Give Peaceful Resistance a Chance

New York Times opinion "Give Peaceful Resistance a Chance" (March 9th, 2011) offers insight into part of an economist's raison d'être. The article by Erica Chenoweth, a Professor of Government at Wesleyan University, misunderstands heterogeneity in revolutionary starting conditions. Her claim:

Unfortunately for the Libyan rebels, research shows that nonviolent resistance is much more likely to produce results, while violent resistance runs a greater risk of backfiring.

To back up this statement, she claims that:

Indeed, a study I recently conducted with Maria J. Stephan, now a strategic planner at the State Department, compared the outcomes of hundreds of violent insurgencies with those of major nonviolent resistance campaigns from 1900 to 2006; we found that over 50 percent of the nonviolent movements succeeded, compared with about 25 percent of the violent insurgencies.

Why is this bad research? Because not all revolutions have the same starting conditions. Imagine a world in which there exist dissidents who optimally choose between armed rebellion and peaceful protesting. These dissidents know the government they face and the probability of success of a given venture. Then the observed probability of failure for armed revolution may be higher than of peaceful protest even when both were always chosen optimally. To understand why Chenoweth and Stephan get the results they do, observe the following conjecture in figure form (click to enlarge).

A rational rebel will take the upper envelope of these two decisions. If this is the case, then we will see violent revolutions under oppressive regimes that generally fail, and peaceful protest under non-oppressive regimes that generally succeed. There will be no Ghandi's under Hitlers, Stalins, and Mussolini's. Ghandis can only be successful under men who are inherently peaceful when others are peaceful with them, such as Churchill. Similarly, it may often be difficult for Malcolm X's or The Weathermen to succeed in vastly less oppressive societies, where hoses and dogs rather than machine guns and concentration camps are used to control protest. They are unable to gain the sympathies of the populace. Martin Luther Kings are better suited for the United States than the Malcolm Xs or Bill Ayers of the world.

It is no coincidence that Bill Ayers changed from attempting to bring down the United States by armed rebellion to bringing it down from within--he reoptimized.

The conclusions Chenoweth attempts to draw are faulty due to sample selection.  Armed rebellion may be more likely to succeed conditional on the situation but less likely to succeed when looking at the unconditional success rate.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.  

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.

Who Should Provide Anesthesia Care?

New York Times article "Who Should Provide Anesthesia Care?" (September 6th, 2010) discusses the ability of a nurse to deliver anesthesia without supervision. It brings in the American Society of Anesthesiologists without properly discussing their stake in government regulation requiring anesthesiologists to supervise nurses.

The two studies — hotly disputed by the American Society of Anesthesiologists — essentially concluded that there is no significant difference in the quality of care when the anesthetic is delivered by a certified registered nurse anesthetist or by an anesthesiologist. The studies were paid for by the professional association for the nurses, a potential conflict of interest, but were conducted by researchers at respected organizations.

The Times notes the conflict of interest of nurses, but not of anesthesiologists.  As Corrections sees it, anesthesiologists have a readily identifiable conflict of interest, while it isn't immediately clear that nurses do, upon further inspection.

The American Society of Anesthesiologists has motivation to artificially constrict supply of anesthesiologists to raise their own wages.  It may do so by raising the quality of new anesthesiologists (more than patients would prefer), reducing the number of residents trained in anesthesiology, or encouraging a general suppression in the number of doctors through the American Medical Association. Their strategy is depicted graphically below (click to enlarge).  They price as monopolists, reducing quantity and increasing price.

One might say nurses have a similar motivation--if nurses can do more, demand for nurses rises, and nurses are paid more.  However, Corrections posits that unlike doctors, there is a vast reservoir of possible nurses; nurses are elastically supplied.  If their wage increased, new nurses would train and bring their wage back down.  Corrections depicts this possibility graphically below (click to enlarge).

Economic grounding gives Corrections reason to believe that while anesthesiologists have a conflict of interest influencing their argument, nurses do not.  This grounding offers a re-statement of a rule of thumb: when an organized group is pushing for governmental regulation, they're likely to be "pulling one over" on consumers.  

