Wednesday, December 29, 2010

Killing in L.A. drops to 1967 levels

LA Times article "Killing in L.A. drops to 1967 levels" (December 26th, 2010)" makes the common and unfortunate mistake of claiming, without cause, that crime rises during economic downturns.
Strikingly, homicides in the city have dropped by about one-third since 2007, the last full year before the economic downturn, according to a Times' analysis of coroner records.
It's unclear why a reasonable person would think that murders rise during bad economic times, beyond some primitive association of poverty and criminality. Certainly, all evidence is to the contrary. The graphs below show the trends in homicide rates over time (first in per capita rates, and second in per capita percentage changes in crime). Nothing in these trends supports the Time's "predictions that a bad economy would inexorably lead to higher crime."
(click to enlarge)

(click to enlarge)
In addition, a 2004 Journal of Economic Perspectives article written by University of Chicago economist Steven Levitt (available here) argues that the impact of macroeconomic variables on crime such as murder is theoretically ambiguous, and that violent crimes do not vary systematically with the unemployment rate. Pointing out how little "experts" seemed to know about crime trends, the article includes the following graph (re-printed without permission, click to enlarge), which could have served as a warning to the LA times.


Friday, December 10, 2010

Autocorrelation in Presidential Approval Ratings

Corrections examined President Obama's Approval Ratings and noticed that they appeared more noisy than white noise, e.g. that they were negatively autocorrelated.  They are displayed graphically below (click to enlarge):
To check that they were too noisy, we graphed out the distribution of "up up", "up down" "down up", etc. in a contour plot, where "darker" means more density, and "lighter" means less density.  A "-1" means down, a "0" means same, and "1" means up.  Therefore, "Same Up happens 5% of the time" would correspond to "x=0 y=1 z=.05".  This is displayed graphically below (click to enlarge).  As a reader can see, most of the time approval ratings stay the same.  But the point is that we have skew--rarely do we get "up up" or "down down", the upper right and lower left corners, respectively. 
The main point here is that for reasons inexplicable to Corrections, a "down" tick is more likely to be met by an "up" tick than a noisy process would predict.  We posit this warrants further analysis.  Suggestions as to causes are welcome.

Update: Upon further reflection, Corrections suggests this is likely due to the absence of a unit root with noise.  That is, every movement we see is one of two types.  The first is a "real" movement.  The second is a "noisy" movement.  Noisy movements are transitory and likely to disappear.  Real movements are permanent, in expectation (letting opinions be a random walk, for example).  Any movement due to noise will likely go away next period--up noise will be met with down, and down will be met with up.  This explanation doesn't completely satisfy Corrections, but it seems relevant. 

Sunday, November 28, 2010

The Unemployed Held Hostage, Again

New York Times editorial "The Unemployed Held Hostage, Again" (November 27th, 2010) simply lies to its readers. It claims that there is no reason for tax cuts, but that extending unemployment insurance is a necessity. "There is no good argument for letting jobless benefits expire, or for extending those cuts."

Both of these claims are false. Harald Uhlig in an American Economic Review article "Some Fiscal Calculus" (also discussed here) estimates that for every dollar of government stimulus, in the long run time-discounted $3.40 is lost. For every dollar given up in taxation, time-discounted $2.40 is gained. On the other hand, Robert Shimer has estimated that unemployment insurance accounts for between 1-1.5% of the nation's unemployment rate.

Saturday, November 27, 2010

A Woman. A Prostitute. A Slave.

New York Times article "A Woman. A Prostitute. A Slave." (November 27th, 2010)states that, when it comes to ending forced prostitution "There are no silver bullets, but the critical step is for the police and prosecutors to focus more on customers (to reduce demand) and, above all, on pimps."Corrections has a silver bullet: legalize prostitution. Essentially reiterating an earlier point ("Enabling prostitution" from September 3rd, 2010), it seems rather obvious that forced prostitution is an inferior input into prostitution services. Presumably, upon the legalization of prostitution, willing prostitute supply will shift out dramatically more than forced prostitutes.  This will cause forced prostitute quantity to shift down. We depict the silver bullet to severely decrease forced prostitution in the United States graphically below (click to enlarge).
The responsibility for the larger amount of unwilling prostitutes is on those that oppose legalized prostitution.

Thursday, November 25, 2010

Revisiting Educational Hiring

Earlier this year, in May, the New York Times ran the article "Teachers Facing Weakest Market in Years" (May 19th, 2010). The article claimed that
Even upscale suburban districts are preparing for huge levels of layoffs. School officials and union leaders estimate that more than 150,000 teachers nationwide could lose their jobs next year, far more than any other time, including the last major financial crisis of the 1970s.
Corrections suggested this was nonsense, that the comparison was faulty, and that the Times only offered anecdotal evidence. A commenter, Student1776, suggested that, given there was little evidence for writing an article about how poorly teachers were faring, the Times might have ulterior motives.

Here, Corrections offers a bayesian update on that hypothesis. The summer was not unkind to educational occupations. Below, we offer the residual of HP filtered, deseasonalized educational hiring and separations ("taking out" the long-run business cycle variation and homogeneous monthly effects).  This image indicates to Corrections that teacher separations (including quits) have not suffered much during the recession (click to enlarge).
For those unfamiliar, Hodrick-Prescott Filtering ("HP filtering") is a way of separating business-cycle frequencies from time-series data.  For those interested, we can graph GDP and HP filtered GDP from the first quarter of 1947 to the third quarter of 2010, in billions of chained 2005 dollars (click to enlarge):
For visual purposes, we can zoom in on the first quarter of 1980 to the third quarter of 2010, to help understand the severity of the recent recession (click to enlarge):
 Finally, it is important to note that while deviations from business cycle trends look like quarterly GDP growth, they aren't.   For better understanding, we offer a graph of recessions from 1947:Q1 to 2010:Q3 and deviations from HP filtered GDP in billions of 2005 dollars (click to enlarge).
Hopefully, this brief introduction to the HP filter makes clear that our extraction of business cycle trends are not taking out the phantom educational job loss claimed by the New York Times.  This job loss does not appear to exist on either the hiring or separation margin, unless one's loss function is as biased toward finding teachers in trouble as the one used by the New York Times.

Monday, November 22, 2010

The Cost of Terrorism and Airline Security

Lost in much of the debate on airline security and invasive searches has been a realistic examination of the worth of the costs and benefits of these invasive searches. Given that the last few attempted terrorist attacks, such as the al-Qaeda's Shoe Bomber, or Umar Abdul Mutallab, the Underwear Bomber were stopped in the air rather than by airport security, it's unclear whether or not security has stopped any attacks that Corrections has heard of. Let us leave that aside.

