Sunday, November 29, 2009

A paradox of plenty - hunger in America

Brend Debusmann, writing for Reuters in his article "A paradox of plenty--hunger in America" (Nov. 24th, 2009), gives both a false analysis of equality in America, and offers a poor comparison of opportunity in America to opportunity in Europe.
After all, a bedrock belief in America held that this is the land of unlimited opportunities where every citizen has an equal chance to succeed and become rich.  That requires an assumption that the system is fair.  How many Americans still believe that?  Last summer, a pair of political scientists, Benjamin Page and Lawrence Jacobs, published a study whose findings included that just 28 percent thought the present distribution of wealth is fair.
The author's evidence has nothing to do with his claim.  Although more than two thirds of Americans may think that Bill Gates does not deserve his billions, that it is "unfair" that he is so wealthy, this in no way informs wether or not each of these displeased Americans had the opportunity to obtain, for example, the schooling necessary to become their own Bill Gates.  Drive, of course, is a pre-requisite to obtaining wealth.  Ex post inequality of outcome does not presuppose ex ante inequality of opportunities.

Also, the article falsely implies that the chance of joining the middle class for poor children in America is lower than in other European nations.
More evidence that the gap between myth and reality is shrinking comes from the American Human Development project, a research group which found that "social mobility is now less fluid in the United States than in other affluent nations...a poor child born in Germany, France, Canada or one of the Nordic countries has a better chance to join the middle class in adulthood than an American child born into similar curcumstances."
 To see why this is a misleading statistic, imagine that half of American children are poor, and half middle class.  Suppose also that assignment into adulthood social class is random, so that a poor child has the same chance as a middle class child of ending up either middle class or poor.  Then, the chance of ending up middle class is 50% for a poor child, just as it is for a child born in the middle class.  Suppose now that 80% of European children are middle class and only 20% are poor.  Then, suppose that class re-assignment is random, so that a poor child has a 80% chance of entering the middle class in adulthood.    We see that under such a random assignment, the chance that a poor child becomes middle class depends completely on the size of the middle class relative to the lower class.

In fact, middle classes may not be comparable.  For example, in Soviet Russia, the probability that a homeless child entered the "middle class" was likely quite large, but the child's living standard, quite low.  All of this implies that expected future income of poor children should be as relevant a measure of lower-class mobility as the probability that those children rise to the ranks of the middle class.  Given this information, we may find that a poor child would quite prefer to take a chance on more in America over less in Germany.

Saturday, November 28, 2009

Can America afford the 'vanity tax'?

The LA Times opinion editorial "Can America afford the 'vanity tax'?" (November 27th, 2009) neglects to acknowledge basic notions of pleasure in its lambast of American leisure.

Although bemoaning taxes is the true national pastime, the one tax nobody really considers is this "vanity tax": the difference between what a thing needs to cost (to fulfill a given function) and what it ends up costing (after being artificially inflated by imperatives besides function).
Of course, our economic system is not structured around functional necessity, but rather around functional happiness.  That is to say, the most fundamental objective of the American consumer is to maximize his own well-being, not to maximize his usefulness to society.  If, as the author seems to suggest, we should build an economic system structured around necessity, it would be important to understand why we would do so.  Replacing every housewife's earrings with a new pair of gardening gloves, every child's toy with a multiplication book, may in the long run make America stronger against its enemies, but what gain have Americans really made?  If we are switching to function-value for another reason, we should ask ourselves, "what is that reason?"  Corrections cannot think of one.

Responding to a critic who called Twitter useless, the founder replied, "So what?  So is ice cream."  We eat ice cream for a reason beyond its "functional value" of eating calories--we enjoy it.

Even if we accept, for some reason, the author's barren, function-only world, we should not forget that luxurious goods have a purpose.  Economists define "Veblen goods" as those goods that grant their purchaser increased status, so the value of a Veblen good to a consumer is always tied-up in its price.  For example, a ferrari would not be valuable to most of the men who purchase expensive cars if it cost only $1.  This is because a ferrari has a function beyond its own use.  Veblen goods publicly display the wealth of those who purchase them and are often the same goods that signal high matching status.   One result of the ability to distinguish oneself from one's peers is to be able to signal (wealth, taste, sophistication) and gain information that allows optimal marriage market matchings.  In this sense, the red Ferarri might be worth as much as its sticker price to "society" since it allows an increase in matching efficiency.

Friday, November 27, 2009

The Jobless Gender Gap

Wall Street Journal opinion editorial "The Jobless Gender Gap" (November 27th, 2009) presents an informative piece, with what may be too-simplistic an analysis of the recession's unemployment gender gap.  It argues that the unemployment rate for men has risen because traditionally male sectors have been hit harder, and that government stimulus spending has been unevenly distributed to women, who have lost fewer jobs.

What has happened to men is fundamentally a product of the times.  This recession made America's already declining manufacturing sector decline more rapidly.  About half of all job losses have been in manufacturing and construction, overwhelmingly male sectors.
Government policy has also exacerbated this trend.  The stimulus dollars were disproportionately directed away from those who lost the most jobs.  The Obama administration estimated early this year that more than four in 10 stimulus jobs were going to women, about twice women's estimated job losses.
There are a number of concerns raised by this line of argument.  First and foremost, it is worth noting that numbers delivered from political entities  naturally suffer from a principal-agent problem.

Secondly, and more interestingly, it is unclear that we would expect what happens to men to be "a product of the times."  If employers can easily substitute men's labor for that of women, then we expect that if men are fired, the wages of women go down.  Men are now competing for their jobs.  However, it is not difficult to believe that women, even working women, could have a higher shadow wage than men.  This can mean a higher unemployment rate for women, in spite of the fact that their specific industry was not hit by the recession.