Some interesting economic side notes are that it would be possible for anesthesiologists wages to increase because of this (for the same reason that if a law that requiring them to build their own cars, or walk to work, was abolished, they'd have more free time to do the things they are paid a large amount for).  This counterintuitive result, that anesthesiologist wages could increase, while the wages of nurses would not is an interesting curiosity, but not likely given opposition by the American Society of Anesthesiologists.

Second, we note that either way, consumers should be better off (even were nurses and anesthesiologists were worse off).  The reason behind this is that they may prefer a different cost-quality combination for anesthesiology than they can get being constrained by government regulation--unconstrained maximization is always greater than or equal to constrained maximization.  

After Bargains of Recession, Air Fares Soar

New York Times article "After Bargains of Recession, Air Fares Soar" (September 4th, 2010) ignores the global phenomenon in air fares to concentrate on the recent.

The increase in fares is the result of a remarkable discipline shown by the airlines, which have generally not added more flights this year even as the economy has improved and demand has picked up. For the airlines, flying fewer and fuller planes has paid off.
Passengers are paying the price. For leisure travelers, domestic fares have increased by more than 20 percent in the second quarter compared with a year earlier, according to data compiled by the travel Web site Orbitz.

Steven Berry and Panle Jia examine the changes in air fare demand between 1999 and 2006, finding in their recent article "Tracing the Woes: An Empirical Analysis of the Airline Industry" in American Economic Journal: Microeconomics (ungated working paper) (gated published), that, quoting their abstract:

Compared with 1999, we find that, in 2006, air-travel demand was 8 percent more price sensitive, passengers displayed a stronger preference for nonstop flights, and changes in marginal cost significantly favored nonstop flights. Together with the expansion of low-cost carriers, they explain more than 80 percent of legacy carriers' variable profit reduction.

This analysis (identified with BLP assumptions) occurred on a span of time before the recession pushed down further prices. As its its wont as the flagship of the left, the New York Times then turns around as soon as prices rise after declining for a dozen years and uses weasel words to describe Airline executives: "Airline executives have since been preaching the need to reduce the number of seats they offer."

It rather seems a joke, considering airline companies costs have gone down, low-cost carriers have become more prevalent, tickets have become competitive due to the internet, nonstop tickets are more common. When efficiency rises, marginal costs go down, quantity rises, and profits fall, it's difficult for consumers not to be massively better off (consumers that aren't New York Times consumers should be neutral when it comes to competitive profits--the reason they're relevant here is because when efficiency rises, overall surplus increases--if profits haven't risen, we know consumers have received all of the increased surplus).

Below, Corrections graphs out a way to indicate three stylized facts from Berry and Jia: prices fall, elasticity of demand increases, supply increases, and quantity supplied increases (click to enlarge). This is not the only way to depict these facts, and these are not the only facts from the paper, but they are suggestive enough that a first pass analysis seems to completely identify the direction of consumer surplus (coloring from blue to red, it unambiguously increases).

On Course for a Cleaner Hudson

New York Times article "On Course for a Cleaner Hudson" (September 1st, 2010) discusses the best way to clean up polychlorinated biphenyls (PCBs) in the Hudson river. In a previous article, "Don't scorn Germany and Japan; learn from them", Corrections has extolled the near-incomprehensible properties of exponential growth. However, when the discount rate is greater than the growth rate, this may not be the case.

The E.P.A. now says the dredging might end up taking 10 years, which is fine. A job done slowly and right is better than one altered or abandoned.

Fortunately, we will not have to wait until the job is completed to see good things happen. When PCB concentrations start falling in the river, they decline in fish. This means the benefits of the project will start being felt long before the last load of toxic mud is pulled up from the bottom. This is the strongest rebuttal to G.E.’s old argument that the answer is to let the carcinogens lie in the river, decaying on their own.

If the cleanup of a river that has been tainted for 60 years and counting takes a few years longer than first planned, nobody should be complaining.

We can model the type of situation that the New York Times is suggesting. Specifically, we might have something we desire, say the Hudson River's stock of fish. We have two options for the same cost: quick cleaning and thorough cleaning. The growth rate of the stock of fish is increased to a higher long-term level due to thorough cleaning, but more slowly. It is increased to a lower long-term level due to quick cleaning. The difference between the changing growth rates is depicted graphically below (click to enlarge).