Let's say that airport security could stop all attacks, and without it two Boeing 737's would explode in the mid-air with 175 passengers every year, with no survivors. The average flyer is 42 years of age, and they would lose around of their expected 77.9 year life, or 33.9 years. This is a total 12,565 life-years lost. There are 809,611,003 airline passengers per year, and according to the wait time figures Corrections found, each individual spends about 5-6 minutes in line (between 1 and 25). This is a waste of approximately 7,697 life-years to 9,236 life-years each year.

If this tradeoff is about correct, then a pure utilitarian back-of-the-envelope calculation makes it look as though the time tradeoff from waiting in line alone is about the same magnitude as the cost of death from two Boeing 737's blowing up every year.

For skeptics, the annual budget is $8.1 billion a year. Taking the typical government $6.9 million per life saved, (a statistical measure of the value of human life), it appears as though we are spending the value of 1,173 people each year on the TSA. That is, if the TSA isn't saving 1,173 people per year, the money may be better spent elsewhere.

From these back of the envelope calculations, it appears that everyone would benefit from the government abolishing the TSA and allowing many people to die each year. Further, this assumes the TSA actually has some nonzero impact.

Corrections is interested in comments. Obviously these are back-of-the-envelope calculations and assume away some issues. What first-order losses or gains are we missing?

Wednesday, November 17, 2010

No, They're Not a 'Hitler' or a 'Stalin'

New York Times article "No, They're Not a 'Hitler' or a Stalin'" (November 16th, 2010) offers a complete misreading of Russian history leading up to the Second Congress of Soviets following the October Revolution of 1917.
Communism has never once arisen — not in the U.S.S.R., not in China, not in Cambodia, not in Cuba, not in Vietnam, not in North Korea — as the cumulative result of social reforms. It was always brought by violent revolution carried out by a fanatical minority, usually during or right after war. Once in power, committed revolutionaries sought to transform agrarian countries such as Russia or China into modern industrial states by oppressing peasants and applying political terror.
This is not true. The lead-up to the Russian Revolution was 56 years in the making, seeing a series of social reforms brought on by both violent extremists and political reforms. In the period between the Peasant Reform of 1861 and the October Revolution, Russia saw the freeing of the serfs, an overhaul of the penal code and judicial system, the creation of the Duma, the legalization of trade unions, organization of political parties, and the creation of local elective bodies with their own taxation rights. To be sure, Russia also saw anti-liberal reforms, but this strengthens the point that this period of great social reform lead directly to the Revolution of 1905, which in turn found its new steady state after the February and October Revolutions of 1917.

The claim that Communism did not result from "cumulative reforms" is a fallacy. Cumulative reforms certainly co-moved with increasing instability in Russia over the course of a half century, leading to the first Communist government, enabling it to kill tens of millions of people until its fall in 1991.

Friday, November 5, 2010

One Year Later

One year ago today Corrections wrote our first post, on the Fifth of November. In the time since, we have written 268 more posts, and received approximately 5,200 unique visits for a total of 10,300 page views. These articles have ranged on topics from crime and punishment to the economics of medicine, drugs, stock markets, GDP, judge political bias, and more.

Of late, our posts have slowed, as we have shifted away from the brief articles that marked the birth of Corrections and towards more detailed, data- and simulation-intensive articles. Initially, our objective was to Correct the news sources we saw as consistently making economic mistakes in their analysis.

For the next year, we plan to offer fewer articles, less focused on an individual news article. Instead, we shall offer articles that go into more depth and explain an idea we see as one that needs Correction. One example of this might be the idea that it's questionable if unemployment insurance raises unemployment. It does. At all times.

Corrections plans to revisit this decision one year from today. As always, comments, Corrections, and suggestions are always welcomed. We would like to thank you for your readership, and hope our new format will offer our readers something new.

Sunday, October 31, 2010

Wyoming Rep. Lummis: Estate tax rise has some planning death

Casper Star-Tribune article "Wyoming Rep. Lummis: Estate tax rise has some planning death" (October 30th, 2010) discusses a cause that Corrections has championed for years but that has been relatively unreported in the media. The estate tax is set to rise from 0% this year to 55% next year for gifts in excess of over $3,000,000. Cynthia Lummis reports an unintended consequence of this tax hike.  She does not, however, note how the same incentives encourage murder.
U.S. Rep. Cynthia Lummis says some of her Wyoming constituents are so worried about the reinstatement of federal estate taxes that they plan to discontinue dialysis and other life-extending medical treatments so they can die before Dec. 31.
In terms of numbers, this most importantly captures small businesses and farms with high levels of capital that are transferred from one generation to the next (hence its mention in a local Wyoming newspaper). Remember that the business does not have to have revenues in excess of $3,000,000, but worth of over $3,000,000.  The death tax has several marginal tax rates, depending on wealth, as displayed graphically below.
If it hasn't earned it previously, the estate tax certainly earns its nickname "death tax" because of the manner in which it currently incentivizes death.  This will come in the form of both voluntary death, as the article notes, such as suicide, or involuntary death, such as a child murdering their elderly parents.  We can graph out the increasing incentive children have to murder their parents--upwards of $3,000,000, they gain about $1,500,000.  Certainly, when store clerks are murdered for less than $100 in a robbery, it is not overly difficult to imagine these incentives meeting a threshold for murder.  Below, we graph the "benefit to murder" created by a hike in the estate tax (click to enlarge).

We note that our analysis foregoes inclusion of the $1,000,000 exclusion allowed for in 2011. Our core point will of course remain the same.

Perhaps the most interesting note is not how much death taxes encourage murder, but how regulatory uncertainty motivates murder.  It could well be that the coming tidal wave of Republicans in Congress will roll back the estate tax.  However, this will occur after it is too late for prospective inheritors to murder their parents.  Therefore, it may be in their interest to pre-emptively murder their parents, even if they think a Republican congress will roll back the estate tax.  In this sense, not only will a hike in the estate tax cause murder, but we can also say that regulatory uncertainty kills.

Saturday, October 30, 2010

Don't judge the jobless

USA Today article "Don't judge the jobless" (October 27th, 2010) discusses "99ers", individuals who have collected extended unemployment insurance for 99 weeks and are about to run out. The author, while attacking Robert Barro who "doesn't know what it's like to be unemployed for this long," claims:
My story isn't unusual for young professionals.
It actually appears to be quite unusual. In order to see why, we can take general U.S. statistics as a first pass. Two questions are important to finding out if someone will be a "99er." The most important is "what are the chances an individual finds a job in a given month?" (Alternatively, "how long does it take to find a job?") We can examine the job finding rate per month as approximately equal to the number of unemployed re-entering the workforce. This isn't an exact statistic, as individuals may move from job to job, but it will be rather close. The number of jobs found in a given month over the number of unemployed for that month is displayed graphically below, and is known as the "job finding rate" (click to enlarge).


