: "Pay what you want for the new Radiohead album

Here is the story, but no this model won't much change the music industry.  Yes you really can download this album and 'tip' Radiohead as you feel inclined to.  But note that:

1. Radiohead is an indie cult band with extreme loyalties from its partisans and the possibility of attracting more such partisans by seeming 'cool.'

2. Radiohead peaks high on the charts (#3 for their last release, if I recall...) but I believe they sell the product pretty quickly and don't have a long run at the top.  Again, they'd like to widen their fan base.

3. Radiohead's gambit has reaped enormous publicity, but this won't be the case next time.

4. Many donors will give to a highly visible 'cause of the month' (remember the outpouring of support for the tsunami victims?) but they won't necessarily give on a regular basis.

5. Radiohead probably has an especially high ratio of touring to CD and iTunes income; see #1.  This scheme is a natural for them but not for Kelly Clarkson. 

What we will see is lots of lesser bands (and authors) giving their work away for free, but that trend has been underway for some time.  And by the way, Radiohead's best album is Kid A."

(Via .)

The Dilbert Blog: On the Other Hand

The Dilbert Blog: On the Other Hand: "I studied economics in college. One thing I’ve noticed is that other people who have studied economics tend to think a similar way. Some of the similarity is probably because it takes a certain kind of person to be interested in economics in the first place. But I’m convinced that the study of economics changes brains in a way I can identify after about five minutes of conversation. In particular, I think the study of economics makes you relatively immune to cognitive dissonance.

http://en.wikipedia.org/wiki/Cognitive_dissonance

The primary skill of an economist is identifying all of the explanations for various phenomena. Cognitive dissonance is, at its core, the inability to recognize and accept other explanations. I’m oversimplifying, but you get the point. The more your brain is trained for economics, the less it is susceptible to cognitive dissonance, or so it seems.

The joke about economists is that they are always using the phrase ‘On the other hand.’ Economists are trained to recognize all sides of an argument. That seems like an easy and obvious skill, but in my experience, the general population lacks that skill. Once people take a side, they interpret any argument on the other side as absurd. In other words, they are relatively susceptible to cognitive dissonance.

Recently I saw the best case of cognitive dissonance I have ever seen. It was on Bill Maher's show, Real Time, which I love. Bill was interviewing Danish economist Bjorn Lomborg, who has a book about global warming, called 'Cool It.' The economist made the following points clearly and succinctly:

1. Global warming is real, and people are a major cause.

2. When considering the problems that global warming will cause, we shouldn't ignore the benefits of global warming, such as fewer deaths from cold. 

3. The oceans rose a foot in the last hundred years, and the world adapted, so the additional rise from global warming might not be as big a problem as people assume.

4. Developing economical fossil fuel alternatives is the only rational solution to global warming because countries such as China and India will use the cheapest fuel, period. If only the developed countries who can afford alternatives change their ways, it’s not enough to make a dent in the problem.

The Danish economist’s argument doesn't fall into the established views about global warming. He wasn't denying it is happening, or denying humans are a major cause. But he also wasn’t saying we should drive hybrid cars, since he thinks it won’t be enough to help. He thinks we need to make solar (or other alternatives) more economical. "

(Via Mankiw.)

Illegal Immigrants Come Back!

Illegal Immigrants Come Back!: "Unqualified Offerings sends us to the story of Juan Galt:

Towns Rethink Laws Against Illegal Immigrantss: RIVERSIDE, N.J., Sept. 25 — A little more than a year ago, the Township Committee in this faded factory town became the first municipality in New Jersey to enact legislation penalizing anyone who employed or rented to an illegal immigrant. Within months, hundreds, if not thousands, of recent immigrants from Brazil and other Latin American countries had fled. The noise, crowding and traffic that had accompanied their arrival over the past decade abated. The law had worked. Perhaps, some said, too well.

With the departure of so many people, the local economy suffered. Hair salons, restaurants and corner shops that catered to the immigrants saw business plummet; several closed. Once-boarded-up storefronts downtown were boarded up again. Meanwhile, the town was hit with two lawsuits challenging the law. Legal bills began to pile up, straining the town’s already tight budget. Suddenly, many people — including some who originally favored the law — started having second thoughts. So last week, the town rescinded the ordinance, joining a small but growing list of municipalities nationwide that have begun rethinking such laws as their legal and economic consequences have become clearer..."

(Via Brad DeLong's Blog.)

Econbrowser: Money creation and the Federal Reserve

A good description from Econbrowser about the recent Federal Reserve activities.

Econbrowser: Money creation and the Federal Reserve: "Money creation and the Federal Reserve

There seem to be some misconceptions about the monetary consequences of actions that the Federal Reserve has taken to address liquidity needs.

