Profits and Poppies?

Economically, it's difficult to understand why opium crops are so substantial in Afghanistan. The classical explanation would be that it's the most profitable use of that land and of those farmers' time. But, there's some research, summarized by The Economist, suggests that ain't so.

Recent research suggests that greed on the part of farmers, at least in
this part of the country, is actually a fairly minor factor in the
decision to plant poppy.
David Mansfield, a researcher for the Afghan Research and Evaluation
Unit, a think-tank, has produced statistics showing that Nangarhar
poppy farmers are rarely the richest people in their communities. Their
profits from poppy are often barely higher, and sometimes lower, than
those from legal crops, particularly where they have to use petrol
generators to pump water to their crops.

So what gives? One clue is that illegal smugglers might be the only ones filling a hole in the capital market and provision of public goods (adequate transport).

Smugglers would visit farms to buy opium. They made loans against
future production ahead of the planting season. Dry opium keeps for up
to two years, so farmers can save it as capital and sell when the
market looks favourable.

Hmmm. Interesting...Basically smugglers are making contracts with farmers for future delivery (futures markets), and the storability of poppy helps make up for the risk involved with poor roads and the inability to get your crop to morket before spoiling.

Reform Model

Instead of letting more models in, why not just more plastic surgeons? Or maybe our immigration policy should be to let more people in with some scrutiny instead of letting fewer people in arbitrarily.

When You Can't Have What You Want, It's Time to Start Wanting What You Have.

It turns out, we actually like something better once we have it. It's called the endowment effect, and it explains my cluttered office. Check it out.

This is Hilarious

Different folks are gonna laugh at this for different reasons: check it out.

The Beginning of WSJ's End

Media bully Rupert Murdoch has begun the dismantling of the Wall Street Journal's center-right pro-market staff and replacing it with his right-fringe pro-business (which is not the same as pro-market) henchmen, much as he did at the Sun. The talented and objective Greg Ip has moved from WSJ to the Economist. Cancel your subscriptions before he renames the WSJ "FoxNews Print Edition."

You Heard it here first

I dunno, maybe someone else has already gone out on this limb, but have a look at this. I'm to cowardly to make it a prediction, but I would not be shocked one bit if gasoline is back to $3.00 within the next year.

Mark it, dude.

June 20, 2008:
............Reg.....Mid...Prem.
Curr. Avg..$4.075 $4.326 $4.482
Yesterday..$4.073 $4.325 $4.481
Month Ago..$3.807 $4.043 $4.188
1 Year Ago.$2.996 $3.181 $3.297

Those Enlightened Europeans!

Before you start thinking the Europeans are all enlightened, read these articles from yesterday's and today's New York Times, and you'll realize just how xenophobic the continent can be. The EU's European Parliament, which is basically set up to manage issues such as trade policy, immigration, and capital flows in and out of the EU, as well as other union-wide policy issues, has decided that it's OK to detain illegal immigrants for up to 18 months. I mean the economic BENEFITS of immigration aside, this is extreme. Many immigrants to European countries never get the right to vote or be citizens, and simply want to earn some small amount of money to send back home. Don't let Lou Dobbs see this story! He'll think it's a new great idea for making use of Gitmo!

It's All about the Children!

This is hilarious:


Study Finds Most Children Not In Favor Of Children2019s Healthcare

Enjoy!

I Told You So

Anytime my students hear me say something that doesn't affirm their bent for supply-sider cowtowing, they think I'm being a biased liberal political stooge, so this post goes out to them.

The Economist is considered pretty objective (this week's cover: "Iraq Starts to Fix Itself"), if not a bit rightish on economic issues. About a dozen times, when asked or when discussing an issue, I emphasized that there is often some ambiguity about the aggregate impacts of specific policies, and even if a policy is more efficient than the competing proposals it is not always the one that stands the test of democratic election cycles. So here are a few snips from an article on the competing proposals, as summarized by the Economist:

On June 9th Barack Obama began a two-week tour to battlefield states, his first as his party's anointed leader, with a big speech on economic policy. He accused John McCain of favouring George Bush-like profligacy by proposing tax cuts he can't pay for. Mr McCain shot back with a speech of his own next day, saying that Mr Obama will raise taxes and unwisely renegotiate trade agreements. Strangely, both of them may have a point.

So, as I've said, neither party has a monopoly on bad economics. The article concludes:

Mr McCain hopes he can avoid crushing deficits with mysterious spending cuts, while Mr Obama relies on varied measures his campaign claims would somehow raise almost a trillion dollars over a decade.
The figures are debatable, but there is one clear difference. Mr Obama's plan would redistribute cash to lower- and middle-income Americans, while Mr McCain's would skew benefits towards the wealthy. That's something voters may find it easy to take a view on.

In other words, the question is much more one of distrubution of economic benefits, not which are going to be greater on the balance of things.

Conscious Rap

I found this a pretty interesting audio from The Economist's "Democracy in America:"



I'm not sure what my take on it is, but it is funny to hear the British host use "gangsta" jargon in parts.

Pension and Protection

This Economist blog got me thinking about the differences between the US workforce in my generation vis a vis the last one.