It is worth noting that the industries people are employed in are dynamic--just because men lost jobs in one industry does not mean they will not gain jobs in another.

A Parking Gift on a Holiday That Was

New York Times news article "A Parking Gift on a Holiday That Was" (November 27th, 2009) suggests that people who get parking tickets on the biggest shopping day of the year are not knowingly taking on more parking risk than they would on an average Friday:
Every year, a sleeping army of New Yorkers and their out-of-town guests forget that Friday is not a holiday and fail to move their cars for street cleaning.  But the city does not forget:  Traffic agents give out parking tickets furiously, more than three times the number on a usual day.  The post-Thanksgiving bonanza of roughly 20,000 tickets is worth some $900,000 to the city.
It seems a more rational explanation is that individuals recognize the risks they are taking, but their demand for goods complementary to illegally parking have increased dramatically.  The price of staying with friends and family, shopping on Black Friday, or sleeping in may seem paltry to a tripling of the probability they will get a $115 dollar ticket.

Additionally, it is worth noting that a number of tickets in New York may triple, but the number of cars that plan on paying their tickets may decrease.  The increase of individuals who live out-of-city also provides a degree of cover for New Yorkers who would like to park illegally.

Obesity is a growing problem in Ohio, with real consequences and real costs

Plain Dealer opinion editorial "Obesity is a growing problem in Ohio, with real consequences and real costs" (November 27th, 2009)  offers terrible solutions to the potential non-problem of obesity.  Concerned with obesity in Ohio, the article argues for state programs:

Ohio's lawmakers are pondering ways to help their constituents, young and old, get into better shape and avoid weighty problems in the future.  One way would be to see that young people, especially, are served healthy food.
State support for programs that grow fresh fruit and vegetables in urban garden plots for consumption from urban plates would be especially helpful.  So would banning soft drinks from schools and a return to state-mandated physical education.

Individuals are choosing to do what is best for them.  What are possible market failures?  These will occur if individuals choosing to eat junk food are not considering the full repercussions of their actions.  Likely, monopolies on junk food or other sources of imperfect information are not problems for the obese--they are inundated with health information every day.  Are there externalities to being fat?  There may be two negative externalities: the first, that obese people may cause negative externalities to people who see them on the street, the second is that obese people may cost thin people more money by receiving benefits from government health programs.  We'll assume the former isn't a serious problem, and entertain the second.  Suppose obesity has this negative externality.  What is the best solution?

The article appears to favor a subsidy on healthy food, revenue for which must be generated from a tax on another good, creating two possible deadweight losses--one from the tax, the other from the subsidy.

The efficient solution to the second would seem to be a Coaseian solution--to privatize the problem.  A Pigouvian tax on unhealthy foods falls inefficiently on the obese and the fit.  A Coaseian fix, declaring that individual health problems brought on by obesity are to be paid for by the individuals causing the externality (the obese), would be more appropriate.

Thursday, November 26, 2009

Reversal of fortune/ Remittances now coming north from Mexico

The San Diego Union-Tribune 's editorial "Reversal of fortune / Remittance now coming north from Mexico" (November 25th, 2009) censures individuals who concern themselves with remittances, but perhaps falls short of grasping the larger economic picture.

For one thing, immigration restrictionists sometimes justify their call for a crackdown on illegal immigration by harping on the billions of dollars in remittances that illegal immigrants send home to relatives in Mexico. The idea that so much money is leaving the country really bothers them.

So do they feel any better knowing that some money is now entering the United States? Is this an argument for allowing illegal immigrants to remain here? That sounds silly.

But then so did the initial concern about remittances. After all, this is the immigrants’ money, and they can do with it what they want.

The Union-Tribune is certainly making a moral point. However, it neglects an opportunity to focus economic opprobrium on claims of its opponents. Specifically, it fails to "follow the money."

  1. U.S. companies/citizens pay immigrants for labor. These companies get more than or equal to what their labor is worth--otherwise, they wouldn't employ them.
  2. Immigrants receive money. They can spend it or invest it in the U.S. or elsewhere:
    1. spend it in the U.S., which is not a case the Union-Tribune's opponents appear concerned with.
    2. invest it in the U.S., which is not a case the Union-Tribune's opponents appear concerned with.
    3. spend or invest it elsewhere, in which case individuals who have been given these U.S. dollars in exchange for producing goods can do one of two things:
      1. Spend it in the U.S., in which case we are back in part 2.1
      2. Spend it somewhere else dollars are accepted, in which case we are back in part 2.3
The process is continued until everything is spent in the manner outlined in 2.1.

It seems that we are either giving immigrants pieces of paper that never impact us again in exchange for real labor, which is nothing anyone but immigrants would want to complain about, or the money is spent in the United States eventually, in which case the Union-Tribunes opponents would be satisfied.

The only reason that anyone would oppose immigrants in the United States is if immigrants were free-riding on U.S. welfare programs, not an unlikely prospect, given that around 15% of illegal immigrants have a bachelors degree or more, while 49% do not have a high school diploma.

Wednesday, November 25, 2009

Boomerang kids: recession sends more young adults back home

Christian Science Monitor article "Boomerang kids: recession sends more young adults back home" (November 24th, 2009) makes a claim that is neither backed up by empirical evidence nor necessarily by economic theory. The article suggests that America's youth will pay for today's government borrowing tomorrow.

But some analysts say the youngest generations are being hit twice by this recession: once up front with the tough labor market, and again later as they’ll pick up a big share of the taxpayer costs of government programs to rescue the economy. This year’s stimulus spending package and other strategies by presidents before Obama have involved buoying the economy with borrowed money. [Emphasis added].

