Wednesday, December 30, 2009

What I got for Christmas

The new book, "Scroogenomics" has economists talking about whether we should even bother exchanging gifts at holidays, and if so, should we exchange non-cash gifts. Freakonomics asks, "what's the best gift you've gotten for (from) an economist?"
Anyway, some of the discussion (and I'm too lazy to go through the entire thread of blogs on it) claimed that there are some things that make a good gift to give (from an economists point of view). One thought is to get something the person doesn't know is out there, so part of the gift is overcoming the informational asymmetry and/or effort of researching the gift. Or, there might be a gift that has a higher marginal benefit to the receiver than marginal cost to the giver.
So, following the economists' view of what makes a good gift, here are a couple of things I got for Christmas that seem to match the criteria.
1. tickets to Illinois basketball. These fit the criteria because it is an instance of the marginal benefit to me (and my wife) being greater than the marginal cost to the person who gave it, since he is a season ticket holder. Plus, it's a late-evening game on a weeknight, and he has to work the next day, so he might have been thinking of selling them anyway. He also got us a gift card for a restaurant a block away from Assembly Hall, which was a cornfield when Jane & I attended. Great gift, Patrick!
2. a compact digital video camera. I had no idea they made them this small, let alone know that they made consumer versions that shoot in HD. This gift has the added bonus of having a positive externality to the giver - Grandma and grandpa get to see videos of their grandson on YouTube from a thousand miles away. Thank you, Mom & Dad!
3. accessories for said digital video camera. Obviously I did not know what sort of video camera I might be getting (mom & dad hinted that they might get it for us), so we wouldn't have known to get a small case for it. Plus I had no idea about the flexible "gorilla" tripods, so I wouldn't have thought to get one of those. Thanks, Linda & Jim.
And, of course, all of the gifts for the baby are great. he gets to look cute, and we probably wouldn't splurge on cute outfits if we were doing all of the buying, so that of course is a nice thing. Thanks everybody!

Airlines, Banks, Competitive Markets, and Market-Babble Lobbyspeak

The pro-business "market-babble" put forth by some thinktanks is sometimes mind-boggling. This spoof of a new regulation to limit tarmac time of airlines to 3 hours is hilarious. Here's an excerpt:
“Forcing airplanes to return to the terminal after three hours will reduce the efficiency of the entire air travel system,” said David Dell’amore, professor of flight operations at Harvard University. “Modern flight management algorithms minimize aggregate wait times and ensure the perfect balance of customer comfort and economic value-added.”

The problem, experts say, is that the government rushed to create new regulations without considering how market forces could solve the problem. “Clearly, if consumers placed a value on a maximum runway wait time, they would have negotiated it with their airlines already,” said Petra Waterman of the American Enterprise Institute. “Since no airline offers such a contract term, we can assume that consumers place no value on it. Besides, if consumers were not happy with the service they receive from airlines, then a new airline would have already entered the market offering shorter wait times.”

Markets are great, but they are explicitly ill-suited for collective action problems (hence, the term "collective action problem").

Tuesday, December 29, 2009

Random blog on Dyslexia

Sometimes it's fun to find new and contrarian information about learning "disablities."

Negative Taxes, Poverty Traps, and Upward-sloping Taxation Curves

An interesting discussion by AG here; Mankiw's crack at it here ; and a couple of good ideas by Daniel Lakeland here and here. The basic idea is a pimped-out version of the negative tax policy advocated by Milton Friedman in the 1960s & 1970s, which was in turn adopted by Barack Obama in 2008, only to earn him jeers for being a socialist. I guess Milton Friedman was a socialist, too.

Democracy is the Worst Possible System...

...except for all the others. Here's a blub from AG's summary & review:
(1) It is rational for people to vote and to make their preferences based on their views of what is best for the country as a whole, not necessarily what they think will be best for themselves individually.
(2) The feedback between voting, policy, and economic outcomes is weak enough that there is no reason to suppose that voters will be motivated to have "correct" views on the economy (in the sense of agreeing with the economics profession).
(3) As a result, democracy can lead to suboptimal outcomes--foolish policies resulting from foolish preferences of voters.
(4) In comparison, people have more motivation to be rational in their conomic decisions (when acting as consumers, producers, employers, etc). Thus it would be better to reduce the role of democracy and increase the role of the market in economic decision-making.

In other words, people mean well when they vote, but elections do not improve policy, democracy doesn't pick the best policy, and political behavior is not always rational. The wrong impression that comes from this, in my view, is that economists somehow don't know this, or that they don't try to take it into account. Informational constraints (so-called "impressionable voters") are not new to the political economy literature. The imperfect feedback mechanism is easily explained by special interest models. And, the fact that democracy leads to suboptimal outcomes is well-known in models using rational expectations. See Ken Arrow's Impossibility Theorem, or Amartya Sen's extension of it, the Liberal (read: classical liberal) Paradox for examples.

Friday, December 18, 2009

More Superfreaky Controversy

Is Levitt really surprised when he attracts controversy anymore or is he just a glutton for it. He insists in Superfreakonomics, and on his blog, that for a given distance traveled, it's safer to drive drunk than to walk drunk, and that it might be a tossup between driving drunk and taking a cab. Couple things: First, the option of driving home drunk, may lead to a longer distance to travel, thus eliminating the option of walking. In other words, as Andrew Gelman points out, it's stupid to assume that "all else is equal."
Here's another thing. Drunk walking has few, if any, negative externalities. Drunk walkers are unlikely to careen off the road and do harm to an innocent bystander. So, even if there is a tossup between the two in terms of private benefits, the public cost is nowhere close.

Taxing Tuition

Pittsburgh has a dumb policy idea: Taxing Tuition. For one thing, since we already subsidize tuition through grants, scholarships, and state funds, it's like robbing Peter to pay ... Peter? For another thing, do we really want to tax education? Shouldn't we tax stupid instead? Oh, wait. That's called The Lottery.

Thursday, December 17, 2009

Hohoho & the WTO

Sorry Santa, your below-cost toy distribution and genetically modified reindeer violate several WTO clauses.

Dumping, Ag Subsidies and Bias in the WTO

A new paper shows that US ag subsidies allow US farmers to "dump" on Mexico by selling below per-unit production costs. Under the rules of the WTO, Mexico could theoretically raise a dispute case (although, it may not have much credibility since Mexico and the US are partners in NAFTA and that would seem like the best place to start). One interesting tangent here is that many countries' farmers are probably being harmed by the same policies. A number of studies show that there are surprisingly few disputes by developing countries against developed countries because there are some inherent asymmetries in terms of the likelihood of getting a favorable decision and the incentives for pursuing the disputes.
Smaller, developing countries are more dependent on trade than bigger, industrialized ones. Because of economies of scale a small country naturally finds it more difficult to diversify than a large one and a fair argument can be made that this is not a bad thing. But, when it comes to unfair trade practices, the only dispute-settling authority the WTO has is retaliation. I suspect that even if a small(er) country like Mexico has a gripe with the US, it has to ask itself "what's gained?" When the roles are reversed, the raising of the dispute, and the lost gains from trade are not as big of an impediment to a larger, richer country. Besides, sometimes raising the case will get the smaller country to change track and get in line, creating a "free lunch" for the larger country.
While we are talking superfund for climate, maybe we should think of a superfund for WTO disputes, instead of the counterproductive mechanism of retaliation.
HT: Elizabeth Malkin at Economix