How might we interpret the above graph? As of August 2010, the number of hirings/unemployed was 0.32. That is, 1/3 as many people were hired as were unemployed. Extending this logic and making a few assumptions (homogeneity, only the unemployed are hired, both assumptions we shall defend as simplifying, but not result-altering later) that only the unemployed are hired, then the average individual should spend 3 months unemployed, or 13 weeks unemployed. 33% will spend one month, 22% will spend 2 months, 15% will spend 3 months, 9% will spend 4 months, and so on. To spend 22.77 months unemployed (99 weeks) comes with a very small probability-- 0.02%. Two hundreths of one percent is rather uncommon indeed. But this is slightly wrong for a number of reasons, though it is relatively accurate as a first pass. Say 30% of those new hires come from people moving jobs. We still have the probability 0.4%, or about half a percent.

First, the author notes that they were re-hired for a four-month stint before becoming unemployed again. We can ask a similar question: "What are the chances (making similar assumptions) that someone who was hired will last for four months?" We can find this from the "job loss rate", calculated as the number of fires, or separations (depending on your preference) displayed graphically below (click to enlarge).

In any given month, about 1.75% of currently-working Americans are fired, and about 3% separate from their job (for the interested, this gives about a 33-month average for a given job, reasonable when teenagers and young adults are added to the picture). In Correction's recollection, adults spend something approximating double that on a given job. What are the chances the author will be fired within four months of finding a job? Making similar assumptions, there's a 93.2% chance that an individual will not be fired before four months. That is, the chance the author would be fired within four months (or less) was 6.8%. While not as small a probability as a hundredth of a percent, this still puts her in a very small minority.

Corrections recognizes that these calculations assume a homogeneity that is not present. However, in the author's case, we actually think these assumptions have helped her. The inability to find jobs has fallen primarily on men, the uneducated, and construction workers. The author, formerly in the information industry, a woman with a college degree, will be less, not more common. Rather than attacking Robert Barro, who "doesn't know what it's like to be unemployed for this long" for a reason, and who wrote the (text)book(s) [1] [2] [3] on modern macroeconomics, the author would be better served by spending time looking for work. Her plight does not seem as common as suggested, and it appears rather difficult to rack up 99 weeks of unemployment, especially if one is college-educated and not in construction.

There is further data about unemployment insurance that Corrections has mentioned before ("Loss of Jobless Benefits Could Lower Unemployment Rate" July 6th, 2010). Even in the depths of Pittsburgh's recession in the early 80's, where local unemployment was higher than it is now nationally, individuals suddenly found jobs when their unemployment insurance ran out (click to enlarge):

Saturday, October 23, 2010

Hidden costs to tax cut

Boston Herald article "Hidden Costs to Tax Cut" (October 23rd, 2010) talks about the benefits of a tax cut as if it would be a direct transfer from government coffers to consumers. However, they would potentially gain much more.
Each voter must decide if that 3 cents per dollar savings is worth more to them than what they would lose in cuts to public safety, schools, roads, senior programs, health care, libraries, housing.
Because taxes create deadweight loss, for every three cents transferred from government is more transferred to them. Indeed, it could be much more. This is depicted in a competitive constant marginal cost case graphically below (click to enlarge). However, it could be extended to a monopolistically competitive case--this would make Corrections point even more strongly, as tax incidence may sum to more than 100% for monopolies, as they transfer the loss of the tax to the consumer inefficiently, so to speak.
Put in the way the Herald is arguing it, individuals may be losing one cent of government services for every three they get back in sales tax. Additionally, they are gaining not only what they lost, but what they never bought because of the tax wedge. They gain the amount they were taxed as well as the distortion, the tax wedge, brought on by that tax.

Sunday, October 10, 2010

The most conservative court? Hardly

Boston Globe article "The most conservative court? Hardly" (October 10th, 2010) discusses the leanings of the Supreme Court over the last few years. What it lacks is the recognition that the average justice's opinion is not what makes up a court--it is the median Justice's opinion. Corrections offers a simulation of the median and mean of a court composed of 9 justices (though the number has changed, the spirit of the simulation remains). It is important to note that all that follows below is a simulation.

Presidents are elected every 4 years with a 50/50 split in expectation between parties. Each President picks up his party's preferences with a small deviation of his personal preference. If a Justice leaves, one is appointed with the current President's ideology plus a noise term. If a Justice does not leave, he changes his opinions slightly from last period in a random walk. Each Justice has a 5% chance of leaving in any given year.

Then for 9 seats from a simulated ~235 years, we can plot the ideology of the person sitting in that seat, depicted separately for each seat graphically below (click to enlarge).



Similarly, we can merge all the Justices into one graph, if it helps understand the magnitude of individual shifts (click to enlarge):



But what is important for the court is the median Justice, not the mean, and not any individual. We present the President's ideology along with the mean and median Justice ideology below (click to enlarge):



In the simple simulation above, for most reasonable parameter values, the median Justice, in part because the parties differ much more than the personality noise for Presidents and the ideology noise for their Justices. Indeed, in any number of most simulations we ran, the median variance was much greater than that of the mean. This is an important distinction that the Globe's discussion of individual Justices did not encompass (though its discussion of decisions remains relevant).

Sunday, October 3, 2010

On the Pulpit, Rabbis Earn More Than Christian Clergy

Normally, Corrections avoids old articles.  However, Jewish Daily Forward article "On the Pulpit, Rabbis Earn More Than Christian Clergy" (September 15th, 2010) wonders aloud why rabbis are paid, on average, more than christian clergy. It comes to no firm conclusions. Indeed, Corrections spent some time thinking on the curious problem: Catholics and Protestants appear to be paid between $25,000 and $40,000, while Reform and Conservative Rabbis appear to be paid between $137,000 and $147,000. A rather large gap.

Corrections came to the weak conclusion that the story was about opportunity cost and relative wealth status. However, the same publication came out, two weeks later, with the article "Rabbi Searches Are Tough, but Are They Illegal?" (September 29th, 2010). This article mentions nothing about pay, and merely describes the theological implications of a cartel of Rabbis:
The RA requires synagogues to enroll exclusively in its search process, filters the selection of candidates the congregations may interview, and prohibits candidates and congregations from finding each other directly. Any Conservative rabbi who seeks a pulpit outside the RA’s centralized process, and any congregation that interviews candidates from other movements, will be penalized.
It bespeaks either a deep ignorance of economics or a willing deception of their readers that the Forward did not connect the two. To note that Rabbis have a firm cartel with punitive powers on the one hand, then wonder why Rabbis are paid so much on the other is ludicrous.

Cartels artificially limit supply to raise prices. It utterly clear to Corrections that the Rabbinical Assembly is a cartel of Rabbis that artificially constricts supply and raises wages. The Rabbinical Assembly's cartel also possibly increases quality above what the market would demand to further drive up price, though there is no evidence for this either way (merely a likely possibility). A depiction of what the Rabbinical Assembly is practicing may be found graphically below (click to enlarge).