One hears a fair bit of chatter these days along the lines of

The Federal Reserve (and other banking institutions around the world) have poured a couple hundred billion dollars into the system in an attempt to ensure that there is enough 'liquidity' for banks to make loans

and references to

the Fed printing money and increasing the money supply on a high scale as if it was dropping money from an helicopter, thus the nickname of Fed Chairman Ben 'Helicopter' Bernanke.

I hope in this post to get beyond these sound bites, beginning if I may with some details of the process whereby money is created in the United States. Where did the cash in your wallet come from? Presumably you got it from your bank or ATM. And the reason that the bank was willing to give you that cash was that you already had deposits in an account with the bank, which were in effect credits to obtain cash when you wanted it.

And where did your bank get that cash? If it is a member of the Federal Reserve, your bank got it from a Federal Reserve Bank. And the reason that the Federal Reserve was willing to give your bank the cash was that your bank had deposits in an account with the Fed, that give it credits to obtain cash when it wants it. These credits are known as Federal Reserve deposits, which I'll simply refer to here as 'reserves' for short.

And where did those reserves come from? The standard mechanism is that the Fed purchased Treasury bills from independent securities dealers, paying for them by creating new reserves in the dealers' banks. The Fed now is the owner of the Treasury bills, and those banks now have new reserves, which they could use to obtain new dollar bills, if they desired.

To follow what's happened over the last 6 weeks, it's necessary to add a few details to this basic story. For day-to-day fine-tuning of interest rates and the money supply, the Fed usually does not use outright purchases of Treasury securities, but is more likely instead to rely on repurchase agreements, or repos. A repo is a short-term loan, often overnight or for just a few days, made by the Fed through a private securities dealer, which the Fed again provides by creating new reserves at the dealer's bank. As collateral for the loan, the Fed temporarily takes possession of high-quality securities. A few days later, the securities are returned to the original owner and the reserves come back to the Fed. Although its effects are strictly temporary, on any given day the Fed's outstanding repos have created reserves and thus potential dollars in circulation."

Continue reading the article here

A Reality Check for Home Sellers - New York Times

A Reality Check for Home Sellers - New York Times: "ECONOMISTS and other humans don’t always see eye to eye. ‘Economists tend to think people are crazy because they won’t sell their houses for less than they paid for them — and people think economists are crazy for thinking things exactly like that,’ said Professor Christopher Mayer, director of the Paul Milstein Center for Real Estate at Columbia Business School and an authority on real estate economics.

Classical economics can’t explain this behavior. That’s because people who refuse to sell their houses for less than they paid for them are violating a cardinal rule of the market: stuff is worth what it’s worth. It doesn’t matter what you paid for it. But when Professor Mayer and his co-author, David Genesove, a professor of economics at the Hebrew University in Jerusalem, studied the Boston condominium market in the 1990s — scene of one of the biggest real estate busts in recent American memory — the actual patterns of human behavior did not seem to follow the standard rules at all."

(Via Mankiw.)

The three way pistol duel puzzle

This is one of the puzzles I like to use in Game Theory applying backwards induction. The answer is not at all obvious at first.

The three way pistol duel puzzle :

You're a cowboy, and get involved in a three way pistol duel with two other cowboys. You are a poor shot, with an accuracy of only 33%. The other two cowboys shoot with accuracies of 50% and 100%, respectively. The rules of the duel are one shot per cowboy per round. The shooting order is from worst shooter to best shooter, so you get to shoot first, the 50% guy goes second, and the 100% guy goes third, then repeat. If a cowboy is shot he's out for good, and his turn is skipped. Where or who should you shoot first?"

(Via .)

Krugman Now Has a Blog

Paul Krugman - Op-Ed Columnist - New York Times Blog: "[L]et me start this blog off with a chart that’s central to how I think about the big picture, the underlying story of what’s really going on in this country. The chart shows the share of the richest 10 percent of the American population in total income – an indicator that closely tracks many other measures of economic inequality – over the past 90 years, as estimated by the economists Thomas Piketty and Emmanuel Saez. I’ve added labels indicating four key periods. These are:



The Long Gilded Age: Historians generally say that the Gilded Age gave way to the Progressive Era around 1900. In many important ways, though, the Gilded Age continued right through to the New Deal. As far as we can tell, income remained about as unequally distributed as it had been the late 19th century – or as it is today. Public policy did little to limit extremes of wealth and poverty, mainly because the political dominance of the elite remained intact; the politics of the era, in which working Americans were divided by racial, religious, and cultural issues, have recognizable parallels with modern politics.

