Insight is a good thing

San Diego Times article "Insight is a good thing" (February 9th, 2010) appears to cast a weak comment against the practice of "ability-grouping." Corrections does not understand why.

As long as teachers approach students with different expectations and rely on dangerous practices such as ability-grouping – blue birds, red birds etc. – in order to make those classrooms more manageable, then we shouldn’t be surprised that students continue to perform at different levels.

The sentence appears quite correct, save for the phrase "dangerous." Ability-grouping is the tactic of putting groups of students at similar skill levels together. If other-student knowledge is complementary to student learning, then putting groups of students together is a good idea. Students help one another learn. Everyone would be better off with a higher-achieving individual in their reading group. However, in terms of efficiency, it may be better to match high individuals with high individuals if higher knowledge individuals help other individuals with higher knowledge more than they help lower knowledge individuals.

That is to say, if a sixth-grade reading level individual boosts another sixth-grade reading level individual's reading level up two grades, and would only boost a fourth-grade reading level up one, then we might say that it creates more total learning to match the two highest--a concept called positive assortative matching in economics. This is more easily seen in the table below (click to enlarge). The table displays the joint returns to schooling. We see that higher reading level individuals create more surplus when matched with higher reading level individuals than they would with lower reading level individuals.



In matching theory, our graph displays supermodularity. Corrections displays this graph in colored 2-d and from two perspectives in 3-d to give an idea of why we might want to positively assort individuals. Click to enlarge 2-d. Click to enlarge 3-D #1. Click to enlarge 3-D #2. Note that colors match between the two 3-D graphs, but not between these graphs and our 2-D contour graph. In all cases, the "surplus" might be imagined to be total extra points on reading tests created from a combination. It ranges from zero to twenty-five (without loss of generality).







While the article is correct that this practice will cause more inequity, it may also cause a higher total amount of learning.

The drug war two-step

San Diego Union-Tribune commentary "The drug war two-step" (December 27th, 2009) fails to mention a curiosity in the "War on Drugs" that helps to make interdiction efforts a self-defeating campaign. The article suggests that the elimination of one drug dealer may reduce violence in Mexico but increase the amount of drugs shipped into the United States. Corrections sees a definite possibility for the opposite to occur. Corrections suggests that the elimination of drug dealers could cause more drug-dealer-on-state violence, smaller quantities of drugs shipped, higher drug prices, and higher industry profits.

The question is will “El Barbas’ ”death have any lasting impact on reducing cartel-related violence and reducing the flow of drugs into the United States. On the first point, there may be some hope, but not for the right reasons. Here’s the rub: drug traffickers are peace-lovers at heart, because peace means no competition for customers and profits. With Beltrán Leyva out of the way, “El Chapo” Guzman can expand his business and keep moving up the list of Forbes magazine’s wealthiest people. Meanwhile, the U.S. drug consumers who are padding his bank accounts can rest assured, there will be plenty more drugs available in the days to come.

When something is demanded inelastically, it means that a one percent increase in price will be met with a less-than-one percent decrease in demand. Addictive, illicit drugs are often examples of goods with inelastic demand. While a monopolist will never supply a good on the inelastic portion of the demand curve, competition will. It is not unlikely that the illicit drug industry is pricing drugs on the inelastic portion of the demand curve.

Therefore, if authorities artificially shift the quantity supplied leftward, it may increase illicit drug industry profits. This is depicted graphically below (click to enlarge).

It is in this manner that drug interdiction efforts may actually benefit the drug industry. It is important to note that under this scenario, fewer drugs will be consumed in the period of interdiction, even though the industry is better off. We could imagine that increased drug-industry profits might actually increase its capacity for violence against the government, concluding the reasons for the above predictions.

Corrections notes as a piquant possibility that one method of reducing the quantity of drugs sold in the United States might be to help form a cartel or monopoly supplier. As outlined above, a monopoly supplier will artificially restrict supply, gaining higher profits. It could be that the formation of a monopoly will cause a smaller quantity of drugs into the market, as depicted below (click to enlarge).

Card Fees only Scrooge could love

San Diego Union-Tribune commentary "Card Fees only Scrooge could love" (December 17th, 2009) offers an ill-reasoned animadversion of credit card company fees.

Because the major credit card brands insist on collecting something on every transaction made on every credit and debit card, so-called “swipe fees” are hidden in the purchase price of all of a retailer’s products. In other words, everyone pays more to cover these fees every time they buy something. This is true even for low-income people who are unranked and must pay with cash. The result is a huge wealth transfer from poor to rich.

In fairness to the Union-Tribune, the economics Ph.D. consulted and cited in the article apparently did not give consideration to the idea that credit card technology could improve the total factor productivity of a firm that sells goods. If this is the case, prices could be lowered because overall efficiency has increased.

This is not an unlikely scenario. We should remember that the adoption of credit cards is optional for a retailer (though once adopted, in Correction's understanding, a merchant cannot charge different prices). If consumers prefer a shop that can offer lower prices but demand cash, then competition will run out the shops offering credit-cards. This is a conjecture robust to a heterogeneous population.

Oh, for the sounds of hammers

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

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

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

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