Saturday, October 2, 2010

The New American Normal

New York Times article "The New American Normal" (September 27th, 2010) states that there may be heterogeneity in the ability of traders to make money during various market conditions. Corrections doesn't see this as being the case. We expect that a trader has an equal opportunity to have a positive expected value on a trade whether the market is highly volatile or not.
Fragmentation holds sway. The stock market used to be a fair proxy for the state of the economy. Now it’s a market of traders, not investors. They want to know what the spread is today and tomorrow; they can make money on the way up or down; they care far less about U.S.A. Inc.

So the market goes where it goes — up of late but largely directionless (which makes it harder on those up-or-down traders) — while out on Main Street the struggle to make family payroll continues. People work longer hours, they juggle how to cover their kids’ needs, how to de-leverage just a little — and they’re still meant to “consume” for the economy’s sake.

First, for the ill-defined class of "up and down traders", we might consider they do better when the market is highly variable. However, a quick view of the 30-day average S&P 500 price variance dispels this notion rather quickly (click to enlarge). If anything, Corrections expects that the average trader did better in the low volatility areas than the high (NBER recession dates are colored in grey).

Either way, it's ludicrous to claim that traders like one market environment over another, unconditional on their current assets. Unconditional on current assets, a trader who believes the market will be constant will be able to make money off selling a put below the current price (believing a stock won't go below the sum of strike price and premium) and selling a call above the current price (believing a stock won't go above the sum of the strike price and premium). A trader can flip sides on the trade if he thinks volatility will be high. If the market is undergoing a constant increase, then demeaning by the expected trend yields the same trading strategy. Whatever the market conditions, it's rather simple to construct trading strategies that require simple adjustments. The level, rate of change, and volatility won't matter.

The only manner in which changing market conditions may matter to a trader is an increase in the cost of capital (for deals requiring leverage) a decrease in their ability to utilize specific knowledge or expertise (analysis of mergers and acquisitions may presumably require expertise and contain a cyclical trend), or if the trader already owns positions in the market and does not want those to decline--distinctly separate (though difficult to distinguish without data on specific trends) from their ability to make money off present market conditions.

The Campaign Disconnect

New York Times editorial "The Campaign Disconnect" (October 1st, 2010) defines and interprets wealth and income dispersion in the United States. Corrections has a different take:
In an era of extreme economic inequality (which is another way of saying economic unfairness) [...]
We forgo analysis of the ludicrous definition of "fair" Bob Herbert uses. What the Times does not note is that high dispersion in wealth and income might be better termed "opportunity" and "motivation." Take the extreme example: complete equality in wealth. There is no opportunity for wealth to increase, and therefore no motivation to work or be creative.

In this respect, while it seems a concern for wealth and income dispersion "equality" is ubiquitous, it appears to miss inequality as a motivating factor in human creativity.

Friday, October 1, 2010

A Best Seller as 4 Films Tied Together With Talk

New York Times movie review "A Best Seller as 4 Films Tied Together With Talk" (September 30th, 2010) concerning the Freakonomics movie is in error in its report on an experiment in public high schools run by John List and Steven Levitt. It gets the payment method wrong in multiple ways.
The Grady-Ewing vignette, filmed in a vérité style, follows an experiment in which ninth graders at a Chicago high school were paid to improve their grades: $50 for every grade above a C and the chance to win a $500 lottery.
To qualify for payment, all students had to have all grades be C or higher, no in-school or out-of-school suspensions, and no more than one unexcused absence. If they qualified, 50% would be paid $50. The other 50% would be given a 10% chance at $500. Further, for 50% of either group, the parents would be paid. For the other, the students would be paid. (That is, there were four treatment groups and a control).

The Times gets the threshold wrong, eschews the payment of parents, and gets the payment doubly wrong.

Wednesday, September 29, 2010

Told to Eat Its Vegetables, America Orders Fries

New York Times article "Told to Eat Its Vegetables, America Orders Fries" (September 24th, 2010) gives potentially misleading statistics about vegetable-consumption in the United States and fails to tell a cohesive story about the incentives for healthy eating.
At restaurants, salads ordered as a main course at either lunch or dinner dropped by half since 1989, to a mere 5 percent, he said.
The profile of diners has changed significantly since 1989, making the average number of salads ordered at restaurants incomparable over time. This is because among modern diners, those who would have ordered salad if they were transported to 1989 may continue to order salad, making the mean number of salads ordered among this group constant between 1989 and 2010. However, this group does not include all restaurant go-ers. Some people who eat out today may not have done so in 1989.

Even if we believe that the population of restaurant goers is unchanged, some meals eaten out would not have been eaten out in 1989 because the number of meals eaten away from home has increased. According to a 1999 study in the Family Economics and Nutrition Review, titled "Contribution of Away-From-Home Foods to American Diet Quality" (available here), between 1989 and 1995, the percentage of meals eaten away from home increased by five percentage points (more than 20%) even though the number of meals eaten daily was unchanged. A graph of the trend is included below (click here to enlarge).


To its credit, the article makes some note of the difference between consumption trends in different demographic groups. What is missing is a solid economic interpretation.

To be sure, vegetables are making strides in certain circles. Women, as well as people who are older and more educated and have higher incomes, tend to eat more vegetables, said Dr. Foltz, the pediatrician who worked on the C.D.C. report.
Vegetables are commodities that cost a great deal in the short-run, but pay off in the long-run. We can think of the true price of vegetables as lower than the market price, since they make people richer in terms of health. Because the length of life (and productivity) is a function of health, avoiding vegetables costs those who make higher wages more (they lose more lifetime income by dying early from unhealthy eating). So, the total price of vegetables is lower for the wealthy than the poor, even though the market price is the same. We can also expect that health is a stronger determinant of life-span in later years, so the elderly, as well as women (who live longer than men on average) can be expected to consume more vegetables.

Monday, September 27, 2010

High Court reveals anonymous donor paid men to grant bills of divorce

Haaretz article "High Court reveals anonymous donor paid men to grant bills of divorce" (September 21st, 2010) notes a curious and uneconomic practice in Israel. Female Jews married in Israel are not allowed to divorce men without their permission, but instead must obtain a "get." This distinction carries legal and not just religious consequences because there is no civil marriage in Israel, but only religious marriages (Christian, Jewish, and Muslim). Because men hold their wives "hostage," anonymous donors give money to the divorcing body, the Chief Rabbinate, to bribe the men to provide a get.
The rabbinical courts' administration already has an arrangement to pay men who refuse to divorce their wives in certain cases, as an incentive to grant the divorce. The money is budgeted by the state. However, the verdict shows that in 2004-2005 an anonymous donor gave the rabbinical courts money to pay off dozens of men and even a few women, to divorce their spouses.