The Great Compression: The middle-class society I grew up in didn’t evolve gradually or automatically. It was created, in a remarkably short period of time, by FDR and the New Deal. As the chart shows, income inequality declined drastically from the late 1930s to the mid 1940s, with the rich losing ground while working Americans saw unprecedented gains. Economic historians call what happened the Great Compression, and it’s a seminal episode in American history.

Middle class America: That’s the country I grew up in. It was a society without extremes of wealth or poverty, a society of broadly shared prosperity, partly because strong unions, a high minimum wage, and a progressive tax system helped limit inequality. It was also a society in which political bipartisanship meant something: in spite of all the turmoil of Vietnam and the civil rights movement, in spite of the sinister machinations of Nixon and his henchmen, it was an era in which Democrats and Republicans agreed on basic values and could cooperate across party lines.

The great divergence: Since the late 1970s the America I knew has unraveled. We’re no longer a middle-class society, in which the benefits of economic growth are widely shared: between 1979 and 2005 the real income of the median household rose only 13 percent, but the income of the richest 0.1% of Americans rose 296 percent.

Most people assume that this rise in inequality was the result of impersonal forces, like technological change and globalization. But the great reduction of inequality that created middle-class America between 1935 and 1945 was driven by political change; I believe that politics has also played an important role in rising inequality since the 1970s. It’s important to know that no other advanced economy has seen a comparable surge in inequality – even the rising inequality of Thatcherite Britain was a faint echo of trends here.

On the political side, you might have expected rising inequality to produce a populist backlash. Instead, however, the era of rising inequality has also been the era of ‘movement conservatism,’ the term both supporters and opponents use for the highly cohesive set of interlocking institutions that brought Ronald Reagan and Newt Gingrich to power, and reached its culmination, taking control of all three branches of the federal government, under George W. Bush. (Yes, Virginia, there is a vast right-wing conspiracy.)

Because of movement conservative political dominance, taxes on the rich have fallen, and the holes in the safety net have gotten bigger, even as inequality has soared. And the rise of movement conservatism is also at the heart of the bitter partisanship that characterizes politics today."

(Via .)

'The Age of Turbulence' by Alan Greenspan - Los Angeles Times

'The Age of Turbulence' by Alan Greenspan - Los Angeles Times: "For nearly 20 years Alan Greenspan, as head of America's central bank, was the most powerful economic central planner the world has ever seen. What did he do? Roughly twice a year, the Federal Reserve chairman had to make a substantive decision about whether to raise, lower or keep the level of U.S. interest rates the same.
 
Why is that important? To lower interest rates is to make the future more valuable relative to the present; to raise interest rates is to make the future less valuable. When the future is more valuable, more people in the economy focus their eyes on it and more actions are taken that will have an effect in the future: the building of factories, investment in research, construction of houses and apartments. To lower interest rates is to shift economic attention and focus from the present to the future. To raise them is to shift that balance back again.

Isn't this odd? Don't we have a market economy? Why should a central planner be setting interest rates? The only reason is that this system appears to work less badly than the alternatives we have tried. Institutions and human psychology lead financial markets to bounce back and forth between exuberant greed and catatonic fear. Times of fear generate high unemployment. Times of greed are likely to be times of destabilizing inflation. Whether the justification is in the terms of Milton Friedman, John Maynard Keynes or -- as Greenspan put it early in the Clinton administration, confusing everybody -- the pre-Keynesian Swedish school, economies seem to function better when intelligent, skilled and public-spirited technocrats perform the calming, coordinating and leaning-against-the-wind role of managing interest rates to curb greed and fortify fear with some low-interest-rate courage."

...

(Via .)

Robert Greenstein - Misreading the Poverty Data - washingtonpost.com

Robert Greenstein - Misreading the Poverty Data - washingtonpost.com: "Misreading the Poverty Data
By Robert Greenstein
Tuesday, September 18, 2007; Page A19


In his Sept. 5 op-ed, ' Importing Poverty,' Robert J. Samuelson assailed the Census Bureau, the American Enterprise Institute, the Center on Budget and Policy Priorities, and the media for missing what he views as the core of the poverty story. When discussing the figures that the Census Bureau released Aug. 28, we all failed, he said, to explain that poverty 'is increasingly a problem associated with immigration,' driven by the large numbers of poor Hispanics entering the country.

But a careful look at the data does not support Samuelson's narrow view of how immigrants in general, and Hispanic immigrants in particular, affect poverty trends.

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The poverty rate in 2006 was 12.3 percent. If immigration had not increased, and immigrants and their family members comprised the same share of the population in 2006 as in 1993 (the first year for which these Census Bureau data are available), the poverty rate would be nearly the same, about 12 percent.

There is debate on whether immigration lowers the wages of natives -- and the research on that subject is mixed -- but even if it does, the added effect on the poverty rate would be small. Immigrants do experience more poverty than native-born citizens, but they are not driving the nation's poverty rate.