Parents care about their children. If government agents are acting against the wishes of the elderly and transferring money from their children to them in the form of government debt, then parents are free to transfer it back to their children in other forms--such as paying for their children's rent (allowing them to move home). It is possible for the introduction of Social Security to have no impact at all--parents who are getting more than they and their children desire can transfer their income back to their children. So too with all government spending programs. Of course, as with all government spending programs, deadweight loss is added, as offspring will be taxed in the future.

Nonetheless, the central point remains: it is unclear that children are the ones being harmed by taxes that have to be paid 40 years in the future.  If parents have their children's budget constraints in their preferences, then it could simply be this generation that pays for future taxes through monetary transfers now.  These transfers can come in the form of educating children, or allowing them to move back home.

Government panel can't put a price on human life

Houston Chronicle viewpoint "Government panel can't put a price on human life" (November 24th, 2009), while titularly correct, fails to realize that human life always has a price, whether the government explicitly acknowledges it or not.

If cost-benefit becomes a primary objective in government-run health care, then government would be in the business of putting a market value on human life, no different than a property appraiser values a home. We know Americans do not want this type of rationing, which would deprive our citizens of life-saving screenings just because they might not be worth the cost on the front end. You can't put a price on human life. [Emphasis added].


We must reduce the costs of health care, but we should instead embrace a number of initiatives, such as electronic medical records, civil justice reform, insurance reform and disease prevention. One thing we can never mark down is the price of human life. It is absolutely priceless.

The fact of the matter is that everyone, including the government, puts a price on human life.  We all price human life--even our own lives--every time that we participate in a life-risking activity. In fact, anytime a person acts to change the inputs in the valuation of others, he provides economists with his shadow price for the lives of others (like deciding to drive 5 mph faster, so deciding to risk one more life per million, in order to clock-in a moment sooner at work).

Perhaps the point of the article is that the government should not put a price on human life, though we ourselves may. While a reasonable position, even then we must realize that at minimum, the government must make cost/benefit calculations about the value of human life in military affairs. It would be very astonishing indeed to find out that the government decided to invest all of tax-payers' money in arming the troops. At some point, we must decide when additional military spending is no longer worth spending. So long as we have government that spends money, it must have an implicit valuation of human life.

Maybe, though, the government doesn't extend such valuations to the civilian sector?  Of course not.  It seems, for example, that mandatory seat belt use laws cost $69 per life saved, while the introduction of an airbag saves $120,000 per life saved, and requiring back center seat belts save one life ever $360,000 spent because of the regulation. Finally, sickle cell screening for non-Black low risk newborns would cost $34,000,000,000 per life saved. Should the government mandate sickle cell screening?

Then perhaps it's the argument that government should never make an explicit valuation of human life. Let's say we get a moral benefit from having government that does not put an explicit value on human life. Even then, the moral benefit we gain might be able to be priced out. Would we be willing to put an explicit value on human life in order to save one hundred thousand lives? One million? Even the government's putting an explicit price on lives has its own value.

The article's proper phrase might be: the price of the government putting an explicit price on lives is too high. While we certainly may agree that the government has no place in healthcare or in setting prices on human lives in that respect, it is important to remember that the cost of the government not putting an explicit price in any realm will be inefficiency.  In this setting, inefficiency translates to a higher death toll.  Ideally, the government would discover an efficient price of life, and would prevent millions of deaths.  The real phrase for the article should have been: Prices are not the problem here, government is.

Tuesday, November 24, 2009

Fostering trade with South Korea

Denver Post editorial "Fostering trade with South Korea" (November 23rd, 2009), while citing the "so-called Law of Comparative Advantage", appears to completely misunderstand the principle. In fact, when two nations trade, both benefit in real terms. The relative benefits of trade have nothing whatsoever to do with the question of whether or not a nation should engage in trade: a country should engage in trade when it benefits from doing so. The article does not correct the misunderstanding that relative gains to trade are irrelevant in the decision to engage in trade.

Obama insists that the trade agreement would not benefit Korea more than the U.S., and he seems to have the better case. [Emphasis added]. Still, the anti-trade bias within his party and in Congress will make it difficult for Obama to make good on his promise.

The trade appears to be something positive, or nothing. Even if the people he is trying to convince only care about relative wealth, it would take a herculean feat to think that we would be benefitting South Koreans 140 times what the United States would be gaining, approximately the amount that would be required to oppose the bill on relative wealth grounds.

As a side issue, the article offers no backing for its conclusion that:

Estimates are that the South Korea free-trade pact would boost the $80 billion in annual trade between our countries by as much as $20 billion a year within five years.

What's more, the expectation is that American farmers and automakers would benefit most, because their products face the toughest Korean trade barriers.

The amount of trade depends on each nation's comparative advantage. It is certainly not clear that American companies like General Motors, Ford, or Chrysler have a comparative advantage over Hyundai and Kia.

Yes, she can: Palin has a shot at the presidency

Washington Post article "Yes, she can: Palin has a shot at the presidency" (November 24th, 2009) misunderstands sample selection and causality. The argument states that above a certain approval rating, no United States president has ever lost reelection; below a certain approval rating, no President has ever won. This is a double fallacy of using inductive logic, and further, misunderstanding sample selection.

First, Gallup polls over the past 60 years show that no president with an approval rating under 47 percent has won reelection, and no president with an approval rating above 51 percent has lost reelection. (George W. Bush's approval rating in the weeks before the 2004 election hovered around 50 percent.)

The 2012 election will be primarily about our current president and whether voters are satisfied with the country's direction.

From the above, the article's central conclusion:
Who the Republican candidate is, and his or her qualifications and abilities, will matter only if Obama's approval rating is between 47 and 51 percent going into the fall of 2012. Interestingly, in the latest Gallup poll Obama's approval rating was at a precarious 49 percent.