The unintended consequences of paying off spouses are threefold. First, in the long run it's not clear that bribes to Jewish men to divorce their wives will change the equilibrium number of "trapped" wives. Potential wives will simply be free to choose a lower threshold of men to marry (private donors subsidize their gamble). Second, if they're monetary expected value maximizers it's in the interest of men to raise their asking price for a divorce by the amount the Rabbinical Court is willing to bribe them. Otherwise, they will raise their asking amount, though not necessarily by the exact amount. In this respect any donation may simply be a pure transfer to husbands without any change in outcome, and private donors subsidize "kidnapping" husbands. Third, it takes away motivation for any reform of Rabbinical Courts (such as allowing civil marriage or intermarriage in Israel) by reducing the benefit of a complementary good. That is, legal reform of Rabbinical power presumably is a bundled good--if bribes are successful, it reduces the benefit of reform.

Friday, September 24, 2010

Post-racial officials finding it's difficult to hold gains

Houston Chronicle article "Post-racial officials finding it's difficult to hold gains" (September 23rd, 2010) concludes that "black is black, white is white," and denotes the end of post-racial relations. Corrections suggests it gives little data for its conclusion.
A mere four years ago, for example, Americans celebrated the rise of two hope-filled post-racial stars: District of Columbia Mayor Adrian Fenty and Newark's Mayor Cory Booker. Each was touted as a young, energetic, post-civil-rights-era savior in the mold of then-Sen. Obama.

Multiracial coalitions of voters elected them both. Each managed to transcend race-based politics and make gains worthy of national praise regarding schools, crime, housing, economic developing and other issues that are either nonracial or should be.

Yet despite those successes, Fenty was voted out of office on Sept. 14. White voters still supported him almost two-to-one, but black voters in the majority-black city turned on him by a similarly wide margin.
What the article does not state is that Adrian Fenty lost to another black man, Vincent C. Gray. When one black man beats another black man in a Mayoral race, it's rather odd, without including more data, to conclude that skin color was a factor in the political race. Individual candidate race holds no predictive power in a simple regression (there is no variance in candidate race).

Our view on consumer protection: When cable guys don't show, give customers some dough

USA. Today article "Our view on consumer protection: When cable guys don't show, give customers some dough" (September 22nd, 2010) is ill conceived. USA Today's editorial advocates a New York City bill to penalize cable companies when repairmen don't show.
In response to complaints about bad repair service, the city has drafted a contract with its major cable TV providers, Time Warner and Cablevision, with this provision: If a technician fails to show up inside the promised service "window," the company has to give the customer a month's service for free.
The only good news is that this gives phenomenal evidence that the government is unable to craft an effective law. It is hardly worth noting what is wrong with this sort of regulation, save to note that if this were effective, why not make cable companies pay $1,000,000 for each late repairman? One thing an economist and the government could agree on: there would be no late repairmen ever again.

Thursday, September 23, 2010

Value of College Degree Is Growing, Study Says

New York Times article "Value of College Degree Is Growing, Study Says" (September 21st, 2010) gets the correlation/causation distinction correct. However, it doesn't give the clear causal reasons why better educated and wealthier people eat more healthily and exercise more: while people often face the same price of an activity, they often face different shadow prices, the relevant price for making decisions.
The report, first issued in 2004 and updated in 2007, also described social benefits: those with a bachelor’s degree, it said, are more likely to volunteer, vote, exercise and have health insurance and pensions. They are also less likely to smoke, be obese or have low-birth-weight babies. It did not assert that a college education, by itself, was responsible for all those differences.

'Correlation is not the same as causation,' Ms. Baum said. 'But that said, the people who have done careful statistical analyses, controlling for demographic characteristics like income and family background, have overwhelmingly concluded that there’s some causation here, that some things that happen to you in college, for example, would make you more likely to adopt healthier behavior.'

Better educated and wealthier people have more incentive to live longer because their time is worth more. Take Kevin Murphy's shadow price of a cheeseburger example (briefly mentioned at the end of this interview). Eating unhealthy cheeseburgers shortens your life, but you gain happiness from them. The time of a low-wage person should be valued by that low-wage person as their wage (or outside wage, if the two are only approximately equal). While state-dependent utility disclaimers apply, the thrust of our argument will be robust to secondary and tertiary corrections.

Let us imagine that the time a rich person is willing to give up for an extra hour of his life is $200, but a poor person is only willing to give up $100. Then if a cheeseburger takes an hour off of an individual's life (for instance), then the true cost to a rich person is $204, while the cost to a poor person is $104. The shadow prices the two individuals face are different. Unhealthy decisions cost rich people more because they value their lives more.

When people decide to become educated, they induce themselves to have different marginal utilities and therefore make different decisions due to facing different shadow prices--a cheeseburger is more expensive for a rich person.

Wednesday, September 22, 2010

Bridging the achievement gap

Los Angeles Times opinion editorial "Bridging the achievement gap" (September 22nd, 2010) discusses the achievement gap between black males and all other students (black females and white males being the primary groups of comparison). It speaks only of educational means to fix the graduation gap, while discussing crime. Corrections would like to entertain a different possibility that might help solve both. The Times also confuses correlation and causation.
These disparities aren't new — the Schott report could have been published a generation ago. What is new and noteworthy is solid evidence that this gap can be bridged, with well-tested approaches that don't require massive changes in public education and don't depend on superhero teachers and administrators.
An economic idea might be that individuals, both black and white, make decisions about education today based on what they believe their income differentials will be tomorrow. One way to encourage education is to ensure higher wages for the educated. Another is to ensure lower wages for the uneducated.

The Times suggests that some of these students might be on the "prison track." "All too often they're on what educators privately dub 'the prison track.'"

If the Times is concerned that black males (or, for that matter, individuals of any race or gender) are opting out of educations and into lives of crime, one way of reducing their involvement in crime and increasing their graduation rates might be to lower their future wages as criminals.

We do a quick back-of-the-envelope calculation to test this hypothesis. We should see a correlation between an increase in law enforcement officers tomorrow and an increase in graduation rates. For the 50 states from 1998-2003, we plot the two, and offer a fitted least squares line. This is displayed graphically below (click to enlarge).
The relationship is indeed positive, which is itself phenomenal. If high schoolers were myopic and unresponsive to future police presence, we would have expected a drop in graduation rates to result in an increase in police next period--an increase in bad high school students should make more police next period a necessity. The fact that we see this indicates that the difference between our two effects is rather large. At a first glance, while the relationship is only near significant, it would appear tantalizing. For those concerned about the outliers, the relationship remains positive dropping them from a fixed effects panel data regression.