What would this mean for fish stocks? Normalizing our starting stock to one, we can display this graphically as well (click to enlarge)

However, we value current benefits more than we value future benefits--we discount exponentially. If our discount rate is greater than our growth rate, then it's quite possible that the net present value of "quick" is more valuable than "thorough". While exponential growth is a powerful force, exponential discounting may make slower growth now preferable to rapid growth later.

One way to illustrate this is to depict how much we value the first period, the first two periods, the first three periods, out to as many as we please. We do so graphically below (click to enlarge). As one can see, while the gap is closed, the net present value from today including any period in the future will always indicate quick growth as better.

Corrections simply notes, therefore, that a job done quickly is not always worse than a job done thoroughly--there are distinct tradeoffs even when considering exponential growth.

N.Y. to Try Again to Tax Indian's Cigarette Sales

New York Times article "N.Y. to Try Again to Tax Indians' Cigarette Sales (August 31st, 2010) fails to note why a government tax program is ill-concieved.  New York is currently considering attempting to tax the cigarette sales of Indian reservations.  In an attempt not to tax reservation consumption of cigarettes, it will give vendors a lump-sum tax break.  This is the reverse of efficient taxation.

The state’s plan does make exceptions for cigarettes sold to tribal members, estimating, based on the population of an Indian reservation, what portion of the sales are made to them. Taxes are charged on the remaining packs, on the assumption that they are bought by customers who are not Indians.

In fact, this does not make reservations for tribal members.  Vendor prices should be the same for all cigarettes, sold to Indians on reservation or not.  The reason is that it appears stamps must be on all cigarette packs--there is no "dual supply" problem.  In this case, vendors will raise the price of all cigarettes by whatever the tax is (recognizing competition and constant returns to scale production) and simply take the tax cut as pure producer surplus.  The supply-and-demand equilibrium before and after is depicted below (click to enlarge).  The upper blue-to-red supply line depicts the taxed supply.  The red line depicts supply without tax.  As we can see, because of the law of one price, producers have in effect been given a lump sum transfer, which will not be reflected in their prices.

The structure of taxation will make this effectively a tax on on-reservation Indian consumption of cigarettes.

The Littlest Redshirts Sit Out Kindergarten

New York Times article "The Littlest Redshirts Sit Out Kindergarten" (August 20th, 2010) discusses the "redshirting" of kindergarteners, the practice of holding them back a year so they have an age advantage. Corrections is dubious that the practice could become a problem, and that it will wane, despite "the signs."

“Redshirting” of kindergartners — the term comes from the practice of postponing the participation of college athletes in competitive games — became increasingly widespread in the 1990s, and shows no signs of waning.

The Times doesn't articulate the tradeoffs that altruistic parents face when deciding when their children will enter school. Children gain some initial advantage entering Kindergarten later because they are older and more mature, and they may gain a measure of happiness by not entering into school immediately. What they lose is that year of their life that they might have spent working or retiring. There are two important empirical questions the Times should have addressed when discussing this issue. First, whether or not there is an advantage to entering kindergarten late, and if so, the time-profile of this benefit. Second, whether or not the net present value of the time profile for benefits due to entering early is greater than, or less than, the net present value of the time profile for benefits due to not entering early.

What are the benefits to entering class early, assuming there are any? On the one hand, if the "alpha dogs" of a class get a larger share of the resources, confidence, and attention, then we might expect benefits to late enrollment to explode over time. Alternatively, if students enter with a fixed advantage and all students learn equally over time, then the benefits to being a year older than one's peers decays over time. Two prototypical time paths are displayed graphically below (click to enlarge). The plot simply shows an advantage, measured initially at 1, and its decay or growth over time. The black line separates two answers to our second question. If a plot stays above the black line, then benefits grow or stay constant, and below, benefits decay or stay constant.



Evidence indicates that the blue line of decaying benefits is the empirical reality. Elder & Lubotsky find that benefits are relatively short lasting in "Kindergarten Entrance Age and Children's Achievement, Journal of Human Resources" (2009) (gated) (ungated). The authors use exogenous changes in state age cutoffs and consequential differences between predicted and actual entrance ages to produce identification (a counterfactual).