This misses two points, one obvious, the other subtle. The obvious point is simply that the past is no guarantee of the future. The subtle point is that Presidential approval ratings may cause certain types of candidates to come to the fore. Take Barry Goldwater and Lyndon Johnson in 1964. Before the election, Johnson's approval ratings were around 74%. They were similar while Goldwater won the republican nomination in the face of competition from William Scranton and Nelson Rockefeller, both moderate "Rockefeller" republicans (Nelson was the namesake). In the face of a widely popular President, the party chose a firebrand. In the face of an unpopular George H. W. Bush, whose approval rating was 41% by the time Bill Clinton cleaned up on Super Tuesday in 1992, democrats nominated a New Democrat to office--had Jerry Brown been nominated, it's by no means clear that even a 41% approval rating would have caused a Republican loss .

The lesson that matches with intuition might be: given you are challenging an incumbent, when a race is hopeless, pick candidates who appeal to your base. When a race is winnable, pick moderate candidates who have a chance.

To be sure, one can object to this specific conclusion as much as the Washington Post's. Nonetheless, the point remains that the qualities of the candidate of choice vary with Presidential approval ratings and are not exogeneous to them. The author's suggestion that a party can "break" with tradition and choose a firebrand is ludicrous--the prediction is outside his implicit model.

Monday, November 23, 2009

October Home Sales Far Exceeded Expectations

New York Times news article "October Home Sales Far Exceeded Expectations" (November 23rd, 2009) failed to properly analyze an increase in quantity of home sales. It claims that an increase in quantity may herald an "upswing" for a housing market, presumably an increase in demand.

Existing-home sales in October rose to the highest level in more than two years, according to a report released Monday, driven by the popularity of a credit for first-time home buyers. The surge far outpaced expectations and nurtured hope that the stubbornly frail housing market might be on the upswing.

The article notes that quantities rose and prices fell. If we take a linear partial identification strategy, all that tells us is that the percentage change in supply of houses to be sold was greater than the percentage change in demand of houses. Far from heralding an "upswing" in housing market demand, we should read this as a relative increase in oversupply.

Sunday, November 22, 2009

Roll Your Own Tax Rate

New York Times editorial "Roll Your Own Tax Rate" (November 21st, 2009) misunderstands the idea that individuals are much better off, in general, when they are left free to choose their own utiility-maximizing bundle.

Obviously the new law is in urgent need of a no- nonsense amendment to bring roll-your-own under proper federal controls and full taxation. The companies plead they merely found a way to save their industry from taxes so prohibitive as to force them to close. That’s not a bad idea, given the public health findings about lethal smoking.

The editorial misses the same things doctors miss when they assume that the sole objective of individuals is to lengthen their life. Maximizing happiness over time involves both quantity of life and quality. If individuals were interested solely in lengthening their life, then they would not listen to music while driving, or, if a passenger would always take the back seat, which is safer. The marginal increase in safety is simply not worth the sacrifice.

Why would we assume that cigarettes are any different? Knowledge? Addiction? The 1997 National Survey indicates that individuals who smoke overestimate the risk level of lung cancer. The idea that individuals are not forward-looking when it comes to addiction is belied by a plethora of empirical evidence: individuals drop consumption of cigarettes now in response to a future tax increases (American Economic Review: Becker, Grossman and Murphy 1994).

The only option left for criticism is that we smoke because our social group lowers our overall utility but increases our marginal utility from smoking--a dubious proposition in the long run, given the physical and monetary cost of smoking and endogeneity of social groups.

Oh, for the sounds of hammers

San Diego Union-Tribune article "Oh, for the sounds of hammers" (November 21st, 2009) appears to miss the special nature of durable goods like housing in the "business cycle." The government should not delay our arrival at a long run housing market equilibrium by building more.

One, be thankful for complex civic projects, the kind that take longer to complete. We’re talking about Vista’s new civic center, fire stations and amphitheater or Escondido’s new police station, almost finished. Or school bond issues, passed last November. The money’s available, but winning state design approval takes time. Districts that act nimbly will be able to stretch their dollars by purchasing material and talent while prices are low. Public projects will keep the construction industry alive while the private sector struggles to shake off the bust part of the boom and bust cycle. [Emphasis added]

Buildings last a long time. We build a very low percentage of houses that go into the market every year, because houses last so long. If we have, due to a shift in our expectations about the need for construction, built too many houses, too many office buildings, too many McDonalds, it must be recognized that it will take some time for us to shift supply back down. We have to wait for enough buildings to depreciate so that we are back to a lower, more appropriate steady-state. Until then, we find ourselves in a situation where investment is zero (or very low), as depicted below.

The government can do one of two things to stimulate the sound of hammers: it can commission public woks projects or it can build houses (for example, by subsidizing building costs for new houses). The government should not to to prop up the construction industry by encouraging public works projects because these projects are already at their steady state (there was no famous public works bubble). If government, on the other hand, props up the housing market by building houses out of equilibrium, they will delay investment. This is because by increasing the quantity of new houses on the market to above equilibrium levels, the government causes the price of housing to remain lower for a longer period of time. This means that the "steady state" time period depicted below (click the image to enlarge) occurs later than it would without government intervention. Ultimately, we see no reason for the government to force such suboptimal levels of production.

Saturday, November 21, 2009

What if a Recovery Is All in Your Head?

New York Times article "What if a Recovery Is All in Your Head?" (November 21st, 2009) is deeply troubling, as it offers an unfalsifiable hypothesis. The author offers the following idea:

Consider this possibility: after all these months, people start to think it’s time for the recession to end. The very thought begins to renew confidence, and some people start spending again — in turn, generating visible signs of recovery.