The Times discusses young black males, their graduation rates, and crime. Following our above analysis, we might think that a way to increase the graduation rates of young black males (who head into crime at higher rates than young white men or young black women) might be to decrease their wage differential between crime and legitimate employment through the hiring of more law enforcement officials over the course of several years. This would have the added effect of decreasing crime. Indeed, if individuals are forward looking and we have a believable commitment mechanism, we needn't wait to see the effects.

Clearly the analysis Corrections provides is both preliminary and inconclusive--it is merely suggestive. Nevertheless, it offers an interesting avenue to improve education by rational forward-looking individuals of all races and genders.

Beyond this discussion of heterogeneous impacts by race of an increase in future police presence on future crime and graduation rates, we might also add a particularly offensive quote by the Times:
A large-scale study in Chicago found that 74% of the boys who attended preschool graduated from high school, compared with 57% of those who didn't.
This is a correlation. It is not clearly causal.

Monday, September 20, 2010

The Recession Officially Ends

Newsweek Magazine/The Street article "The Recession Officially Ends" (September 20th, 2010) struggles with even marginally objective journalism. Throughout an article discussing the decision by the National Bureau of Economic Research (NBER) that the recession had ended in June 2009, it can't help itself but snipe, repeatedly. Newsweek, doing its best to imitate Pravda, would doubtless desire the reformation of the Tsentralniy Komitet Kommunistitcheskoi Partii Sovetskogo Soyuza, the Soviet Central Committee, to make centralized decisions concerning recessions.
The recession isn't just over, it actually ended in June 2009, according to a statement made Monday by the elite, ivory tower cadre of U.S. economists known as the National Bureau of Economic Research (NBER).

[...]

In its typically obtuse economist language, NBER noted in calling a June 2009 end to the recession that in "determining that a trough occurred in June 2009, the committee did not conclude that economic conditions since that month have been favorable or that the economy has returned to operating at normal capacity. Rather, the committee determined only that the recession ended and a recovery began in that month."

[...]

To support their claim that the recession ended over a year ago, while for many Americans there has been little indication of a recession lessening, NBER notes 'economic activity is typically below normal in the early stages of an expansion, and it sometimes remains so well into the expansion.'
The problems associated with assigning recessions in real time are manifold. With noisy information that changes over time, changing relationships between economic variables, different predictions from different variables, and multiple variables of interest, it is a task that's easy to criticize when an institution hates economics, like Newsweek. However, Newsweek's criticism is not well-placed.

The NBER's approach is to avoid denoting recessions until they have a relatively large amount of data. For example, The NBER's Business Cycle Dating Committee waited 28 months to declare the end of the 2001-2003 recession. In this case, it agrees with a "real-time" approach James Hamilton developed using Stock and Watson's historical work. An example of Hamilton's work that this article has been influenced by was "Calling Recessions in Real Time" (Working Paper, 2010).

Hamilton runs a regime-switching Kalman Filter, a general tool discussed elsewhere by Corrections in "How to Lose an Election Without Really Trying" and "Census as a Celebration". Starting with the data, we can observe his assigned probability of whether the United States is in a "recession" state or not, along with the current Bureau of Economic Analysis issue of the GDP growth rate (click to enlarge):
Hamilton's approach generates results very similar to the NBER's based solely on GDP, not NBER's recession dates. We can see this by depicting Hamilton's probabilities of recessions, and coloring in both his recessions in red and NBER's in blue (click to enlarge).  Near-complete overlap with red can be seen on most blue bars.
We can see Hamilton's methods find this recession only lasting one more quarter than the NBER's Business Cycle Committee's. The calling of recessions is not a falsifiable endeavor, though updates are possible if the call is made in real time.  Nevertheless, when the NBER and James Hamilton, (who literally wrote the book on time series analysis) are susceptible to the same criticism by Newsweek, it is vastly more likely that Newsweek's understanding of the world is flawed, not theirs.

Saturday, September 18, 2010

Old age robs criminals' skill

Boston Herald article "Old age robs criminals' skill" (September 18th, 2010) offers a rarity for opinion editorials: an intellectually stimulating article and relatively original idea. The article's interesting question is: why does crime rise in some recessions, and fall in others? The article's proposed answer is recessions with high inflation drive crime because criminals see individuals as holding large amounts of cash now in anticipation for needing it in the future (implicitly, an economic "cash-in-advance" model). Recessions with low inflation will simply find individuals with less in their pockets, and therefore less to steal.
But in previous recessions, in the 1970s and ’80s, the crime rates went up. The difference perhaps was that those recessions were in times of high inflation, giving robbers an incentive to take your money while it still held its value.

Being broke, people don’t go out late and thus are less likely to be mugged. And if folks do travel, the thieves know they’re probably not carrying much of value.

If newspaper writers are going to undertake causal analysis or conjecture, it's enjoyable when they use good structure or thoughtful analysis. If the reflexive premises of the New York Times are that firms are evil and people are very dumb and easily tricked, this article argues that even criminals respond to incentives, and puts forth their testable conjecture--the pinnacle of a non-empirical opinion editorial.

As Corrections sees it, the testable prediction the Herald's conjecture offers is as follows: real goods, such as automobiles or jewelry, are relatively robust to inflation. Cash is not. If burglary and robbery are substitutes for one another, but inflation causes robbery to become relatively less valuable than burglary, then a difference-in-difference will bring out the causal link between inflation and crime.

That is to say when inflation changes from low to high, we should expect the difference between the change in robbery and the change in burglary to be negative. Below, we first graphically display the data: inflation rate, robbery and burglary rates over time (click to enlarge), from 1960-2003.

A graphical and first-approximation is to plot percent change in inflation on the x-axis and the difference between percent changes in robbery and burglary on the y-axis. As we can see from the positive slope, if anything an increase in inflation appears to lead to a relative increase in robberies, not burglaries, as the Herald's theory might predict (click to enlarge).
Of course, this is only a first-pass approach. Consumers, recognizing that inflation will cause more robberies, could reinforce their homes and cause less total robberies (due to security) that has a larger effect than inflation causing more robberies. However, the empirical evidence behind the Herald's theory appears weak--rather than burgling more inflation-robust assets when inflation increases, individuals are robbing more inflation-insecure assets when inflation increases.

Friday, September 17, 2010

Recession Raises Poverty Rate to a 15-Year High

New York Times article "Recession Raises Poverty Rate to a 15-Year High" (September 16th, 2010) fails to acknowledge the poverty rate's intertemporally unstable nature. It compares poverty rates over time, an improper comparison due to the way poverty rates are calculated.

The share of residents in poverty climbed to 14.3 percent in 2009, the highest level recorded since 1994. The rise was steepest for children, with one in five affected, the bureau said.

