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.