Without any exogenous variation on this somewhat amorphous concept, the argument is ludicrous, and appears untestable. Indeed, the article admits as much:

According to the standard schedule, we’re due for recovery. Given this knowledge, the mere passage of time may spur our confidence, though no formal statistical analysis can prove it.

If philosophy gained anything in the 20th Century, it was the concept that statements are scientific if and only if they are falsifiable, if they are testable. By its own admission, the article is unscientific in its conjectures. Insofar as it takes economics out of the realm of science, Corrections follows Hume's self-condemnatory suggestion at the end of "An Enquiry Concerning Human Understanding" (1748)

When we run over libraries, persuaded of these principles, what havoc must we make? If we take in our hand any volume; of divinity or school metaphysics, for instance; let us ask, Does it contain any abstract reasoning concerning quantity or number? No. Does it contain any experimental reasoning concerning matter of fact and existence? No. Commit it then to the flames: for it can contain nothing but sophistry and illusion.

Holder targets racial profiling in Detroit speech

The Detroit News article "Holder targets racial profiling in Detroit speech" (November 20th, 2009) highlights U.S. Attorney General Eric Holder's misunderstanding of optimizing use of law enforcement resources.

"Racial profiling is simply not good law enforcement," said Holder, who told the crowd that he was racially profiled in the 1970s as a college student.

Holder is wrong. One should further say that racial profiling is not racially discriminatory, insofar as it is not marked by unfair distinction between different categories of people. This is not to say that racism isn't possible. Let us take traffic stops. The marginal arrest of a black man should yield the same result as a marginal arrest for a white man. Let us say that the police have 10 traffic stops to make, between 10 black and 10 whites. If the 7th worst black man is equally likely to be bad as the 3rd worst white man, then we can say that pulling over 70% of blacks and 30% of whites is not racist--it's treating all criminals equally.

Congress should rein in spiraling credit card rates

Boston Globe article "Congress should rein in spiraling credit card rates" (November 21st, 2009) attributes insidious motives to an expected and profit-maximizing behavior.

The banks have jacked up interest rates to as much as 30 percent, apparently to preempt a new rule that comes into force in February, requiring that consumers receive notification 45 days before a new rate hike.

Interest rates are prices. When a company is free to vary its price depending on the state of the world that materializes, then we expect efficient prices immediately. When they are restricted from changing prices, they must deal in a world of expectations, and a weighted average price that lies somewhere between a low-state and a high-state is a firm's proper price.

Why should we be surprised that we have inefficient prices--sometimes too low, sometimes too high, when we restrict prices?

Members of Congress need to extricate themselves from the python-like embrace of the financial sector and establish a regulatory framework for determining fair and reasonable credit card rates.

The Globe should recognize that the market for credit, for capital, is perhaps the most competitive in the world, and the only result of interference will be inefficiency and shortages.

Friday, November 20, 2009

The great jobs-stocks disconnect article "The great jobs-stocks disconnect" (November 18th, 2009) is short-sighted in its understanding of growth theory.

How can the stock market hit new highs at the same time unemployment is hitting new highs? Simple. The market is up because corporate earnings are up. Corporate earnings are up because companies are cutting costs. And the biggest single cost they’re cutting is their payrolls. So they let people go and, presto, their balance sheets look better and their stock prices rise.


The result, overall, is an asset-based recovery, not a Main Street recovery. Yes, the economy is growing again, but the surge in productivity is a mirage. Worker output per hour is skyrocketing because companies are generating almost as much output with fewer workers and fewer hours.

There are, generally speaking, two inputs to goods: labor, and capital. The return to an investment of labor is the wage the labor receives, just as invested capital has its own average return. Every increase in productivity of capital or labor In the past two centuries, accrues to one or the other (every dollar a business takes goes out somewhere). But capital is elastically supplied, while labor is relatively inelastic, even in the long run. Because of this, in the last two centuries, it has been the wages of labor that have increased by factors of magnitude, while the return to capital has stayed relatively constant.

To deride a short-term increase in the return on captial is to misunderstand that all productivity gains in the last two centuries are collected not by capital, whose rate eventually returns to 5-7%, but to labor, who permanently gains.

The Wrong Side of History

New York Times opinion editorial "The Wrong Side of History" (November 18th, 2009) submits social security as a successful reform that paves the way for programs like public health care:

Indeed, these same arguments we hear today against health reform were used even earlier, to attack President Franklin Roosevelt’s call for Social Security. It was denounced as a socialist program that would compete with private insurers and add to Americans’ tax burden so as to kill jobs.


In hindsight, it seems a bit ridiculous, doesn’t it? Social Security passed, and the republic survived.

Yet we can say that Social Security is an inefficient savings mechanism that made the old better off at the cost of at least one future generation. Furthermore, it remains unclear whether or not social security will indeed survive the next eighty years of negative population growth, as a pyramid-shaped payment scheme requires more dollars from fewer individuals. The full story of social security will be told in the next eighty years. We might additionally correct the article, noting that private savings in America fell when social security was imposed--savings is a form of private insurance, and social security, an inefficient savings mechanism, has surely competed with it.

Thursday, November 19, 2009

A Stimulus That Could Save Money

New York Times article "A Stimulus That Could Save Money" (November 17th, 2009) misses the forest for the trees.

The one highly visible success of the stimulus program has been the cash-for-clunkers program. It induced a boom in vehicle sales this summer that clearly would not have happened otherwise.

Presumably, the article is referring to the large increase in car sales during the Summer of 2009. Cars are a durable good, last around a decade, and cost around $28,000. With an average rebate of $4100, a 14% average price decrease, we should expect individuals who were going to replace next year to intertemporally displace their purchases to the Summer of 2009.

But this is just shifting purchases and is by no stretch of the imagination expansionary in the long run--what we gain now in sales is taken out of sales in the future. It was foolish to draw sales nearer to today at the expense of tomorrow in a negative sum game--far from a success.