One might think that individuals in the U.S. were only as well off as they were in 2004, when chained GDP/capita was approximately the same as it is this quarter. However, Corrections contends that we are actually even better than this. Below, find graphically depicted U.S. GDP over time in chained 2005 dollars (click to enlarge), and U.S. GDP per capita over time in chained 2005 dollars (click to enlarge). Note that chaining dollars is an attempt to introduce new products for comparison (otherwise, comparing cell phone prices from 1960 and today would not be well-defined).





The poverty rate from 1994 is measuring something completely different from the poverty rate in 2009. Poverty thresholds have changed multiple times, under a "sliding scale" approach. For example, in 1964, ~2.6% of U.S. households owned a color television. Circa 1994, 97% of U.S. households owned a color television. Beyond this, these televisions were not only cheaper, but were of better quality, programming, and durability.

Why is this relevant? Because increasing product quality is not properly measured, even with chained GDP. Below, we take minivans as an example.

In 2003, using Barry, Levinson and Pakes's instrumental method for demand estimation (also discussed in a previous post), Amil Petrin, in his phenomenal paper, "Quantifying the Benefits of New Products: The Case of the Minivan" (JPE 2002) estimates the value in dollars to consumers from the advent of the minivan by Chrysler in its first five years (1984-1988) as $2.8 billion in consumer surplus, and $2.9 billion in total surplus.

This surplus comes solely from an improvement in product quality that is largely unreflected in price due to monopolistic competition by competitors (GM and Ford introduced their own minivans in 1985). This sort of change will not be reflected by even chained GDP numbers. Because of increasing product differentiation (Petrin's "new goods" problem) and monopolistic competition (or competition), life is getting better than we're measuring with our best measures of product-chained GDP. Quality of life is higher.


Poverty indicators are not appropriate for "long" time spans because of innovation. Locally, we might think 2008 and 2009 are comparable. But in 1994, the internet had yet to be invented. Since then, as Austan Goolsbee and Peter Klenow estimate in "Valuing Consumer Products by the Time Spent Using Them: An Application to the Internet" (AER 2006) (gated) (ungated), the median individual gained $3000/year because of the advent (and widespread use) of the internet. The reason for this large gain is largely due to increased price competition and increased value of time. Since 1994, almost everyone in the United States is vastly better off than they were. (Another example might be how much individuals would have paid for a smart phone in 1994, given the millions that have them now and how "little" they paid for them relative for 1994 willingness-to-pay). This massive increase in consumer surplus generated from an increased value of time is unmeasured by GDP (underestimated) and poverty measures (overestimated). Use of these to compare long-run trends is ill-advised, especially when one has an ideological/Malthusian axe to grind.


Unfortunately, the notion that GDP growth generally underestimates utility gains is almost universally ignored in long-run intertemporal comparisons of utility.

Thursday, September 16, 2010

F.D.A. Panel Urges Denial of Diet Drug

New York Times article "F.D.A. Panel Urges Denial of Diet Drug" (September 16th, 2010) discusses the FDA's rejection of a new diet pill and their standards without addressing the improper incentives that lead the FDA to cause the excess deaths of thousands of people a year, and cause excess pain to hundreds of thousands.
The advisers to the Food and Drug Administration voted 9 to 5 that the potential benefits of the drug, called lorcaserin and developed by Arena Pharmaceuticals, did not outweigh the risks.
Let's imagine, for simplicity, that there are two kinds of medical drugs. Drugs that save lives, and drugs that kill people.  When pharmaceutical companies test drugs, they gain a signal with error about whether or not that drug is a good drug or a bad drug. The U.S. Food and Drug Administration will then choose the cutoff. If we assume that error to be normally distributed (this is an innocuous assumption: the difference between the sample average and the true signal converges to a normal distribution by Lindeberg-Levy Central Limit Theorem).

The FDA must choose some threshold for a signal, below which they reject all drugs, and above which they accept.  They save lives by rejecting bad drugs and accepting good ones.  The FDA kills by rejecting good drugs or accepting bad bad drugs.    (Corrections is willing to discuss our precise "moral" phrasing, which we posit as accurate).

The FDA can't tell the difference between good drugs and bad drugs beyond the signal they receive. The point, therefore, is what the proper cutoff should be. Whether or not the FDA should be "very cautious" and kill by denial of more good drugs than prevention of bad, or "loose" and kill by allowing more bad drugs than good drugs. The optimal "life saving" diagram is depicted graphically below (click to enlarge).
Officials at the FDA are not in the business of saving lives, however. If a bad drug gets through their screens and kills, they lose their jobs. If a good drug never gets through, no one is ever penalized, as the consequences are not graphic. Below, we depict the FDA's scheme due to improper incentives (click to enlarge):
As we can see, because the FDA is risk-averse because of its suboptimal incentive scheme, it ends up, at the margin, killing many more individuals through its denial of live-saving drugs than it saves because of the marginal life saved by limiting a dangerous drug.

Individuals often state that among the first things the government should be doing after protection from coercion internationally through the military and internally through the justice system is setting up systems like the FDA.  What is not noted is that the FDA, because of poor incentives, kills many more individuals by withholding drugs than the private market would.  

A private system would be optimally incentivized because of the long-term, monopolistically competitive nature of its brand.  For those that think this wouldn't be a viable private enterprise, consider the 14 Californian kosher-certification services, or dozens of national certification services.  These companies have been successfully serving tiny portions of the United States population for decades.  Further, these companies have reason to avoid regulatory capture (unlike the FDA) because they are competing with other companies for consumer's trust (the FDA does not have competition).  

If anything, the FDA isn't among the first things government-loving individuals should push for--instead, an altruistic government-loving individual should abolish the FDA to save lives.  Any individual with a smidgeon of appreciation for the private market should be chomping at the bit to abolish the FDA and save lives, ease the pain of those denied efficient drugs, save the money of the poor who are denied price-reducing competition, and help improve the lives of individuals who might be benefitted by diet drugs endorsed by almost everyone but an intensely risk-averse FDA.  

3-D girl a reminder for B.C. drivers in school zone

Toronto Star article "3-D girl a reminder for B.C. drivers in school zone" (September 9th, 2010) describes the decision of Vancouver officials to put an optical illusion of a girl playing in the road to slow drivers down. Corrections thinks this is a mistake.
The visual image of the girl is believed to be the first time a child is being used to drive home the message of the dangers in excessive speeding. In 2008, the city of Philadelphia began using virtual images of fake speed humps of white, blue and orange triangles to get drivers there to slow down.

Vancouver officials are "crying wolf." The lesson to be learned from hyperinflation or the story of the boy who cried wolf is rational expectations. Individuals are not fooled over the long run. Drivers get a signal of a child playing in the road. They then make a decision on whether or not to slow down, and if so by how much. Normally, the stronger the signal the more a driver would break. By "muddying" the signal by making it unclear whether or not it is a trick or a real child, drivers are rationally less likely to slow down. This, in turn, is likely to be a mistake.