In addition, the overall drop in the poverty rate and the rise in national median income in 2006, compared with 2005, were driven by improvement among Hispanics. Hispanic poverty fell, and the median income of Hispanic households rose. Non-Hispanic whites and African Americans, by contrast, experienced no such improvement.

Indeed, since 2001, Hispanics have made considerably more progress against poverty than the other groups. Their poverty rate is lower than it was in 2000, before the last recession -- it stands at its lowest level on record -- while poverty rates for non-Hispanic whites and blacks remain well above their pre-recession levels.

Samuelson focused on longer-term trends and, in particular, on changes in the number of poor Hispanics since 1990, using Hispanics as a proxy for immigrants. But in doing so, he told only one side of the story.

In the 1990s, the number of poor Hispanics did increase substantially even as the number of non-Hispanic poor declined. So Hispanics accounted for the entire increase in the poverty population in that decade. But that's not true since 2000. The Pew Hispanic Center has found that newly arrived Hispanic immigrant workers were better educated and much less likely to be low-wage earners in 2005 than in 1995.

Moreover, even while the number of poor Hispanics rose markedly in the 1990s, the Hispanic poverty rate -- that is, the percentage of Hispanics in poverty -- fell, and it fell more than the poverty rate for the rest of the country. Since then, the Hispanic poverty rate has continued falling (except for temporary increases related to recessions), even as large numbers of new immigrants continue to enter the United States.

How could this be? How could the number of poor Hispanics rise but the percentage of Hispanics who are poor fall sharply? Because the Hispanic population is growing so quickly. Samuelson complained that there were 3.2 million more poor Hispanics in 2006 than in 1990. He did not mention that the number of non-poor Hispanics -- including doctors, teachers, small-business owners, waiters and members of the armed forces -- grew by 20 million over the same period. (And contrary to Samuelson's implication that the Center on Budget and Policy Priorities ignores poverty increases among Hispanics to avoid upsetting its supporters, we reported frequently in the 1990s on the rising numbers of poor Hispanics and the role of immigration in contributing to that increase.)

Nor was poverty the only issue on which Samuelson's focus was too narrow. He noted, correctly, that Hispanics accounted for 41 percent of the increase, since 2000, in the number of Americans who lack health insurance. That sounds alarming, until you realize that Hispanic population growth accounted for 51 percent of total U.S. population growth over this period.

In fact, Hispanics also accounted for 60 percent of the increase in the number of people with insurance. And the percentage of Hispanics who are uninsured grew more slowly than the percentage of non-Hispanics who lack insurance.

Poverty, race, ethnicity and immigration are complicated and controversial issues, and they arouse strong passions. That's all the more reason that we should be careful how we use data to tell a story. We should not oversimplify a complicated story, as the normally careful Samuelson has done here."

(Via .)

Road to Serfdom in Comic Form

From Boing Boing


Here's a comic book pamphlet adaptation of Nobel prize winning economist Friedrich A. Hayek's 1947 anti-collectivism book The Road to Serfdom. It was originally published in Look magazine in the early 1950s. Link

Water Taste Test

An example of a Veblen good:

Water Taste Test: "Water Taste Test
The folks at NPR wondered if $55 Bling H2O really tasted better than other bottled waters. They conducted a taste test featuring Bling H2O, normally-priced bottled water, and Manhattan tap water, and posted a video report. I don’t think the results will really surprise you. Link -via Metafilter"

(Via Neatorama.)

World’s Worst Credit Card

A terrible credit card offer

World’s Worst Credit Card: "
The Consumerist reports on the Continental Finance MasterCard. The fees include:

Account setup fee: $99
Program participation fee: $89
Annual fee: $49
Account maintenance fee: $120 (charged @ $10/month)
Purchase APR: 19.92%
Authorized user fee: $30 (great! seems like $53 credit is a bit too much for a single person to handle)
Credit limit increase fee: $25 (and you don’t even have to ask for it!)
Internet payment fee: $4 for each authorized internet payment.

After all that, your credit limit is $53. Link"

(Via Neatorama.)

Matthew Yglesias Summarizes Jason Furman

Matthew Yglesias Summarizes Jason Furman: "What we're seeing here are dynamic analyses of the effect of tax cuts on the income of people at different income levels, under different scenarios. The top selection shows what happens if you pay for tax cuts via decreases in spending -- i.e., what conservatives typically say should be done. Most households -- 74 percent of them, in fact -- wind up worse under this scenario than they would have been without the tax cuts. But 57 percent of families in the top twenty percent benefit. And 99 percent of families in the top one percent benefit. If, by contrast, the tax cuts are paid for simply by a future re-raising of taxes, then 76 percent of households wind up worse off, but 43 percent of households in the top one percent benefit."