Just for Grins

Turns out...
Although southerners rebelled against growing centralization of the federal government, they had no qualms about establishing a strong national state of their own.  Scholars have classified the Confederate central government as a form of "war socialism."  The Confederacy owned key industries, regulated prices and wages, and instituted the most far-reaching draft in North American history.  The Confederacy employed some 70,000 civilians in a massive (if poorly coordinated) bureaucracy that included thousands of tax assessors, tax collectors, and conscription agents.
- John Majewski, Modernizing a slave economy: The economic vision of the Confederate Nation.
Folks around here celebrate "Lee-Jackson Day" (which, ironically, is the same day as the rest of the country celebrated MLK Day), call the Civil War "The War of Northern Aggression," and proudly fly the Stars 'n Bars.
So.... I guess it isn't about less government vs. more government, more about government my way or the highway.
HT: TC at MR.

Bernie Sanders and Glen Beck

Glen Beck wants an audit of the fed. Bernie Sanders wants an audit of the fed. Bernie Sanders is a socialist. Ergo, Glen Beck is a socialist?

Wednesday, December 16, 2009

The Pelzman Effect and Moral Hazard in Mountaineering

I caught the update on NPR on the search for three missing mountain climbers in Oregon this morning at about 6:50am while driving to work. I don't have any real comment on that search, as it is terrifying and sad to think of their fate.

However, the story had an add-on about a proposed policy: Republican John Lim has rallied around a group of Oregonians supporting mandatory radio beacons. The policy effects of such beacons are unclear, however. First, they might not be very effective. The current leader of the search effort says in the clip that no one is saying, "if only they had a radio beacon." Second, as the piece suggests, amateur climbers will feel safer about their odds of surviving the difficult climb, and be more likely to get into an accident. This is a specific type of moral hazard known as the Pelzman Effect. Essentially, more beacons may mean more total accidents, and, even if they rescue success rate improves marginally, more total accident deaths.

Sunday, December 13, 2009

Remembering Paul Samuelson

Paul Samuelson left us today. He was a unique figure in the field because his work touched so many of the subfields: His mark can be found on microeconomic and macroeconomic theory, international trade, monetary economics, public finance, welfare economics, and economic pedagogy. He literally wrote the book on Economic His theorem with Wolfgang Stolper, the Stolper-Samuelson Theorem, explains which interest are likely to lose out in the opening to trade, even though there are net welfare gains at the national level.
He was sharp and witty to the end, evidenced here in an interview for the Atlantic Monthly where he makes keen insights into the financial crisis, recession, and fiscal response to it. He was an intellectual giant who will be sorely missed.

The Supply-Side Approach to Kindness

A tongue-in-cheek holiday card by Uwe Reinhardt at Economix makes an interesting point about American charity. It's not that we're less generous, it's that generosity (on the issue of health care for example) might be more expensive in the US:
Namely, thanks to the expensive and often wastful manner in which our country's
health care providers and insurers have managed their affairs, they have helped
price kindness out of America's soul.

Hmm. Agree or disagree, it's a damned interesting statement.

Saturday, December 12, 2009

Your Climate Change Probability Score

From Andrew Gelman:
What probability do you assign to the following statement: increasing the atmospheric carbon dioxide concentration above 800 ppm will change the global average surface temperature by more than 2.5 degrees C (4.5 F)? This would imply a climate sensitivity somewhat below the extreme low end of what the Intergovernmental Panel on Climate Change says is credible.

I think I'm a 0.95 (or a 95-percent-er). What's your number?

Wednesday, December 9, 2009

Three Burning Questions

From Matt Yglesias:
1. Why are we spending a multiple of Afghanistan’s total GDP on fighting a war in the country?
2. Couldn’t more be done, for cheaper, with cash for bribes and development?
3. How is it that it doesn’t take the Taliban years to train competent soldiers?

More silly Poll numbers

So yesterday I made a little funny about how 10.2 sometimes being greater than 10.8. Just to be clear, I do know that 10.2 is actually less than 10.8, but it was a metaphor for a thing that we can jokingly say about statistics being similar to bikinis: What they reveal is interesting, but what they conceal is essential. In this case looking at the national average unemployment now versus in 1982-4 conceals some essential facts about these two recessions, namely that when we control for age and education, unemployment for each subgroup of the population is higher now than in 82-4.

But some things don't add up. Like this:
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Tuesday, December 8, 2009

Every dog has his day

Last week's economix econoquiz results.

Congrats to Jim Bang, Jeffrey, GDeFelice, Ken, Kevin McGrade, Richard Nerland, Pradeep Srivastava, Jennifer Shepardson, Matt Warner, Bob Glassberg, Hippo, Carolyn, Arjun Raguram and John Gardner, who all received perfect scores.

On tight grading distributions

High schools in Virginia were faced with the need to "raise standards," so they did 2 things: (1) they instituted "SOL's" - standardized tests that, as far as I can tell, mainly give teachers a teast to teach to; and (2) tightened grade distributions so that each letter grade is only five units wide. Well, they did the same thing with the GRE around 2001.
I always knew this was a stupid idea (in both cases) but I could never quite put my finger on why until today: As Craig puts it on his blog, it will "reduce the variance in the scores and, unfortunately, reduce the signal-noise ratio in the scores." If the test is written so that the D students are able to get an 80-85, how am I supposed to distinguish between a D student who was lucky and a B student who was just unlucky on one or two questions? I'm all in favor of keeping a wider variance and letting the distribution fall where it may.

When is 10.2 > 10.7?

Apparently during the current recession. Let me explain. According to current statistics, the average unemployment rate was 10.2% in October (now 10.0). In 1983, the unemployment rate peaked at about 10.8%. There have been a lot of bogus comparisons of the current recession to past ones designed to support the claim that the current recession is somehow "worse" than previous ones by looking at the change in jobs instead of the total number of jobs.
But, it turns out that there might be a good reason to believe that these folks are correct, even if their metric is bad. If we disaggregate by education (or age), we find that the unemployment rate now is higher at every level of education than it was at the peak of the 1982-4 recession. How? Simpson's paradox. Demographics have shifted towards an older, more educated work force. Older, more educated workers have historically enjoyed lower rates of unemployment.