The GOP's no-exit strategy

Washington Post editorial "The GOP's no-exit strategy" (November 19th, 2009) bemoans a spate of procedural delays in the U.S. Senate.

As of last Monday, the Senate majority had filed 58 cloture motions requiring 32 recorded votes. One of the more outrageous cases involved an extension in unemployment benefits, a no-brainer in light of the dismal economy.

Passing extended unemployment may be a very unwise decision, and certainly is not a "no-brainer". Individuals respond to incentives, and an extension of jobless benefits from six months by an additional thirteen weeks adds to the shadow price of taking a job now, causing people to take their time looking for a new job. Given that during a recession with relatively high unemployment we expect labor supply to be relatively inelastic with respect to wages (i.e. it's hard to find a good job), we must conclude that even in search model, which would normally predict greater placement efficiency due to unemployment benefits (i.e. the longer everyone looks, the better the jobs they find), it takes a great suspension of disbelief to think that lengthening unemployment benefits makes sense in this economy.

Proper economic solutions would avoid the large implicit tax that individuals face when deciding to accept work or put it off for the future (in a manner similar to fixes for the welfare trap--partial reduction in benefits when one works, rather than complete reductions).

Wednesday, November 18, 2009

Not enough to eat

Philadelphia Inquirer opinion editorial "Not enough to eat" (November 18th, 2009) writes on a USDA report showing that there are a number of families in the United States that are "food insecure". The Inquirer's solution to the problem is to encourage an increase in food stamps:

So now that the "wake-up call" has been sounded, what would would it mean to actually take the issue of hunger seriously?

In the relatively short term, Congress should increase funding and eligibility for safety-net programs like the Supplemental Nutrition Assistance Program - what used to be called Food Stamps - as well as child-nutrition programs like school lunch and breakfast, as well as after-school and summer food programs. More Americans may be malnourished than at any time in the last 15 years, but without federal feeding programs, the situation would be exponentially worse.

This is an error. If we are concerned with starving individuals in the United States, then food stamps at their very best are less than or as efficient as cash, never more. That individuals would not know that they wanted food more than something else suggests that they were not starving to begin with. Similarly, to pretend that food stamps are not inefficiently fungible with cash is in error.

Better to give starving individuals the same amount of money in cash--taxpayers are indifferent and starving individuals are made better off.

Stop the waste of water

Miami Herald opinion editorial "Stop the waste of water" (November 17th, 2009) appears to miss the simplest solution to the over-watering of lawns and landscapes in South Florida. It complains of an exception to a rationing rule that allows southern counties to water their landscapes.

The rules set up a double standard that allows counties south of Lake Okeechobee to waste water.

South Florida, the state's biggest water gulper -- 179 gallons per person per day is our shameful average -- still gets to water its landscapes three times a week under the new rule's exemption approved Friday by the South Florida Water Management District's board.

If the Herald feels water is being wasted, the panacea to shortages is privatization of resources or to charge the real cost of producing water. If watering lawns is not worth it for families and institutions, then they won't water them. If it is, then how could we possibly define what they're doing as waste?

Tuesday, November 17, 2009

Where are the Doctors to Implement ObamaCare?

Wall Street Journal editorial "Where are the Doctors to Implement ObamaCare?" (November 17th, 2009) is mistaken in its causal conclusion concerning the need for more minority doctors. Specifically, it drew the conclusion that because (obstensibly) white doctors tend to practice in white communities and minority doctors tend to practice in minority communities, that we need to emphasize more minority doctors because minority communities are more in need of doctors.

Furthermore, the physician workforce does not reflect the ethnicity of the population, underscoring health disparities that result in a higher incidence of chronic diseases and higher mortality in minority and low-income populations. Because minority physicians are more likely than non-minority physicians to practice in ethnically diverse communities, it is vital for medical schools to train a diverse workforce of physicians to practice with a clear emphasis on prevention, and with cultural competency and sensitivity.

Let's imagine a world in which doctors of different races are choosing where to serve. If we imagine a world with the weakest possible racism, where I don't care where/who I serve, but as a tiebreaker, all other things being equal, I use race. I'm not willing to pay one penny to be a racist. In essence, no one is a racist, and only uses race as a tiebreaker. Then we should still see perfect segregation for one race. The figure below indicates our matching model (click to enlarge).

But in this model, if we wanted to serve underserved minority areas, how might we go about doing it? The economic answer appears to be that we can train Ku Klux Klan members just as easily as we could Black Panthers. Why? Because it is only the marginal racist that matters. The KKK members will certainly serve white areas, and doctors who don't care will be pushed to serving minorities. We can see this in our new figure (click to enlarge).

Our "no racism exists" model above doesn't change our conclusion that it doesn't necessarily matter if a new doctor is minority or not--it is the marginal racist that matters, and if, at the margin, we have doctors who aren't racist, then we shouldn't care what race doctor we introduce--teaching Ku Klux Klan members may help minorities as much as teaching Black Panthers.

Monday, November 16, 2009

STDs Continued Record Increase in 2008

Time magazine's news article "STDs Continued Record Increase in 2008" (November 16th 2008) neglects to mention a mitigating factor in its article on the rise of sexual spread diseases.

Sexually spread diseases continue to rise, with reported chlamydia cases setting yet another record in 2008, government health officials said Monday.

Specifically, that the cost of being infected by sexually transmitted diseases like chlamydia has gone down, as new, better vaccines and treatments have been advanced. A more appropriate measure would be a "quality-adjusted" sexually transmitted disease increase--society may have more AIDs cases than it did in 1990, but those with AIDs are certainly better off than their predecessors.