(Via Brad DeLong's Blog.)

Computer crime is slicker than you think - Security - CRN Australia

An interesting read on the economics of malware and cyber crime

link.

The Demand Side Politics of Supply-Side Economics

The Demand Side Politics of Supply-Side Economics: "Following Jon Chait, Matt Yglesias writes:

...the central element of the Republican Party's tax policy -- lower taxes rates will lead to higher tax revenues -- is a discredited crackpot notion.

Fine, but a more fruitful question which I'd like to see Yglesias, Chait and others grapple with is why discredited, crackpot ideas can become central elements of a winning political party in the world's most important democracy.   Explain the demand side and give us your policy prescriptions."

(Via Marginal Revolution.)

How Bad Is The Wall Street Journal?

How Bad Is The Wall Street Journal?: "On August 24th, [the WSJ] published an editorial entitled 'How To Raise Revenue.' In it, they promised to defend further tax cuts on grounds of equity. They did so by arguing that 'The supply-side revenue effects on the rich are remarkable: Tax rates on higher incomes have been halved, but the federal tax share of the top 1% has nearly doubled.' They even produced a helpful graphic:

Can't argue with a graphic. But you can mention what it leaves out. According to the Pikkety and Saez data, in 1980, the income share of the Top 1% was 8.18% of the national total. In 2004, it was 16.08%. For those playing along at home, that's a 96% increase.

During the same period, their share of federal income taxes went from 19% to 36% -- a 89% increase. So controlling for the increase in income, the tax burden on the rich fell. That's some remarkable supply side effect: As the incomes of the rich go up, their tax liability goes down. And it didn't just drop a few percentile points: Because we have progressive tax rates, as more income pooled at the top, their tax liability should have increased substantially, as they'd pay more on that income than less wealthy families would.

The Wall Street Journal editorial page either couldn't figure this out -- in which case they're innumerate -- or they didn't want to tell their readers, in which case they're mendacious. Either way, why does Will believe this is an institution worth supporting?"

(Via Ezra Klein.)

More on the supply side claims made by Republican candidates here and here

Number Crunching

Number Crunching: "Yale's Ian Ayres has assembled links to a variety of fun prediction tools. For example:
Predict How Long You'll Live
Predict Your Child's Due Date
Predict the Market Value of Your Home
Predict Your Child's Adult Height
Predict Justice Kennedy's Vote
Ian emails me to ask for more suggestions. If you know of any similar prediction tools, post them in the comments section.

You can also read the first chapter of Ian's new book Supercrunchers."

(Via Greg Mankiw's Blog.)

The economy of airports

The economy of airports: "Tyler says:

Think of airports as temporary prisons for the wealthy, and the luxury good offerings as reflecting the extreme value of their attention.  Airports will sell goods which are complements to that attention, which is otherwise so hard to get. "

(Via Marginal Revolution.)

Hangover from the Austrians

: "Some libertarians extol the Austrian theory, not because they have really thought that theory through, but because they feel the need for some prestigious alternative to the perceived statist implications of Keynesianism. And some people probably are attracted to Austrianism because they imagine that it devalues the intellectual pretensions of economics professors. But moderates and liberals are not immune to the theory's seductive charms--especially when it gives them a chance to lecture others on their failings."

(Via .)

Stanford Business Magazine August 2007

Stanford Business Magazine August 2007: "Susan Athey Awarded John Bates Clark Medal
by Joshua Gans
Susan Athey, a 1995 graduate of the Business School’s doctoral program in economics and currently a professor at Harvard, became the first woman to be honored with the very prestigious John Bates Clark Medal in April. The medal, which is one of economics’ oldest awards (60 years as compared to 40 years for the Nobel Memorial Prize), is given every two years to the best economist under 40 in the United States. It is one of economics’ most prestigious awards and a predictor of future Nobel glory. (At Stanford Ken Arrow, Michael Spence, and David Kreps are all past recipients.) While insiders already knew that Susan’s work was outstanding, the award tells outsiders (either to the field or to academia) of the news."

(Via .)

Does Inequality Cause "Tangible Harm"?

Does Inequality Cause "Tangible Harm"?: "The Economist's blog Free Exchange argues that increases in income inequality have not caused a corresponding increases in unhappiness and asks that egalitarians defend the proposition that inequality is harmful. Chris Dillow answers the challenge:

The tangible harm of inequality, by Chris Dillow: The Economist's blog asks egalitarians to point to some 'tangible harm' from income inequality.

In some senses, the question is silly. To see why, imagine a slave society in which the slaves are reasonably content. It would be hard to point to a tangible harm, but something would be wrong.