Monday, December 7, 2009

Wednesday, December 2, 2009

Thoughts on Global Warming, Broken Windows, and Emissions Taxes

Yesterday, TC at MR had some interesting thoughts on "good versus evil thinking" about the Climategate issue. To summarize, he basically says that there is a chance that the people (who, in this case did something somewhat dishonorable) were acting with good intentions at heart. In other words:
One response is: 1. "These people behaved dishonorably.  I will lower my trust in their opinions." Another response, not entirely out of the ballpark, is: 2. "These people behaved dishonorably.  They must have thought this issue was really important, worth risking their scientific reputations for.  I will revise upward my estimate of the seriousness of the problem."
One other thought I have is, to look at the other side of the debate over climate. What if views and opinions are not only unfounded in rigorous scientific methodology, but are also inconsistent? What credibility do we owe them? For example, some opposers of "green job creation" liken the problem to the "Parable of the Broken Window" by Frederic Bastiat. It's a reasonable comparison in the sense that subsidizing the cleanup does marginally incentivize polluting behavior. This is precisely why most mainstream economists recommend a pollution tax over a cleanup subsidy. A cleanup subsidy (paying for the shopowner to fix the window) creates a moral hazard, or more simply, a modest incentive to produce in sectors that create the mess (break more windows). Two things: one, to accept the parable, you must admit that damage has been done (to the environment); and two, the next question is how to implement the proper incentive mechanism.
In the case of the broken window, the optimal mechanism is to tax (punish, fine, etc.) the breaker of the window above and beyond the simple replacement cost. In the case of the broken environment, it would be appropriate to "punish" firms (and consumers who buy those goods for that matter) that do most harm to the environment. The least discriminatory way to do this might be a carbon tax, but cap and trade has its advantages, too.
I've discussed these options before, and all else equal, the cap and trade auction is probably the most efficient. But there is another twist to things that I recently considered, which is, "How do we charge domestic carbon emitters without implicitly subsidizing foreign emitters?" Not only might it discriminate against domestic producers, but it might even result in more worldwide emissions - emissions intensive production may get offshored to an even greater extent to countries that allow even dirtier modes of production than previously occurred in the US. Thus, I am increasingly leaning towards a carbon tax, which could be levied against the carbon content of all goods sold (domestically produced or imported - cumulative of the carbon emitted in-transport). It lacks the elegance of an auction, but without an international trading block for emissions it is the next-best option.
But this sort of punishment (tax) on vandalizing the environment is not what the "broken window gang" argues for. In fact, they argue against both strategies. In other words, they argue against punishing window-breakers and against compensating shopowners (the future generations who are likely to be impacted by environmental degradation). In doing so I do not really see much benefit of the doubt that can be granted to the opposition. I can think of two scenarios. Either: one, they deny the science of climate change, and thus will construct any convenient argument to oppose it, without actually admitting their state of denial; or two, they do not think climate change is an important issue. I do not think that the first is the case because I think that most of the "broken-windowers" acknowledge climate change. Maybe there is a face-saving third alternative, but I'm skeptical.

Sunday, November 29, 2009

A bit on policy efficacy

Quoth Becker:
I fully endorse Posner's suggestions to cut the minimum wage, but I do not see that happening with the present Congress. My favorite approach it to try to stimulate the economy by cutting income taxes, especially corporate income taxes and other taxes on capital, both physical and human capital. Such tax cuts will stimulate investments in the economy, and in this way increase the demand for workers.

I won't waste space addressing Posner's argument for these tax cuts - he's clearly a hack at this point. But, it is unfortunate that Professor Becker misses the most obvious and direct way to lower costs - cutting the payroll tax. Cutting the payroll tax would be a preferred and more direct intervention on labor costs than any fiddling with the overall rate of income taxes or capital taxes. Hiring workers directly into public works projects would also be a good short-run remedy.

It further surprises me that he does not recognize the obvious drawback to his own solution of cutting capital taxes - that it depends on the extent of complementarity (or substitutability) between capital and labor. (Then again, he may well recognize these things but is leaving them out of his story because it doesn't agree with his politics.) Reducing tax rates on capital might be desirable for other long-run objectives, but its effect on labor markets is theoretically ambiguous. It seems as if Dr. Becker has supported these sorts of tax cuts for some time for these other reasons, but arguing for them as a means for fixing the labor costs problem seems forced.

Wednesday, November 25, 2009

Tea Partiers: Retake High School Civics

I'm not the only one who thinks the likes of Glen Beck, Rush Limbaugh, tea partiers, and nine-twelvers need a lesson in the constitutionlest they continue to embarrass themselves.

Saturday, November 21, 2009

Can it smell baby poo?

Statfight: Draft Position and Per-Play QB Performance

A few of my students frequently want sports examples about statistics. Here is a good one.

Survey Design Bias

Another example of biased survey design (here is a link to the full survey results).
Ninety-four percent of Obama voters correctly identified Palin as the candidate with a pregnant teenage daughter, 86% correctly identified Palin as the candidate associated with a $150,000 wardrobe purchased by her political party, and 81% chose McCain as the candidate who was unable to identify the number of houses he owned. When asked which candidate said they could "see Russia from their house," 87% chose Palin, although the quote actually is attributed to Saturday Night Live's Tina Fey during her portrayal of Palin during the campaign. An answer of "none" or "Palin" was counted as a correct answer on the test, given that the statement was associated with a characterization of Palin.
Obama voters did not fare nearly as well overall when asked to answer questions about statements or stories associated with Obama or Biden -- 83% failed to correctly answer that Obama had won his first election by getting all of his opponents removed from the ballot, and 88% did not correctly associate Obama with his statement that his energy policies would likely bankrupt the coal industry. Most (56%) were also not able to correctly answer that Obama started his political career at the home of two former members of the Weather Underground.
I'm thinking if Zogby had asked questions about Obama that were of a similar nature to the questions about McCain/Palin, they would have gotten more of their negatives correct. For example, "which candidate has been tied to radical preacher Jeremiah Wright?" or "which candidate has a muslim half-brother?" probably would have gotten a higher response rate, and in similar proportion to the McCain questions. On the other hand asking about McCain, "which candidate said that auto industry jobs aren't coming back?" would have gotten a lower response rate.
I also wonder what the survey results look like controlling for education and income. Democratic voters tend to be poorer and less educated (and not because liberal policies are dumb - they are just more compassionate towards people who are less well-off). That didn't make the report either, but it was part of the survey.

Thursday, November 19, 2009

Remember This?

One day, I think, Bill Bellichick will be respected for making a bold and well-calculated decision, even if the game ends up impacting the Pats' run this year.

Monday, November 16, 2009

Hail, Bellichek

I have never liked Bill Belichick... Until last night. I wasn't sure what the numbers on last night's failed attempt on 4th and 2 are, but I had read this paper by David Romer, which basically says that teams punt WAY less than the optimal amount. Then, there's this analysis by Advanced NFL Stats:
With 2:00 left and the Colts with only one timeout, a successful conversion wins the game for all practical purposes. A 4th and 2 conversion would be successful 60% of the time. Historically, in a situation with 2:00 left and needing a TD to either win or tie, teams get the TD 53% of the time from that field position. The total WP for the 4th down conversion attempt would therefore be:

(0.60 * 1) + (0.40 * (1-0.53)) = 0.79 WP

A punt from the 28 typically nets 38 yards, starting the Colts at their own 34. Teams historically get the TD 30% of the time in that situation. So the punt gives the Pats about a 0.70 WP.

Surely, Belichick would not have been criticized if he had punted and the Colts had driven down the field, but based on historical stats, he made the right choice. That would have been the conventional approach, and would not have been controversial.
P.S. Matt Millen said "well, those stats don't take into account the fact that the Colts have a better-than-average quarterback." True, but they also don't take into account that the Pats do too, not to mention the fact that, if having Peyton Manning increases the probability of a Colts touchdown on a 29 yard field, it also increases the probability of a Colts touchdown on a 70 yard field. To me, that's close to a wash.