Sunday, November 15, 2009

Locked Up

Chicago Tribune Editorial "Locked Up" (November 14th, 2009) appears to neglect the proper statistics. Speaking on the life incarceration of young men for multiple serious crimes not involving murder, it claims:

Does it sound sensible to write off a teenager because of two serious convictions that don't include murder? Not to our mind.


As a matter of general policy, there are reasons to be skeptical about jailing a youthful criminal for the rest of his life. Juveniles lack the judgment and impulse control to be fully responsible for their actions, and they may be more amenable to rehabilitation than adults. With 77 inmates serving life without parole for non-homicide crimes committed as juveniles -- twice as many as all other states combined -- Florida clearly puts excessive reliance on this option.

While they may be more amenable to some new, untried rehabilitation that we have not been practicing, the percent of released prisoners from all states who were rearrested within three years is a monotonically decreasing function. The older you are, the less likely you are to be re-arrested, and re-convicted. It seems to be in our interest to put younger individuals away longer than older individuals.

Additionally, of all violent offenses, property offenses, drug offenses, public order defenses, and other offenses, murderers are the least likely to be re-arrested or re-convicted within three years Releasing the marginal murderer seems much less criminal than the marginal rapist using recidivism statistics.

Reform and Medical Costs

New York Times editorial "Reform and Medical Costs" (November 15th, 2009) has repeatedly made the same mistake as many other shrill reformists have made concerning medical costs. Specifically, speaking on rising medical costs, it claims:

Medical spending, which typically rises faster than wages and the overall economy, is propelled by two things: the high prices charged for medical services in this country and the volume of unnecessary care delivered by doctors and hospitals, which often perform a lot more tests and treatments than a patient really needs.

Similar arguments may be made for the alleviated pain individuals live with when sick. Costs are the product of quantity and price. Costs rising in and of themselves does not mean anything bad, economically. Some would argue the rise in medical costs since 1900 are paltry compared to the 30 extra years of life expectancy individuals have received. (Not to say that one shouldn't continue to cost-minimize, but to emphasize that quantity/quality of medical care has certainly gone monotonically up over time).

Saturday, November 14, 2009

U.S. Signals Shift on Asia-Pacific Trade

The Wall Street Journal's editorial "U.S. Signals Shift on Asia-Pacific Trade" (November 14th, 2009) is mistaken and slightly misleading in its dismissal of the Trans-Pacific Strategic Economic Partnership Agreement,

Although touted by free trade advocates, the combined size of the four economies [Singapore, Chile, New Zealand and Brunei] in the pact is smaller than Belgium's economy.

A more apt comparison might be to say that the nominal GDP of the four countries exceeds that of Taiwan, which often finds itself as the United States 10th largest trading power, by approximately 25%. Or that their GDP measured by purchasing power parity (PPP) exceeds that of Belgium by 58%.

GDP can be misleading--production prices can matter much more. If another country, very large, has exactly the same prices and technologies as us, then we are, in most cases, indifferent to trade, as are they. The more different the production prices, the larger the gains to trade. We should note that the ratio of PPP to GDP is a crude measurement of the difference in prices between countries. As the countries in question have relatively high PPP to nominal GDP ratios, they are to be seen as more attractive trade partners than a similarly-sized economy with PPP to nominal GDP ratio close to one.

Furthermore, GDP is not a good measure of gains to trade for a country. To use the classic example, when a secretary trades with a doctor to save him 2 hours of administrative work, she does not save him the $15/hour he pays her--his gain from trade is the $485/hour he now makes doing what his comparative advantage is (doctoring for $500/hour). Her "GDP" may be $30, but her worth in trade was $875.

Friday, November 13, 2009

Turn America into a nation of savers

The Christian Science Monitor's opinion editorial "Turn America into a nation of savers" (November 9th, 2009) wishes for the U.S. savings rate to go up.

Deciding that America needs to save, Mr. Cramer advocates government spending:

For the next few years, we should expect the federal government to continue to spend more than it takes in. This will be a good thing as it solves the troublesome "paradox of thrift," where reduced economic prosperity leads to sudden declines of consumer spending, which accounts for two-thirds of the economy.

But once the economy recovers, a high savings rate still will be essential to financing the investments American business must make to improve efficiency and avoid the looming prospect of inflation. And the more Americans of all classes save, the less dependent the country becomes on foreign creditors to buy our debt.

1) This article implies that savings are good. No course in economics would dare to make such a claim. If not saving makes people happy, then they shouldn't save!
2) The existence of a "paradox of thrift" is not clear. A fall in consumption and increase in savings will cause both prices to go down and interest rates to go down, both of which encourage consumption. Unless we believe in a multiplier, there's no paradox.
3) Ricardian Equivalence should take place when it comes to simultaneous government spending and consumer saving. The governmental budget constraint is the aggregate consumer budget constraint.

The only Paradox of Thrift that Corrections can see is the Paradox of consumers spending more (as individual taxes raise) while saving more (as individual bank accounts rise).

More Foreclosures to Come

New York Times editorial "More Foreclosures to Come" (November 13th, 2009) submits a concern for the future of homeowners on the brink of foreclosure. Neglecting to answer the question, "why should the government worry about foreclosures?" the article begs the question of whether or not the Obama administration should spend its limited resources on fighting foreclosures.

By conservative estimates, 2.4 million homes will be lost in 2010, while prices will fall another 10 percent or so. This should be a wake-up call for the Obama administration. Foreclosures are expected to surge, in part, because lenders have been delaying the process during the long rollout of the administration’s antiforeclosure plan. But according to Moody’s, most troubled borrowers ultimately will not qualify for help, and a backlog of bad loans will soon enter foreclosure.