This just shows that the 'tangible harm' criterion is psychologically, economically and philosophically naive. Psychologically so, beecause people adapt to their circumstances, so 'losers' don't feel too bad. Economically, because a gain foregone should count as much as a tangible cost; in a slave society no-one can see that freedom creates prosperity better than slavery, but this fact should surely count in our judgment. And philosophically, because inequality matters for more than consequentialist reasons. Justice matters too.
Anyhow, let's address the question. Aside from the ill-health which the Economist mentions - as if death were not tangible enough - I'd cite five other possible harms:

1. Crime. Basic economics says the relatively poor commit more crime than the relatively rich. This is because their opportunities to make money honestly are more limited, and the cost of being imprisonment - foregone earnings - is lower. Empirical work corroborates this. Is it really a coincidence that unequal countries (south America) have more crime than egalitarian ones (Japan, Korea, Scandinavia).

2. Lower social mobility. Societies with higher income inequality have lower social mobility. Politics in the US and the national media in the UK are now largely hereditary occupations. Many of you might think this unhealthy.

3. Slower growth. There are some reasons to think inequality can retard growth, say, by reducing social capital and therefore investment, or by creating credit constraints that prevent potential entrepreneurs.

4. Bad customer service and job dissatisfaction. The inequalities that matter are not merely of income, but of power. Some people have it, some don't. And in companies, these inequalities breed slovenliness and inefficiency. Cloke and Goldsmith put it thus:

Through years of experience, employees learn that it is safer to suppress their innate capacity to solve problems and wait instead for commands from above. They lose their initiative and ability to see how things can be improved. They learn not to care and to accept things as they are. They justify making mistakes and are allowed to be irresponsible and pass the blame to others for their mistakes. They become mindlessly obedient, fatalistic, intransigent and hostile.

5. Inner-city blight. Another consequence of inequalities in power is that poor areas become bad areas, with urban decay, poor schools and crime, because the poor lack the power to get the state to provide proper policing and schools.
So, there are almost certainly tangible harms from inequality. The more awkward question for egalitarians is: would there be more harm done by reducing inequality?

There is also Robert Frank's argument about positional goods:

The conventional wisdom has long been that a growing gap between the rich and the middle class is a bad thing. But that view is now under challenge. Some revisionists, respected economists among them, argue that inequality doesn't really matter so long as no one ends up with less in absolute terms. Using income levels to measure the well-being of individual families, these inequality optimists argue that since the rich now have much more money than before and the middle class doesn't have less, society as a whole must be better off.

Yet 'having more income' and 'being better off' do not have exactly the same meaning. I will argue that changes in spending patterns prompted by recent changes in the distributions of income and wealth have imposed not only important psychological costs on middle-income families but also a variety of more tangible economic costs. . . ."

(Via Economist's View.)

The Dismal Science, Dismally Taught - New York Times

The Dismal Science, Dismally Taught - New York Times: "Studies have shown that when students are tested about their knowledge of basic economic principles six months after completing an introductory economics course, they score no better, on average, than those who never took the course.

In other sectors of the economy, such dismal performance might provoke malpractice suits. But in the university system, students and their parents put up with this situation year after year.

Why aren’t introductory economics courses more effective? One possibility is that professors try to teach their students far too much. The typical course bombards students with hundreds of concepts, many of them embedded in complex equations and graphs. The mathematical formalism that has become the hallmark of economic research has yielded deep insights. But it does not seem to have helped introductory students learn basic economic principles."

(Via .)

Today Is a Great Day in Finance!

Today Is a Great Day in Finance!: "Today is a great day in finance! That is, it is a great intellectual day for those of us who are friends of and committed to the intellectual project of Shleifer and Vishny, for today one of their theories is made flesh, and stomps about Wall Street like Godzilla:

Andrei Shleifer and Robert W. Vishny (1997), 'The Limits of Arbitrage,' Journal of Finance, 52:1, pp. 35-55. Abstract: Textbook arbitrage in financial markets requires no capital and entails no risk. In reality, almost all arbitrage requires capital, and is typically risky. Moreover, professional arbitrage is conducted by a relatively small number of highly specialized investors using other people's capital. Such professional arbitrage has a number of interesting implications for security pricing, including the possibility that arbitrage becomes ineffective in extreme circumstances, when prices diverge far from fundamental values. The model also suggests where anomalies in financial markets are likely to appear, and why arbitrage fails to eliminate them...

Yes, today we have reached the limits to arbitrage: most of the people who spend their lives trying to buy low and sell high using other people's money and leverage have given up extending their positions (and so pushing prices back toward normal-time fundamentals), and are hunkered down simply hoping to survive the next month."

(Via Brad DeLong's Blog.)