Saturday, November 14, 2009

... But Hayek was Wrong...

When I think about the hyperbolic claims about welfare and tyranny, it reminds me of Hayek's predictions about social welfare states. As Bruce Bartlett (pal of Art Laffer among other supply-siders, and guru of the Reagan tax cuts) points out in an article which partially debunks Hayek's claims:
In 1944, the Austrian economist F.A. Hayek published an extraordinarily influential book, The Road to Serfdom. In it, he argued that liberalism eventually leads to totalitarianism; that is, once a nation has embarked on the creation of a welfare state, there is no natural limit to the size of government until it controls everything, socialism becomes pervasive and political freedom evaporates.

I have my doubts about the extent to which the rank-and-file member of the recent conservative backlash is familiar with the economic philosophy of Hayek, but these are the ideas from which they have taken their intellectual cues. Hayek made a lot of significant contributions to the field of economics, and his ideas about Creative Destruction were revolutionary in their time. However, his argument about social welfare is both a logical fallacy and inconsistent with the empirical evidence of the last 20 years.
Logically, the argument rests on a flimsy and fallacious "slippery slope" argument. As Bartlett notes:
Since Hayek's book appeared, it has been an article of faith among American conservatives and libertarians that every expansion of government is a step on the slippery slope to totalitarianism. National health insurance today, the gulag tomorrow, many of those on the right genuinely believe, often citing Hayek in support.
Consequently, it is axiomatic that Europe, which is much further along the road to a welfare state than the U.S., is also further along the road to socialism and totalitarianism.

But this turns out to be false, both when it comes to Europe, and when it is compared with evidence from the rest of the world. Economies (many of which developed and still have sizable social welfare programs) have been liberalizing the industrial sectors of their economies at a tremendous pace, political and economic freedoms have been extended to more people than ever before, poverty has fallen dramatically, the number and intensity of violent conflicts have subsided considerably, and more countries' political systems are based on democratic institutions than ever before. Empirically, much of this progress on economic, political and social fronts has been credited to globalization and the retreat of government from industry. But even as economists laud these sorts of liberalizations, the mainstream view (advocated by, for example, Bhagwati, Stiglitz, and others) continues to stress the importance of the social safety net to avoid a socialist backlash.
Also, with respect to the "Europeanization" of the US, it is false to assert that European countries are less politically free because of their higher taxes and more pervasive welfare states. Conservative think tanks such as Freedom House and the Heritage Foundation, Consistently rank countries like Denmark, which has an average tax rate of 49% compared with 28% in the US, on a par with the US.
The bottom liine is that the intellectual argument that the 9/12 and teaparty activists have founded their protests on has a number of holes in it.

Friday, November 13, 2009

Thursday, November 12, 2009

Endogenous Change in Tort

Maybe the Return on Investment for lawyers will either (a) run up the costs of legal action; or (b) decrease the supply of lawyers to the point where tort reform is not an issue.
Funny how the Right trusts the market to allocate doctors efficiently, but not legal services. Seems like market signals are working more appropriately in the latter than the former.

Power laws

Statistical power laws relating size to frequency, discussed by Aaron Clauset. Interestingly absent: wealth.

Differing views on 900b.

Tyler Cowen brings together two sides of thought on the $900b. figure from the CBO.
Arnold King says the costs will be higher because people will game the system.
Jonathan Gruber says the costs will be lower because reducing costs and lifting the implicit tax of having to pay employee health benefits will increase wages and create jobs.
They're both probably right.

Lies, Damn Lies, and Lou Dobbs

Lou Dobbs has lied about:
1. Leprosy;
2. Immigrant Crime Rates (immigrants ACTUALLY commit less crime, on average, than natives);
3. The "North American Union" (which doesn't exist);
4. Immigration in general;
5. Trade in general;
He has also hosted known white supremacists.
I wonder why rumors have it that he will be going to FOX after having left CNN?

Wednesday, November 11, 2009

Math in Stalin's Russia

Three reasons Russia stayed good at math.

Thought US taxes were progressive?

Wait till you see this. And, by the way, it's from the conservative Ludwig von Mises Institute, not some hippie liberal thinktank. This is why a negative income tax on income below a certain threshhold (first proposed by Milton Friedman) would be a better way to flatten out the income distribution than lump-sum cash subsidies.

Federal Budget Challenge

Think you can do it? Good luck - I cut the 10-year estimated deficit substantially, but there's no way I'm getting re-electid because I had to screw seniors, and raise some taxes. I wonder if anyone can do it without raising taxes. My guess is no.

Tuesday, November 10, 2009

Who is Mike and Why did His Dog Eat a Frog

This is from the Journal of Differential Geometry:
And they say the peer review process in economics is imperfect!

Poland 20 Years after the Fall of the Wall

Might higher wages in China and India Hurt US Workers?

Found this interesting summary of a paper by Gavin Wright on Free Exchange:

What broke the south's isolation? According to Mr Wright, it was the labour policies of the early 20th century and the New Deal, which served to increase southern labour costs. That's right—policies which pushed southern wages above the market rate saved the southern economy. And what's fascinating to note is that northern industrialists favoured many wage-increasing policies specifically because they believed that those policies would limit job growth in the south, and low-wage southern industrial competition. As Mr Wright notes, the 1939 minimum wage increase affected only 6% of northern workers, but 44% of southern workers.

How could this have benefitted the south? Well, the region's isolation was in no small part self-chosen. Southern leaders wanted to maintain a certain way of life and culture, and they resisted any policy out of Washington which would lead to increased interdependence with the rest of the nation. Suddenly high southern wages broke this world open. Farmers and other producers rushed to trim labour forces and adopt labour saving technologies, which led to high unemployment and waves of migration to the north. This meant, first, that there was finally significant cross-regional labour movement involving the south and, second, that southern leaders had to begin attracting investment or face total depopulation.
FE offers another interesting parallel from East Germany:

Of course, everyone knows the argument in favour of rapid wage convergence, i.e. the danger of migration, time and again castigated by politics. If wages lagged, there might be west-migration of many people and that had to be prevented. But why? ... Even under favourable conditions, it would take at least one decade for the necessary investments to restore an industrial base. ... In the end, East Germany would have grown faster without the push for higher wages, and most people would meantime have returned home again when a flourishing economy would have developed. 

Mass unemployment, caused by aggressive wage politics, probably resulted in much more emigration [emphasis mine] (and much less immigration) than would have been the case with lagging wage convergence. The wage push became a program for “deconstruction of the east” and, if at all, “reconstruction of the west“, i.e. the opposite of what had been intended.

So, might imposing "higher labor standards" in the rest of the world (India and China being the usual scapegoats) actually lead to technological innovation in China, increased emigration pressure from South and East Asia, and ultimately hurt workers in the US? We'll see. Oh, and by the way the net direction of capital flow for china is OUT.