Homes are not lost. They are foreclosed upon, often by banks. Banks have no use for houses. If they can sell them, or rent them, they not only "should"--they will. Only foolish laws that prevent them from renting for short periods or foreclosing gives them incentives to keep them until better buyers come along. While one family may leave a home, another will enter it. Houses are not "lost", they are transferred.

Furthermore, it is not evident why we want to keep families in homes whose rental rate, (or mortgage payments) are much too high for these most troubled borrowers. It seems the same number of dollars are better spent helping a greater number of marginal families--those who have a chance at making most of their mortgage payments.

Thursday, November 12, 2009

Why We Shouldn't Give Christmas Gifts

Time Magazine article "Why We Shouldn't Give Christmas Gifts" (November 12th, 2009) appears to neglect a fundamental trait in the utility of individuals: that they may like to give. One wouldn't want to sell interviewee Joel Waldfogel short, but if individuals get a "warm glow" from giving gifts and don't care about the actual felicity their gift recipient garnered, then gift giving is not only rational but quite "selfish" (insofar as it does not concern itself with the utility of others).

Wednesday, November 11, 2009

Raw Deal: Is protecting consumers from uncooked oysters a rotten plan?

Arthur Allen's Slate article "Raw Deal: Is protecting consumers from uncooked oysters a rotten plan" (November 11th, 2009) misses the economist's view on banning oysters.

Ostensibly playing devil's advocate, he argues that banning raw oysters, which may cause food-poisoning deaths, is a slam-dunk case, unless you count 1) Heterogeneous risk across population 2) Economic impact on Gulf oyster industry 3) There are bigger fish to fry for the FDA.

While waving his hands at the point, Allen never states the simplest economist's perspective on the issue: individuals will know the risks when they decide to eat, and decide it's a risk worth taking for the enjoyment. (Indeed, for a near-parallel issue like cigarettes, individuals often overestimate the risk they are taking). Individuals know what they prefer much better than others do, and they maximize their happiness.

Friday, November 6, 2009

Costs Surge for Medical Devices, but Benefits Are Opaque

New York Times article "Costs Surge for Medical Devices, but Benefits Are Opaque" (November 4th, 2009), offers a subtle but fundamental misunderstanding of the manner in which profit maximization will take place. Speaking on defibrillators, the Times quotes a doctor who argues that companies may produce deliberately short-lived products as a ploy to make higher profits:

The federal government could also play a more aggressive role in making sure it is getting better value for its money, he added. A case in point — requiring that makers of heart devices use batteries that last longer than five years, the period of time when patients must now undergo an additional, potentially dangerous operation to have a costly device replaced.

Dr. Maisel said, “Why would you build a better light bulb that lasts longer if it is going to reduce your profits?

This thinking is wrong. Planned obsolescence should not take place. Given two technologies, firms will produce using the technology that is cheapest per unit of quality good.

Take Dr. Maisel's lightbulb. If I am offered a choice between a "good" lightbulb and a "bad" lightbulb at two different prices, which will I pick? To be specific, but with no loss of generality, let's say I'm offered two lightbulbs that last for year each rather than one lightbulb that lasts two years. I will purchase the cheaper lightbulb, as defined as the cheapest lightbulb per unit time. If the two-year lightbulb is priced more than twice as expensive as the one-year lightbulb, then I will only purchase the one-year lightbulb. The "worse" lightbulb. If the two-year lightbulb is priced less than twice the one-year lightbulb, then I will only purchase the two-year lightbulb. This is because I am not purchasing a lightbulb when I go into the store, I am buying light for a specific period of time. The price I am willing to pay is not a function of number of lightbulbs, but of dollars per unit time.

In economics, we will often see scenarios in which monopolists deliberately reduce quantity produced to raise price and lower profits. Dr. Maisel and the Times are in error in extending to the conclusion that a monopolist will deliberately reduce quality.

This is because a monopolist knows that the price they can charge is determined only by the price they charge per unit time provided by the good they are selling. A consumer doesn't care about how much a good took to produce, only what they get out of it and the price charged. Therefore, a profit-maximizing monopolist will choose the cheapest means of producing per unit time, as that choice has no impact on consumer behavior (purchasing more or less), just on profits. That is to say, only prices (price per unit time) and quantities (total light per unit time) come into the consumer's decision, not cost to make. A monopoly will doubtlessly reduce quantity of lightbulbs, but the choice of quality is a concern of cost minimization, and they will always arrive at the efficient technology.

It is precisely for this reason that even monopolists will produce the best, cheapest technology they can--they will charge the same price for it, but will get greater profit from producing a better product.

The Times is wrong on the economics of lightbulbs and defibrillators.

Thursday, November 5, 2009

A Powerful Idea on Youth Violence

New York Times editorial "A Powerful Idea on Youth Violence" (November 4th, 2009) fails to provide adequate analysis of a counterfactual to make its point. Indeed, speaking of Ron Huberman's observations about Chicago Public Schools, it claims

But the chaotic schools attended by high-risk students tend to differ from better-run schools in measurable ways. They have fewer counselors and social workers. They have higher rates of suspension and expulsion. They more often involve the police in minor skirmishes, like shoving matches, that then go unresolved.

By no stretch of the imagination does it necessarily follow that these schools are not minimizing violence with respect to the resources that they have. It may be that were they to have equivalent levels of resources as schools where high-risk students do not attend, they would have equivalent levels of resources. Additionally, it may be that "well-run" schools have more counselors precisely because they didn't have to pay for security guards, as they were in better neighborhoods.

To conclude that schools with less violence have more counselors implies more counselors will cause less violence is folly. Unfortunately, that appears the thrust of Mr. Huberman's hopes.

Mr. Huberman wants to remake the high-risk schools by beefing up the social work and counseling staff, by better training security guards and overhauling a disciplinary process that seems designed to throw out as many children as possible as quickly as possible.