Edward Glaeser: Where Edwards Is Right

Edward Glaeser: Where Edwards Is Right Commentary,  nysun.com: Last week in the New York Times, David Brooks compared the anti-poverty programs of Barack Obama and John Edwards. Senator Obama's plan focuses on making impoverished places more successful with funding for public transportation and community centers while Mr. Edwards wants to give housing vouchers directly to a million people. ... Should the government focus on fixing poor places or should it provide poor people with the resources to leave those communities?

Mr. Obama's poverty proposal includes some person-based policies, like expanding the Earned Income Tax Credit, but he also is awfully fond of place-based strategies, like Community Development Block Grants and a 'promise neighborhoods' program, which uses national resources to develop 20 impoverished areas. Mr. Edwards is a bigger fan of person-based strategies like housing vouchers and temporary jobs. I am no supporter of Mr. Edwards, but he is right to focus more on helping poor people than poor places.

Mr. Brooks, however, disagrees. He claims that vouchers are ineffective and lauds Mr. Obama's 'more developed view of social capital.' I think that means that Mr. Brooks likes the Harlem Children's Zone that is the model for Mr. Obama's 'promise neighborhoods' program. I like HCZ too, but its success says as much about the government's ability to build communities as Google's success says about the government's ability to develop Internet search engines.

The Harlem Children's Zone is an entrepreneurial nonprofit that receives most of its money from private donors. Saying that the federal government is going to fight poverty by developing its own HCZs is like saying that the government is going to increase GDP growth by starting its own Microsofts.

If we want to understand what future federal place-based policies will look like, we should turn our eyes from private nonprofits to past governmental forays into place-making like urban renewal and the Model Cities program. The track record of these place-based programs gives us plenty of reason to be skeptical about this approach.  ...

The Great Lakes were once a great place to make cars and now they aren't. Federal aid for the Motor City can't change that. ...[B]y subsidizing impoverished areas the government essentially is bribing people to live in economically unproductive areas. Even when these policies do make a place more attractive, it isn't obvious that the poor will benefit. ... Building strong communities is critically important for poor children, but lumbering federal bureaucracies are not particularly good at building strong communities.

Mr. Brooks' view of place-based aid is too rosy and his view of vouchers is too negative. ... [V]ouchers ... look better than most federal place-based projects. At least, the bulk of the money actually will go to poor people, not to politically connected banks and builders.

We should focus on helping people not places, although we can continue to use some place-based tools, like schools, to help poor children. Better schools and safer neighborhoods are the most important things we can give to poor children, which is neither an easy task nor exclusively a Democratic Party agenda. ..."

(Via Economist's View.)

A Taxonomy of Economists

A Taxonomy of Economists: "Dani Rodrik breaks down the two types of economists:

I call them 'first-best economists' and 'second-best economists.' Here is my guide to them.

You can tell what kind of an economist someone is by the nature of the response s/he offers when confronted with a policy issue. The gut instinct of the members of the first group is to apply a simple supply-demand framework to the question at hand. In this world, every tax has an economic deadweight loss, every restriction on individual behavior reduces the size of the economic pie, distribution and efficiency can be neatly separated, market failures are presumed non-existent unless proved otherwise (and to be addressed only by the appropriate Pigovian tax or subsidy), people are rational and forward-looking to the first order of approximation, demand curves always slope down (and supply curves up), and general-equilibrium interactions do not overturn partial-equilibrium logic. The First Fundamental Theorem of Welfare Economics is proof that unfettered markets work best. No matter how technical, complex, and full of surprises these economists' own research might be, their take on the issues of the day are driven by a straightforward, almost knee-jerk logic.

Those in the second group are inclined to see all kinds of complications, which make the textbook answers inappropriate. In their world, the economy is full of market imperfections (going well beyond environmental spillovers), distribution and efficiency cannot be neatly separated, people do not always behave rationally and they over-discount the future, some otherwise undesirable policy interventions can generate positive outcomes, and general-equilibrium complications render partial-equilibrium reasoning suspect. The First Fundamental Theorem of Welfare Economics is proof, in view of its long list of prerequisites, that market outcome can be improved by well-designed interventions. Since they have given up on the textbook model, members of this group have an almost-infinite variety of 'models' to choose from as they think of public-policy issues.
That's a useful taxonomy, actually, and it cuts across ideological lines. Rodrik identifies not only libertarians like Greg Mankiw, but left-of-center types like Brad DeLong, as first-best economists. Folks like Paul Krugman, Joe Stiglitz, and the EPI-types are second-best economists. So far as dabblers go, most of my libertarian friends are first-best types. Im a second-best types. And this isn't surprising. As Rodrik puts it, 'these disagreements are often grounded not in economics per se, but in strongly held prior views about the world in which we live in.' Of course, we all think our views are grounded in economics and evidence, but which evidence you find most compelling, and which assumptions you're willing to make (can consumers be rational and wise health care purchasers), matter greatly."