All this Nonsense about Tyranny

From the TC at MR:

I first visited Berlin in 1985, while traveling with Randall Kroszner.  We drove to West Berlin by car and we were terrified for the few hours we were underway in East Germany.  Randy did not drive over the speed limit once.  I was hardly a communist sympathizer but still I was unprepared for the day trip to East Berlin.  I saw soldiers goose-stepping down one of the main streets.  In the stores old ladies yelled and swung their brooms at me.  Many buildings still had bullet marks or bomb damage from World War II.  In a restaurant we ate a rubber Wiener Schnitzel and shared a table with an East German family; they did not have enough trust in their government to speak a word to us.  I was unable to spend my mandatory thirty-mark conversion on anything useful; I carried back some Stendahl and Goethe but didn't want the Lenin.  This was in the capital city in the showcase of the communist world.   

My biggest impression was simply that I had never seen evil before.

This sums up my feelings about why all this nonsense people are histrionically throwing around about tyranny and oppression in a simple social welfare bill in a democracy with free speech is so disgusting. Most of us have never seen tyranny, oppression or evil in our own lives. In Leipzig and East Berlin there are a museums devoted to documenting the horrors of the East German Communist secret police, the "Stasi." I've visited them.

I guess this makes me ruminate about the importance of getting a little perspective and not being a psychotic lunatic who pretends that the health care bill is the end of democracy in America. Maybe more folks (especially college students at VMI and around the country) would benefit from taking real trips abroad and seeing some of the museums and monuments established around the world in memory of those who were terrorized, imprisoned, and killed by truly tyrannical governments; usually for no more than speaking out.

Saturday, November 7, 2009

Used Barf Bags and Statistical Literacy

NYTimes Magazine Via Joshua Gans. Find the logical (statistical?) mistake:

As a last ditch effort, I grab an air sickness bag from out of the wall pocket. Using one of the rejected crayons I scrawl a face on the bottom of the bag. I reach inside, turn it into a hand-puppet and say the funniest thing I can think of: “Ooga booga.” The child stops crying. Then smiles. Then giggles.

“You like the puppet?” I ask. “MO PUPPA!” she says.
Then think to myself, “sure, one puppet is fine, but two puppets — now that’s a show!” I reach into the wall-pocket in front of my husband and take out his air sickness bag. I draw another face, this time taking a little more time and care with my creation. I give it curly hair, long eyelashes and glasses so that it looks a little bit like me. Nice touch.

I stick my hand inside. And then my world contracts.

Seems this air sickness bag has been used before, but not for a puppet show. No, it’s been used for the purpose that god intended.
Roughly two million people fly the friendly American skies every single day. How many of those travelers feel nauseated enough to reach for, and then use, an air-sickness bag? (I travel often and can count on one clean hand the number of times I’ve seen it happen.) And of those phantom pukers, how many would choose to tuck the vomit-filled vessel back into the wall-pocket? And then, what’s the likelihood that a cleaning crew would overlook the sack o’ sick? And finally, what are the odds that all of this would become the perfect set-up for one arrogant idiot who tries to make a hand-puppet out of a barf bag?!
Anyway, it’s possible that the occurrence of this mathematical improbability has created a statistical vortex by which we are virtually guaranteed that this plane will land safely.

Best Jobs

Mathematician #1, Statistician, #3, Economist, #11. Have no clue how historians and sociologists beat us out, but at least we beat "philosopher," or "stand-up philosopher" aka "bullshitter" (gotta love Mel Brooks).

College Selectivity and Student Mobility

Via TC @ MR: A recent study by Caroline Hoxby
shows that although the top ten percent of colleges are substantially more selective now than they were 5 decades ago, most colleges are not more selective. Moreover, at least 50 percent of colleges are substantially less selective now than they were then. ... [S]tudents used to attend a local college regardless of their abilities and its characteristics. Now, their choices are driven far less by distance and far more by a college's resources and student body. It is the consequent re-sorting of students among colleges that has, at once, caused selectivity to rise in a small number of colleges while simultaneously causing it to fall in other colleges.
I'm a bit puzzled. Though the results almost certainly document an overall decline in student quality for a large number of more remote colleges and universities, I'm not sure this proves that there has been a decline in "selectivity" on the part of those universities. Schools may not be lowering their standards; they may just be getting a more average applicant pool with fewer top-talent students. I would invoke the principle that people will find your results more believable if you interpret them conservatively.

Wednesday, November 4, 2009

Socialist Highways and When to Shut up and Pay your Taxes

I was just wondering what the average share of the highway budget most Americans would pay if it were divided according to the "benefits received" principle (i.e. how much you use it). Turns out, on average, if you mostly commute on federal roads (not a horrible assumption, but we could easily just assume that the per-mile cost is the same for federal roads as state and municipal roads and be OK) then it would be about $110, just for your daily commute to work.
According to the Department of Transportation there was about 43.5 billion allocated to federally-maintained highways in 2008. The total vehicle-miles traveled was about 3.03 trillion for the same year. The average commute (according to an ABCNews survey) is about 16 miles each way. So if you work 5 days a week about 48 weeks out of the year, and have an average commute, you'll travel about 7680 miles per year just to get to and from work, or 0.0000002535% of the total highway vehicle miles traveled. So if you paid that "share" of the transportation budget, that would come to about $110 per worker.
So you might say, "GREAT, PRIVATIZE THE ROADS OVER TO THE MARKET!" Not so fast! If we ran things according to the market, many of you suburban republicans would have a higher than average commute, especially you folks in big urban-sprawl areas like St. Louis or Dallas or Chicago. Plus, some people may not use roadways at all, or they may "use" them much more lightly. I travel 3 miles and ride a bike. Why the hell should my tax dollars subsidize some jerk with a full-size pickem up truck that does more road damage??? Some folks would call that downright un-Amuhrrican! Clearly some folks should pay more. Plus, whoever owned the roads would have a monopoly, so they'd be able to price-discriminate and charge double from 7-9am and 4:30-6:30pm, and make a tidy economic profit off the deal. So you'd probably pay at least 2 or 3 hundred a year to the private company. So, on average by privatizing certain things (or not having regulation) we probably end up saving 100 so that we can pay twice or thrice that, i.e. bending over a dollar to pick up a dime.

Political lobbying explained through the example of all-pay auctions

Tuesday, November 3, 2009

Sampling Bias and "Enthusiasm Gaps"

This is an interesting twist on sampling bias. Since robopolls are less able to coax you into staying on the line, they only grab the more enthusiastic likely voters. In New Jersey, human polls and robopolls are indicating leads to opposite candidates. Human polls favor Corzine, and robopolls favor Christie.

The Productive Nature of Whining

Don't let a VMI cadet see this.

More Rationale for Overoptimism

There is a simple way to get overoptimism (and hence bubbles): suggest that the agent's payoff is correlated with his guess. Here's another:
The observer’s beliefs are different from agent A’s.  They are drawn from the same distribution G but there is no reason that the observer’s beliefs are the same as agent A’s.  In fact, the action agent A took will only be the best one from the observer’s perspective by accident.  Actually, the observer’s beliefs will be the average of the distribution G which is lower than the belief of  agent A since agent A deliberately took the action which he thought was the best.  This implies that the agent A who took the action is “overoptimistic” relative to an arbitrary observer.

Sunday, November 1, 2009

Economists Category on Jeopardy

They zip through world history and Shakespearian quotes, but a question about Adam Smith elicits blank stares. Priceless.