Depicted graphically below is the ordinary relationship between signals of kids playing (balls in the street, summer days, hockey nets in garage ways) and the likelihood that kids are actually playing--that they are going to rapidly dart out into the street from behind a car, or are in the street playing already (click to enlarge).

Vancouver's optical illusions change that relationship by making strong signals mean less (click to enlarge).

Consequently, drivers break less when their signal means less--when the cry of "wolf" is less likely to yield a wolf (click to enlarge). The blue line indicates the original regime, the red line indicates the new regime, and the mixed line is the two lines overlapping.


Corrections notes that this is our own application of the "Lucas Critique" to almost all "behavioralist" policy advisements. Too often policy is suggested by small-scale experiments, when macro conditions change, given the adoption of certain policies. While experimentation yields valuable results, its generalizability outside the localized field (in which the policy it is testing has not been adopted) should always be in question.

Wednesday, September 15, 2010

Can New Orleans schools thrive in democracy?

New Orleans Times-Picayune "Can New Orleans schools thrive in democracy" (September 14th, 2010) discusses the quality of public schools in New Orleans. It makes the case that New Orleans schools are rather bad, and the article questions whether or not public schools are reconcilable with democracy in New Orleans.
Understand, anybody who tells you the pre-Katrina Orleans Parish School Board had made a good case for democracy is a liar. The truth ain't in 'em. Our schools were mostly awful. The system's finances were even worse, and the board members were hostile to the very idea that they had anything to do with the way things were. Ellenese Brooks-Simms, the president of the board who later pleaded guilty to bribery charges, liked to blame the poverty of its students for the school system's woeful performance.
Corrections would simply note that bad, dysfunctional schools with concordant low taxes likely raise overall utility--at the very least, their presence along with the presence of school districts that aren't dysfunctional is likely a net benefit. Why? Some people have preferences for low-tax, low-quality schools. Others have a preference for high-tax, high-quality schools. Assuming that low quality is a function of low taxes and not simple inefficiency, more options are better.
In order to see this in a "guns and butter" like diagram, imagine there are two types of people, as described above. The first type, preferring disposable income, in depicted in blue. The second type, preferring education, is depicted in red. Then both types are unambiguously better if they are allowed to live (or move to) cities that they prefer. This is depicted graphically on the left (click to enlarge). On the right, we see that individuals forced to have the same measure of income and schooling make both worse off.
As we can see, allowing Tiebout sorting can enhance utility. Not everyone has the same preferences, and a distribution of public services rather than a single quality/standard is likely to make everyone better off.

Sunday, September 12, 2010

Trading Away the Stimulus

New York Times OpEd "Trading Away the Stimulus" (September 9th, 2010) presents a foolish analysis of trade, completely neglecting the notion of opportunity cost.
Also essential is a border tax to counter foreign export rebates. In countries with value-added taxes, those levies are returned to producers when they export their goods — which allows them to lower their products’ prices in our market. In response, we can ensure fair competition in our home market by applying a tax equal to the rebate upon a product’s entry to the American market.

COnsumers in the US are made unambiguously worse off by a tax on foreign imports. We show this in a graph depicting the US market for some good both before and after a border tax meant to counter a Chinese export subsidy. An analysis of the market in the US requires that we consider the total supply of goods, both Chinese and U.S.-made. Then, the total supply in the US market is found by adding US supply and Chinese supply. It may be that, due to a Chinese government subsidy of s per unit, Chinese suppliers are able to produce every unit more cheaply than US suppliers. This means that even with the same technology, their supply curve could lie below that of US producers. We depict the equilibrium in such a market below (click here to enlarge).


If the US counteracts the Chinese subsidy of s dollars with an import tax of t=s dollars, then the Chinese supply becomes identical to US supply, and we have a new equilibrium. We depict this market below (click here to enlarge).



Now consumer surplus (the green shaded area) is smaller than before, while US producer surplus (the red shaded area) is larger. Nonetheless, because the equilibrium price is higher in this regime, and quantity is lower, we as a country are worse off than we were without the tax. The gray shaded area shows the total loss to the US from a tax that would benefit a few marginal (high cost) producers. This again gives our rule of thumb for politics: whenever a group is pushing for more taxes or regulation, it is because they and government officials they fund are "putting one over" on consumers, taking their surplus and dividing it between them.

Friday, September 10, 2010

Seatbelts are the lifesavers in your car

New Orleans Times-Picayune editorial "Seatbelts are the lifesavers in your car" (September 9th, 2010) speaks positively of seat belts.  While they have undoubtedly saved lives, they have also undoubtedly cost them through the externalities their cost-shifting generates.
More Louisianians buckled up this year compared to last, according to the Louisiana Highway Safety Commission, but the New Orleans area actually saw a 1.1 percent decline in the percentage of people using seat belts.

Even with the statewide increase for drivers and front-seat passengers, which went from 74.5 percent to 75.9 percent, Louisiana still lags behind the nationwide usage rate of 83 percent.

That's discouraging, because buckling up is a simple and easy thing to do, and it's a proven life-saver.
The most interesting economic concept when it comes to seat belts and safety regulation is the "Peltzman Effect", as Sam Peltzman discusses in his 1975 Journal of Political Economy article "The Effects of Automobile Safety Regulation" (gated).  Below, we reproduce his diagram graphically (click to enlarge).  What the diagram indicates is that risky driving gives us something we enjoy--for example getting to our destination more rapidly.  Our first bit of risky driving is particularly beneficial--perhaps when we are in a hurry.  As we increase our risky driving, the marginal benefit decreases.  This is represented by the downward sloping red line. Under a regime with no seat belts, we end up at an equilibrium represented by point A on the risky driving schedule.  Under a regime with seat belts, we end up at an equilibrium represented by point B.  As driving becomes safer, we drive more riskily.
This, in turn may cause more pedestrian deaths, whose cost is presumably not fully borne by drivers.  Below, we graphically depict the relationship between risky driving and pedestrian deaths (click to enlarge).  We can see that pedestrian deaths rise as we go from point A and B.  (Point C will be discussed below).
As a thought exercise, famous among Austrian economists, is what would occur if instead of seatbelts or airbags, we installed a large spike in driving wheels, faced toward the driver a driving wheel looking similar to this:
In this case, we would have the following relationship between risky driving probability of death to driver (click to enlarge):

If this is the case, we end up at point C on the diagram above (again, click to enlarge).

This article serves to demonstrate a few concepts.  First, a common refrain on Corrections: when we reduce the cost of behavior that has benefits and costs, we increase the partaking of that behavior.  Second, when that behavior has externalities, as it does with driving, we may actually foist the cost of risky driving onto pedestrians rather than consumers.