(Via Ezra Klein.)

Cramer begs Fed Reserve Chairman to cut interest rates (video)

Cramer begs Fed Reserve Chairman to cut interest rates (video): "Xeni Jardin: I've been a fan of Jim Cramer for many years, and I've seldom seen him flip out as epically and fantastically as he does in this clip.
On CNBC's Mad Money Friday, he screamed at Federal Reserve Chairman Ben Bernanke to slash interest rates, to help the stock market. Video Link. The money quote: 'No, we HAVE Armageddon.'

Also, is it just me, or does he look pretty awesome at 62? (* in fact he's not, it's a running joke on the show). But the lame-ass bobblehead is utterly unconvincing. (thanks, Kent!)"

(Via Boing Boing.)

Chart of presidential candidate's positions

Chart of presidential candidate's positions: "Chart of presidential candidate's positions
Mark Frauenfelder: Based on this chart that shows the issue positions of 18 presidential candidates, I don't like any of them. My dream candidate would be Ron Paul and Dennis Kucinich's love child.

(Via

Boing Boing.)

Tax These People

Tax These People: "These Silicon Valley millionaires seem to me to be a perfect example of why we need more progressive taxation.  It's not that they're unsympathetic characters -- they work very hard, and they seem like perfectly nice people.  The trouble is that they're a case study in how the marginal utility of money diminishes, especially when there's nothing left to pursue but positional goods:

‘Everyone around here looks at the people above them,’ said Gary Kremen, the 43-year-old founder of Match.com, a popular online dating service. ‘It’s just like Wall Street, where there are all these financial guys worth $7 million wondering what’s so special about them when there are all these guys worth in the hundreds of millions of dollars.'

...Silicon Valley offers an unusual twist on keeping up with the Joneses. The venture capitalist two doors down might own a Cessna Citation X private jet. The father of your 8-year-old’s best friend, who has not worked for two years, drives a bright yellow Ferrari.

Apart from one woman who fulfilled a childhood dream by having a swimming pool in her backyard, there don't seem to be many people who are using their wealth to satisfy deeply felt personal desires. 

Laffer curve fans won't be happy with this article either.  The people that the article describes are working 60-hour weeks and coming in on weekends despite their high tax rates.  And the occasionally-mentioned people who had opted out of the Silicon Valley rat race didn't do it because they realized that high tax rates meant that their work was insufficiently remunerative.  They left because they'd made enough money to ensure a high standard of living for the rest of their lives.

If the central idea behind the Laffer curve is that high tax rates decrease revenue by discouraging work, it's possible that there are cases in the article that bend the curve backwards.  If part of the reason why the Gage family left for a wonderful house in Oregon with their $3 million was that they'd made enough money to live as they wanted to, we have a case that bends the curve backwards.  If people are planning to make a fixed amount of money after which they can move away and live comfortably for the rest of their lives, higher tax revenues actually encourage work.  They make you work a longer time to accumulate the millions you need to live comfortably.  And as you work longer at higher tax rates, you pour more money into the federal coffers. 

"

(Via Ezra Klein.)

‘Falling Behind: How Rising Inequality Harms the Middle Class’ - New York Times

Robert Frank from his new book:

‘Falling Behind: How Rising Inequality Harms the Middle Class’ - New York Times: "[C]hoose between two worlds that are identical in every respect except one. The first choice is between World A, in which you will live in a 4,000-square-foot house and others will live in 6,000-square-foot houses; and World B, in which you will live in a 3,000-square-foot house and others in 2,000-square-foot houses. Once you choose, your position on the local housing scale will persist.

According to the standard neoclassical economic model of choice, which holds that utility depends on the absolute amount of consumption, the uniquely correct choice is World A. For if absolute house size is all that matters, A is indeed a better world for all, since everyone has a larger house there than the largest house in World B. The important thing, though, is to focus on how you would feel in the two worlds."

(Via .)

News Room Home

News Room Home: "Sunnyvale, Calif. -- August 2, 2007 --A new economic study issued today by Dr. Michael A. Williams, Director, ERS Group, found that Intel has extracted monopoly profits from microprocessor sales of more than $60 billion in the period 1996-2006. Dr. Williams’ analysis explains why pro-competitive justifications for Intel’s monopoly profits are implausible.

Williams also found that consumers and computer manufacturers could gain over $80 billion over the next decade if the microprocessor market were open to competition. The analysis noted that consumers would save at least $61 billion over the period, with computer manufacturers projected to save another $20 billion, enabling them to increase their investment in R&D; create improved products and greater product variety; and provide additional innovation benefits to computer buyers around the world.
"

(Via .)