Brain Drain or Brain Gain?

This article in Foreign Policy confirms what economists have said about skilled migration for the last decade or so: It helps both the recipient and the source country. One of the ways they acknowledge emigration to help is through remittances.  However, the last point, "Just as fears about possible negative effects of brain drain are typically overblown, so is the hype over the ability of countries to tap their diaspora to set up trade and investment," is not consistent with recent research. There are a few papers out showing a strong positive link between skilled emigration and FDI flows in the other direction, including one that a couple of guys named Bang and MacDermott are trying to get published.

Tax Water?

Urban economists might think taxing land is the ideal way to manage urban growth; PK thinks it wouldn't raise enough $$. Should we tax water? Like a tax on land (not a tax on property, which would include the development of land), it would likely not distort investment. I'm concerned about the distributional consequences of a tax on a necessity that many people consume inelastically.

Rich people with civic responsibility

Rich Germans petition in protest of government tax rates!!! That's right, they think they're paying too little and they should be paying MORE!

Thursday, October 29, 2009

Contrarian Spurrious Correlation of the Day

Murders and suicides seem to be negatively correlated according to shock-jock economists at freakonomics. Really? It seems Levitt should be able to look at this and find easy econometric techniques that would rule out any causal relationship. Right off the bat, it seems that higher suicides in Japan come from the fact that life insurance covers suicide. Problem is, he would have start once again caring more about doing real work and less about shocking the world for fun and profit.

Salience and Taxes

Are taxes distortionary when they're higher, or just when we think about them more. This paper by Amy Finkelstein of MIT (HT: Ian Ayres) seems to suggest that it's not the rate, but the "salience" (i.e. how much we think about taxes) that drive us crazy. It explains that using irrational numbers to calculate taxes might keep us from getting to wrapped around the axle over them. This might explain why small business owners are more crazed about taxes than others since they have to file and pay taxes using quarterly estimated tax forms instead of filing once at the end of the year. This year I had some weird "additional tax" thrown on by the state of VA (which has a really complicated filing) and had to spend over a month of phone calls and correspondence trying to get an explanation of what was going on with it. For some reason they claimed that I was supposed to have been filing estimated tax forms because the withholding was too low, which is nuts.
Anyway, I don't mind taxes. I think if I knew what I was paying and knew what I was left with at the end, and had to think less about "this part goes to tax" I probably wouldn't mind the taxes so much, and it wouldn't mess with my consumption choices as much. This is one thing that's always puzzled me about sales taxes here in the US. Why can't they just be included in the price? Why does something priced at a dollar have to come out to $1.06 or something?
This is also probably why we don't think too much about tariffs on imports. We never see how it impacts the prices, so we almost just assume that we're not really "paying" any of the burden (which of course is patently false). This might mean that the consumption distortions from trade restrictions are not as high, but it might mean that the production distortions are even higher.

Green Jobs are More than Broken windows

A number of bloggers (see here or here or here) in the econoblogoshpere have been relating green jobs to the parable of the broken window, by Frederic Bastiat:
Have you ever witnessed the anger of the good shopkeeper, James Goodfellow, when his careless son happened to break a pane of glass? If you have been present at such a scene, you will most assuredly bear witness to the fact, that every one of the spectators, were there even thirty of them, by common consent apparently, offered the unfortunate owner this invariable consolation—"It is an ill wind that blows nobody good. Everybody must live, and what would become of the glaziers if panes of glass were never broken?"
Now, this form of condolence contains an entire theory, which it will be well to show up in this simple case, seeing that it is precisely the same as that which, unhappily, regulates the greater part of our economical institutions.
Suppose it cost six francs to repair the damage, and you say that the accident brings six francs to the glazier's trade—that it encourages that trade to the amount of six francs—I grant it; I have not a word to say against it; you reason justly. The glazier comes, performs his task, receives his six francs, rubs his hands, and, in his heart, blesses the careless child. All this is that which is seen.
But if, on the other hand, you come to the conclusion, as is too often the case, that it is a good thing to break windows, that it causes money to circulate, and that the encouragement of industry in general will be the result of it, you will oblige me to call out, "Stop there! Your theory is confined to that which is seen; it takes no account of that which is not seen."
It is not seen that as our shopkeeper has spent six francs upon one thing, he cannot spend them upon another. It is not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library. In short, he would have employed his six francs in some way, which this accident has prevented.

It seems that the comparison of using stimulus dollars for green investments to broken windows is akin to making a type III error: giving the right answer to the wrong question. No, green investments by the public sector will not increase the long-run number of jobs, and they may have some unintended consequences if future harm is not priced with a tax or an auction. However, short-term public sector jobs will reduce the pain of the current recession by reducing overall employment in the short term. Then the question is what the best thing to do is, i.e. "are green jobs better than the next best alternative for public funds?" To many the answer is "yes." Investments made now to clean up the environment and improve our energy infrastructure will do a lot to increase welfare even if that welfare is not well measured by the metrics of GDP and employment. The "broken windows" analogy also frames the debate in a misleading way. If the analogy is apt, then it must be the case that the "windows" are already "broken" and the cleanup investments are just paying the tab for the vandalism of past generations.

Wednesday, October 28, 2009

Split or Steal

Lesson: Don't trust anyone who's been stabbed in the back before (especially if you're the one who did it).

Wednesday, October 21, 2009

Why 3d Graphs are usually misleading

Just because you can do it in Excel doesn't mean it's the right way to do it. Below, the author has made a graph of the number of Starbucks over time. The height of the cylindrical columns is increasing, but so is the width, making it seem (visually) as if the increase has been all the more gruesome.

Sunday, October 18, 2009

Will and Krugman

Was fun to watch George Will & Paul Krugman bristle while trying not to interrupt the other on ABC this morning. Will was looking down and tapping his fingers nervously at Krugman, then Krugman looked like he was about to rip of his own beard while Will decried the possibility that the Chinese would own our debt. PK's argument was that that's not how they were going to pay for it. The bigger question is, if the Chinese buy US bonds to finance health care, for whom is that worse in the long run? If inflation shoots up and the dollar crashes (like GW himself has predicted) this would clearly ruin the Chinese!

Friday, October 16, 2009

Should OPEC be Compensated?

Economically, there is no argument for giving oil exporters a handout to compensate for our ability to reduce our own demand, thus driving down the price. Remember, they don't give us a kickback for all of their supply-reducing behavior that drives up the price. But, there might be some political reasons to make such a side-payment.

Carbon Tariffs

From Matt Yglesias a few days ago:
The EU, Canada, and Japan are in the aggregate much more significant trade
partners than China/Mexico/Brazil. And the case for them charging us carbon
tariffs seems about as good as the case for us charging the Chinese.
I think we're missing the bigger issue: Why a carbon tariff? Why not just a tax on carbon content for domestically and foreign produced goods? Why give domestic producers a "carbon subsidy?"

Thursday, October 15, 2009

Sad Commentary

This post is not related to VMI per se, just a small part of the article revealing a sad fact about society:
Last year, the U.S. Justice Department began investigating whether VMI's environment is especially hostile to women. Allegations of sexual assault have become a fact of VMI life, occurring about once a year, typical for a school of this size, according to college officials. The first case to result in a criminal charge ended Tuesday.