Elder & Lubotsky indicate that there are benefits, however fleeting. What are the costs? Earnings rise as one gets older (falling as one enters retirement age). Inspired by Empirical Age-Earnings Profiles (Kevin M. Murphy and Finis Welch, Journal of Labor Economics, April 1990), Corrections offers a similar treatment, using historical cohort averages of earnings from the Current Population Survey (available at the Census Bureau). We use the data (not plotted) to fit a cubic polynomial of earnings over time or age for cohorts born in 1940 or 1950, displayed graphically below. The first plot has earnings (all earnings in current dollars) by age (click to enlarge) the second plot has earnings by year (click to enlarge). Both plots use median data from males only (all races).





To overcome the cost of putting off one's earnings profile by one year, how much would an individual born in 1940 have to be paid? In this primitive analysis, ceteris paribus, if the net present value of putting off one's education is greater than $8,500, an individual should do it.

Corrections might further add that even if the trend has been increasing, it is likely to find some equilibrium. As the proportion of "alpha-dogs" increase, their allotment of resources above the baseline presumably decreases--the benefits of postponing decrease, while the costs, as discussed above, remain the same. This leads to an interior equilibrium, (the equilibrium proportion of late-entrants is .247, the point of intersection) as displayed below (click to enlarge). In this case, no benefit is gained to waiting, and individuals are indifferent to waiting or not.

Free That Tenor Sax

New York Times editorial "Free That Tenor Sax" (August 21st, 2010) espouses a shift in U.S. copyright law. Specifically, it advocates shortening the copyright law to only protect a work during an author's life, rather than an author's life plus seventy years.

Copyright laws are designed to ensure that authors and performers receive compensation for their labors without fear of theft and to encourage them to continue their work. The laws are not intended to provide income for generations of an author’s heirs, particularly at the cost of keeping works of art out of the public’s reach.

Corrections should first note the patent falsity of this statement. The law protects a work for an authors life plus seventy years. To argue that the law is only meant to protect a work during an author's life, but not past it, is the sort of socialist self-deception the New York Times editorial board has made a habit. The position of the Times is ludicrous.

But more important than this deliberate deception by the Times are the false economic implications behind its statement. The Times appears to believe that an author prefers monetary reward only during his lifetime. Authors are not so selfish as to only desire profits in their lifetime--they have dynastic preferences, and are altruistic towards their heirs.

When deciding how hard to work, authors care about the net present value of profits--that is, total profits over all time, discounted to the present period. In the current paradigm, we might suppose that profits look like this (click to enlarge):



The Times wishes to change this to a value-stream following this model: (click to enlarge):



If all authors care about is the shaded area, their total profits, then we can see why the Times idea serves as an assault on art--it helps corrode and shrink an artist's livelihood and joy from his work.

Yet the point Corrections is espousing holds even if authors didn't care about their children. All an author needs to gain the net present value of all future profits is to sell the continuing rights to his work before his death. In this manner, all that matters is the total profits an artist can make--he can obtain the net present value of his work's entire stream of profits currently by selling the work to another individual. Indeed, a work's copyright could span many generations and liquidation would still be possible.

What the Times is suggesting is to destroy a portion of the incentives that authors have to create their original works in return for a few works to be out-of-patent now. This is, in effect, a tax on the value of all author's works. If ever an organization was willing to kill the infinitely-lived goose for its golden egg, the New York Times is.

Indeed, we might note that because an author is a durable-goods monopolist that does not face the Coase Conjecture (gated) (not to be confused with the Coase Theorem), profits are further decreased that they would otherwise have been, because consumers are willing to put off their consumption during an author's lifetime when they know the end of copyright is near.

Foreclosures Grind On

New York Times editorial "Foreclosures Grind On" (August 19th, 2010) suggesting that the government intervene in helping those who can't afford their mortgages avoid foreclosure notes that,

Another big problem is that many lenders, whose participation in the program is voluntary, have been reluctant to aggressively rework bad loans. Reducing a loan’s principal balance — rather than lowering interest levels or extending payout periods — is often the best chance of keeping underwater borrowers in their homes.

The entire article is predicated on the assumption that, somehow, borrowers were prey for lenders. Any reasoning individual could see the situation for what it really was--those who couldn't afford to own homes taking advantage of the opportunity to live in them for a short amount of time. The number of homeowners skyrocketed in the past decade, as the figure below shows, and now appears to be falling back to historical levels (click here to enlarge). For some reason lost upon us, the New York Times article suggests that the government intervene to maintain apparently unsustainably high levels of homeownership.