In that case, a female cadet alleged that Stephen J. Lloyd, then a senior from Mason Neck, Va., pulled her into a storage room the night of March 27 and raped her. Lloyd no longer attends VMI. On Tuesday, he entered an Alford plea, which means he did not admit guilt but acknowledged that there is enough evidence to convict him. The plea is tantamount to a conviction of misdemeanor sexual battery.

The sentence: a year in jail and a $2,500 fine, suspended.

That means they guy could have easily been convicted, but instead got a suspended sentence, meaning he will not serve a day for rape. Probably happens all the time all across the country, and that is a sad commentary on our society.

Wednesday, October 14, 2009


The dow closed over 10,000 today. What does it mean? Nothing, really, but maybe it helps psychologically.

Tuesday, October 13, 2009

Lurking Variables and Statistical Literacy

People are squealing about pork and the payrolls for federal employees. Fact: Federal employees make more on average than private-sector employees. Fact: They are not overpaid.
Economix explains why:
In 2008, only 14 percent of federal workers were on part-time schedules, compared to 26 percent in the private sector. Federal workers were far older on average: 55 percent were between the ages of 45 and 64, compared to 36 percent of private-sector workers. Furthermore, 45 percent of federal workers held a college degree or higher educational credential, compared to 29 percent of private-sector workers.
analysis of the impact of individual education and experience on earnings in the United States by the Harvard economist George Borjas showed that federal employees are paid considerably less than comparable private workers at the top end.
Basically, people looking at the simple averages are not accounting for several important ("lurking") variables that more than explain the average differentials between federal employees and the average private-sector employee.  Andrew Gelman calls this a lack of "statistical literacy"; some call it "lying with statistics". These statistical liars include Chris Edwards at Cato (who by the way should probably know better but is advancing a deliberate agenda), The Free Enterprise Nation, Ilana Mercer of World Net Daily, and Jeff Jacoby of The Boston Globe.

Monday, October 12, 2009

The Prize

The prize in economics went to Ostrom and Williamson for institutional economics.
“In reading [Professor Ostrom's and Williamson's] work, you are
impressed that economics is not really fundamentally about markets, but
about resource allocation and distribution problems
. Markets appear
because they operate effectively to handle a subset of these resource allocation
” - Michael Spence, senior fellow, the Hoover Institution.

A timely reminder to those who are following the current crisis.

Sunday, October 11, 2009

Protons, Prostate Cancer, and Bad Incentives in Health Care

Here, and here. If you have 3 options of equal impact, one that is free, one that is $50,000, and one that is $100,000, why is it that our current system picks the third one? Answer: it's hard to convince most people that more health care is not equivalent to better health care. Most people think "proton radiation therapy" sounds like it will do more good than "wait and watch." It doesn't.
I'm still puzzled by the blind faith we put in doctors when it comes to their motives in recommending treatment. Doctors, like mechanics, have an incentive to "run up the bill" even to the point of making s--- up or recommending treatments (repairs) that may or may not be necessary. We should WANT a bureaucrat that knows something about the effectiveness of treatments between us and our doctors, whether it's a government bureaucrat or a private sector one! Problem now is that the private sector bureaucrat has perverse incentives, too. A little regulation in these cases (or a public provider) could go a long way.

Saturday, October 10, 2009

Thursday, October 8, 2009

The Downside of a Global Supply Chain

Mmmmm beef parts. Still damn tasty.
Ground beef is usually not simply a chunk of meat run through a grinder. Instead, records and interviews show, a single portion of hamburger meat is often an amalgam of various grades of meat from different parts of cows and even from different slaughterhouses.... The frozen hamburgers made by the food giant Cargill, were labeled “American Chef’s Selection Angus Beef Patties.” Yet confidential grinding logs and other Cargill records show that the hamburgers were made from a mix of slaughterhouse trimmings and a mash-like product derived from scraps that were ground together at a plant in Wisconsin. The ingredients came from slaughterhouses in Nebraska, Texas and Uruguay, and from a South Dakota company... Those low-grade ingredients are cut from areas of the cow that are more likely to have had contact with feces, which carries E. coli, industry research shows. Yet Cargill, like most meat companies, relies on its suppliers to check for the bacteria and does its own testing only after the ingredients are ground together.

Wednesday, October 7, 2009

Order Matters

Most polls have health care reform in its currently proposed form at about 43% for/45% against. Fox News has it at 35% for/49% against. Something's fishy, but the sampling was fine and so was the overall wording of the question. It was the questions that preceded the health care question that may have biased the attitudes of the respondents. See more at

Tuesday, October 6, 2009


Here. Maybe my students could think of a joke relating to a full-contact statistics exam.

Saturday, October 3, 2009

"Locavorism" and the Environment

"Buying local" is not necessarily buying green:
...lamb raised on New Zealand’s clover-choked pastures and shipped 11,000 miles by boat to Britain produced 1,520 pounds of carbon dioxide emissions per ton while British lamb produced 6,280 pounds of carbon dioxide per ton, in part because poorer British pastures force farmers to use feed. In other words, it is four times more energy-efficient for Londoners to buy lamb imported from the other side of the world than to buy it from a producer in their backyard.
Nor is knowing the producer necessarily good for the community:
Historically, such personalized economic transactions were the norm, but they were inherently fraught with risk and tension. In colonial America — a place I’ve studied in some depth — all markets were initially driven by face-to-face interaction. It should come as no surprise that things could get, well, personal. Markets were intensely competitive and exclusive. Everyone knew everyone. And that was often the problem. The court records of colonial New England are replete with personal market transactions gone awry.
Food for thought, so to speak. Trade is good.

Thursday, October 1, 2009

Bayes' Rule and Dick Cheney's One Percent Doctrine

I was teaching Bayes' Rule this week, and there's an example that has to do with lie detectors and stealing. The story is that you have employees, of whom 10% are stealing. You also have a lie detector that is 80% effective (i.e. P(positive test given stealing) is 0.8 and P(positive test given not stealing) is 0.2, etc.). So, if you apply Bayes' Rule, you learn that given a positive test (i.e. the lie detector says you are lying/stealing) is just 0.308!
So, what about Cheney's "One Percent Doctrine" for justifying torture? Even worse! Let's suppose that there is a 1% chance that a detainee has information about a terror attack. Now suppose that torture is 90% effective in the sense that if that detainee is conspiring with terrorists he "confesses" and gives information about it with probability 0.9, but also confesses (with whatever made-up details he can think of) with probability 0.1 if he is innocent. (This, I think, is being generous to the effectiveness of torture!) Then, GIVEN a confession, the probability that there was really a plot is just 0.009/(0.009+0.099) = 0.083 - less than 10%!
The conclusion here is that the one percent doctrine logically fails when there is even a small chance of getting false positives from your intelligence-gathering resources and methods. It seems from what you hear that torture leads to sufficiently many false positives that it probably isn't helping, and is probably HURTING our security by leading our enforcement agencies on wild goose chases! Food for thought!

Made up Statistics

Nate Silver accuses Strategic Vision of cooking its books on poll "data" it releases.

Alex Tabarrok Tells Reiterates all the Good Stuff about Globalization

Another Ted.

Intrinsic Motivation vs. Extrinsic Motivation (a.k.a. "Incentives")

From Ted Talks.

More Financial Innovation that Doesn't Suck

For the last couple of years unbanked Kenyans have been using their mobile phones as mobile banks, which has proved invaluable as a means for small savings and remittance transfers for poor households.

Wednesday, September 30, 2009

Sunday, September 27, 2009

On the Wages of Clergy and Accountants

Cap and Trade Basics

If you care to be informed about the impact of cap and trade, read this. Here are the important points:
1. Think of the benefits to the private sector from pollution. ... it’s cheaper ... to produce goods if you don’t worry about whatever emissions result as a byproduct.
2. A cap-and-trade system puts a limit on overall emissions, so that emitters have to pay a price for emitting.
3. The cost to the economy of this limit is the benefit the private sector would have gotten by emitting more than is allowed under the cap.
4. The creation of cap and trade means that emission permits command a market price, and the value of these permits ... (a growing fraction over time) would be captured by the government through auctions, and ... in effect, recycled to consumers.
A couple of notes for those who don't want to read the original: 1. the costs in (3) are not very big - they are a deadweight loss triangle, not the total market value of the permits (which is what some guesstimates of the costs say); 2. the current and future environmental benefits of the cap may or may not outweigh the losses to firms; 3. assuming that the "cap" does a good job of balancing firms' losses with environmental gains, an auction is more efficient than a Pigouvian carbon tax which is more efficient than the current system of "cap and regulate," which is in turn more efficient than subsidizing emission-reducing investments (*see below); and 3. the effectiveness or fairness of how the government is able or willing to "recycle to consumers" the revenues generated is something we can have a fair debate about.
* Note on policy options: Cap and trade and a carbon tax both have the advantage of allowing the firms for whom it is most expensive to cut emissions to emit more if they are willing to pay, whereas those for whom it is least expensive have an incentive to make more cuts. Firm-by-firm regulations do not achieve this, and subsidies have the unintended long run side-effect of leading to higher consumption of the very things whose production results in emissions. In theory, an auction does a better job of "getting the price right" for a given desired quantity. One thing that might tilt in favor of a tax over an auction would be setup costs - designing an auction that gets the price right is a difficult problem in theory and in practice.

Using Derivatives for Good Instead of Evil

This excerpt Robert Pozen's "Too Big to Save? How to fix the US Financial System" points to a good use for derivatives (HT: Marginal Revolution):
The Danish model has another critical and innovative feature.  Holders can retire their own mortgages by purchasing the same face amount of mortgage bonds at the prevailing market price.  To prepay a mortgage by purchasing bonds, the home owner must give advance notice of several weeks to the MCI [mortgage credit institutions], which designates by lottery the specific bonds to be purchased.  Thus, if rising interest rates or other factors cause mortgage bonds to trade at a discount, home owners can reduce the principal or retire the whole mortgage by purchasing an appropriate mortgage bond at a discount.
This is an example of innovation that would make markets more robust help prevent foreclosures, rather than the types of innovations we've seen in the US, which are mostly meant to subvert regulations. The fact that this has not evolved in the US makes me think two things: One, that the balance of power IS tilted in favor of banks and against the consumer (maybe due to lobbying power, which Adam Smith and other "classical" market economists warned against); and two, that the regulatory framework has created some degree of moral hazard and/or regulatory capture (i.e. banks are taking risks and doing things way beyond what they would normally do because they do not face consequences from the market, i.e. bailouts, or the regulators, i.e. bureaucratic corruption) over the last 30 years.

Thursday, September 24, 2009

Fossil Fuel Subsidies

This graph from David Roberts is somewhat misleading (for example, it's hard to tell if magnitude is measured as radius from the origin or total area and I'd like to see a breakdown per BTU or something), but it has a powerful point: We subsidize "dirty energy" more than we subsidize "clean energy" in the aggregate. Why not, before getting into a big brew-ha-ha over cap-and-trade, remove the implicit and explicit subsidies for making the environment worse-off?

Wednesday, September 23, 2009

Incentive to Die?

I remember a humorous story from Parentonomics about a policy in
Australia (which had been facing unusually low population growth) that
awarded new parents a couple thousand bucks to have a kid during a
specified period (let's say ending June 30 because I can't remember the
exact dates). Well, the story went, there were an unusually large
number of births on during the last week of June that year, and
especially on June 30 (along with a correspondingly low number during
the first few days of July). There were lots of theories about this,
including: (1) fraud, getting doctors to put June 30 for a baby born on
July 1; and (2) inducements and/or cesarian sections scheduled before
the deadline.
Bush (W, not HW) put through a law that would
decrease and eliminate the estate tax by 2010, but with a rebound to
pre-Bush levels in 2011. How did no one accuse Bush of creating a death
panel?!? Wouldn't this promote some combination of fraud or worse,
euthanasia? Part of me says, "Let's leave it that way and see what
happens - it would be a neat experiment on the limits of tax
evasiveness," but that wouldn't be ethical. Instead, something needs to
be done to either make sure it is slowly phased back in, or not
reintroduced depending on your political fancy.

Sleep in the Age of Rational Expectations

From MR:
Lately I've developed a new theory as to when I sleep especially well (in general I sleep well so the variance is not so large).  I believe that I sleep especially well when I end up going to bed at exactly the same time I expect to be going to bed.  On the unusual occasions when I don't sleep well, it is because I have been winding down my body and mind before I actually have the opportunity to fall asleep.  Somehow when the later chance to sleep comes, it is too late for that sleep to be deep.  Or so it seems to my mental econometrics; it would be interesting to measure it.
Interesting, yes. Testable? Hmmm.

Monday, September 21, 2009

Thank you Captain Obvious (Ron Jaworski)

"They [the Dolphins] don't want any negative plays under Coach
Speranno." As opposed to all those previous coaches who were
strategically trying to lose yardage?

Sunday, September 20, 2009

Faith-Based Uncertainty?

From Regent University's graduate course catalog (p. 226):
GOV 601 Quantitative Analysis (3) Skills for quantitative data gathering, measurement, policy analysis and program evaluation. Research and sampling design, surveys, data collection and data reduction and display. Review of basic statistics through multivariate analysis, z-scores, regression through the use of statistical computer package (SPSS), and a Judeo-Christian perspective on the use of statistics.
What? HT: AG.

Just a Boring Note on Sampling....

From Nate Silver at
...[T]he Investors' Business Daily poll purporting to show widespread opposition to health care reform among doctors is simply not credible. There are five reasons why:
1. The survey was conducted by mail, which is unusual.
2. At least one of the questions is blatantly biased: "Do you believe the government can cover 47 million more people and it will cost less money and the quality of care will be better?"
3. ...The IBD/TIPP polling operation has literally no idea what they're doing. ... For example, I don't trust IBD/TIPP to have ... selected ... a random panel, which is harder to do than you'd think.
4. They say, somewhat ambiguously: "Responses are still coming in." ... Professional pollsters generally do not report results before the survey period is compete.
5. There is virtually no disclosure about methodology.