Lenders suffered after housing prices fell, not ineligible homeowners who entered their contracts just as they will leave them (with nothing). It is unclear to Corrections why taxpayers should fund those who have already have enjoyed stays in homes well beyond their means--it would seem that for nearly a decade already they have gotten more than they paid for.

U.S. Farmers Wary of Gaining From Russia's Woes

New York Times article "U.S. Farmers Wary of Gaining From Russia's Woes" (August 19th, 2010) offers a series of quotes from U.S. farmers that simply do not make sense when taken at face value. Specifically, wheat prices have gone up because Russia, a large producer of wheat, appears to have banned exports in the coming year. The New York Times quotes confused farmers that appear to suggest that they don't want to plant wheat, due to uncertainty about Russia's next moves:

Mr. Schroder said he feared that wheat prices were being driven by speculators, as was the case a few years ago, just before the recession, when the price soared and then crashed.

“What is this wheat market? I don’t have a clue, and I’m a professional wheat farmer,” he said. “There’s a complete lack of transparency.”

The problem the Times is pointing out is that farmers only know the current price, while their planting decisions should be based on prices in the future. They are subject to a large variability of even autoregressive prices. Corrections depicts such a movement graphically below, along with 95% error bands (click to enlarge).

A naive Times writer might instinctually think this represented a market failure. This is incorrect. Indeed, commodities futures markets, perennially despised by market-opposing individuals, are the market solution. However, the good news for farmers is that they do not have to bear any of the turbulence or non-transparency in the market at all. All they have to do to look at futures prices to plan their planting patterns. Why might this be?

Historical knowledge that appears to have been lost, even by some ideologically-motivated economists, is the very reason commodities markets, and commodities futures markets, were created. The Chicago Board of Trade (CBOT), to Correction's knowledge the oldest still-operating futures market, was created in 1848 to help farmers cope with fluctuating wheat prices.

The problem was as follows: farmers are often poor and unwilling to bear the risk of producing wheat and holding it until it is to be sold at some unknown price. What the Chicago Board of Trade did, and still does, is homogenize a good--in this case, sort wheat into bundles of the same quality, and allow a futures contract between speculators/investors, who are willing to bear the risk farmers don't want, and farmers, who are able to lock in the current price for their wheat. In this manner, all a farmer has to do is sell a futures contract in order to take all market-based uncertainty out of his decision to plant wheat--in selling the contract, he has, in effect, paid someone to bear the his risk. This allows him to plant the most valuable crop, even if its future prices are highly variable.

Therefore, farmers now only need to look at current futures prices--they should not care about the current price or what they think might happen to the price, only what the current futures price is. If we examine CBOT's wheat futures prices for July 2011, we see that the current futures price of corn is elevated (click to enlarge).

Farmers can lock in this price now. No risk necessary. It is important to note that a very large proportion of farmers do this every year, creating the massive derivative markets we have today. The only "risk" that a farmer would take is that he might miss out on higher prices now. Indeed, this is precisely the example the Times gives:

Another brake on any irrational exuberance over wheat will be farmers’ own suspicions, despite the incentives of higher prices.

Some think they are being played, and that the big run-up is partly, or largely, just market manipulation — like the increase in 2007 and 2008 that drove wheat prices more than twice as high as they are now before a gut-wrenching crash during the global recession.

'I hate to sound negative, but I’ve been burned so many dang times on wheat that I think I’m done,' said Olea McCall, who farms about 4,000 acres near the Kansas border, mostly in corn, wheat and sorghum. Mr. McCall said his attitude was not helped by missing out on the new rise in prices.

'I sold at 4, and three weeks later went to 6,' he said, referring to the price in dollars per bushel.

The Times continues:

“It took 20 years to sort the market out after [the similar 1972-73 Soviet Union crop failure],” Mr. Stulp said of the 1972-73 price bubble.

As much as the Times might write about "irrational" "bubbles" harming farmers, it supports the ridiculousness of the concept with its own quotes. Farmers need not fear any bubbles--they need only to lock in their high prices with futures contract and allow speculators to bear any "bubble" that might be present.