So, I'm wondering how the change in how we save and contribute to our employer-sponsored tax-sheltered (kinda) retirement annuities affect the politics of trade protection. Maybe it's a stretch but a large part of the argument against trade agreements are thinking of the fifty something worker, many of whom have "defined-benefit" retirements - pensions - vest only after 5 or more years and are based on the tenure of service in the company (often times with 5- or 10-year "milestones" at which the monthly benefit takes a discrete jump). A fair case could be made that these are the folks most affected by the structural shifts brought by trade.

The generation that has followed them, saves for retirment in "defined-contribution" plans. These plans vest sooner, and usually do not require service with a single company over an entire lifetime to make a good retirment. The former plans are designed for liftime service to a company - the latter are designed for a mobile and flexible labor market. Workers who have pensions have a strong incentive to invest heavily in firm- and industry- specific knowlege and skills. These plans encourage worker loyalty, but also create the types of interest groups that would oppose changes to the economy that would render their industry skills less valueable.

I don't mean to say this in a way that "blames" workers because I feel for what their dilemma. They essentially entered into an implicit contract with their firm, industry, and town to keep their job viable while they work towards a pension that they've been promised. It may be stretch, but we've lived to see a decline in the political clout of unions as union membership has declined. As workers become more self-reliant for retirement, maybe there will be less lobbying to put up stumbling blocks to trade.

Consumption Smoothing and "Irrational" Savings

I'm just going to post a link to this, dedicate it to a certain special someone I know (who happens to feel strongly and differently about personal finance) and say nothing more than, "I'm not the only one out there who thinks this way."

Do What you Want to do and Excel at it

There's an old (bad) joke bout statistics (especially averages): They're like bikinis - what they reveal is interesting, but what they conceal is essential.

Statistics reveal that Engineering majors earn more (on average) than Economics majors, who earn more than Business, and Philosophy majors, respectively. But what these statistics conceal is that the choice of major is not random - not everyone has a knack or interest for engineering. In fact the sorting is pretty one-dimensional. As my undergraduate Money and Banking prof used to say, "theres people who can do calculus and people who can't."

That's not the news. What is, as Free Exchange points out, new research shows that individual differences in ability within each major explains most if not all of the difference. After all, an exceptional student in philosophy can go on to a great career as a lawyer.

Here's the bad news for the artsy-fartsies: the research underlying on which the post is based long-run lifetime earnings. So, if you're a philosophy major, be patient. You'll be surpassing your business major classmates around the time your kids are following in your footsteps as philosohpy majors.

Prohibition, the War on Drugs, Zero-Tolerance Laws, and Abstinence

The world is full of perverse unintended consequences in response to government attempts to eradicate markets, even when there is a well-intended reason for attempting to do so (usually to "save the children"). Fewer children drinking, using, driving under the influence or being sexually promiscuous is clearly a good thing. Does that mean that we should advocate for a monolithic policy of prohibition or should we take a more nuanced approach?

We certainly learned this lesson the hard way during prohibition. The prohibition of alcohol led to more crime, and while some individuals may have done without, significantly more folks simply used and produced alcohol more recklessly than they ever would have before prohibition.

There is also considerable dissent against the stupid war we are waging against drugs. This policy has driven the price of narcotics through the roof, created a monopolistic cartel market structure that has introduced an incentive to engage in violence to capture profits and other rents, and created entrenched bureaucracies in government that distort information and lobby for higher budgetary allocations and/or rights to retain money and property seized in raids. (A nice paper on this is Benson, Ramussen, and Sollars, “Police Bureaucrats, Their Incentives, and the War on Drugs,” Public Choice 83 n. 1, 21-45, 1995.)

Zero-Tolernce and lowering absolute thresholds in DUI laws also doesn't work. Under 0.10% BAC laws you've got a window of about 3 drinks before you're over. Basically, it has a divergent effect on use: a few more drinkers will abstain knowing that if they drive at about two drinks they're over the limit, but it raises the BAC levels of other social drinkers who drive after a party because being over the limit at 3 drinks is not much different from being over the limit t 5 drinks once you're caught. My friend Darren Grant has a neat forthcoming paper in Economic Inquiry on this.

If that weren't enough, check out this article from the Economist. Basically, Britain is trying to get kids to drink less by forbidding it, and forcing pubs to show more diligence in enforcing the 18 or older law on drinking. As a result, more teens are abstaining, but their volume of use is on the rise! As it turns out, for kids who were sidling up to the bar at 17, 16, 15 years of age, the old drunks and bartenders actually did a pretty good job of keeping an eye out and keeping them from obliterating themselves. Neat!

Growth, Emerging Economies, and the Leverage in the WTO

From the PBS NewsHour (click the picture to link to video).

Having your Cake and Eating it Too

I'll just post the link. Make your own judgements – I'd like to simply think about it in terms of opportunity costs.

Lou Dobbs, Hoax Victim

He's actually sunk to reporting urban legend as if it is fact. Thanks, Lou, needed more fodder! Check out these mythbuster articles by actual journalists: Seattle Times; Interntional Herald Tribune; The Economist. Wheeeeeeeee! (See Below):

"NO BOUNDARIES" to Sweet Lou's Gullibilitiy

Making the Grade

As it turns out, getting good grades in college is not a tricky empirical question. There is a simple formula:

1. Be smart;
   
2. Work hard.
   

Studies by James Michaels and Terance Miethe (1989, Social Forces) and William Rau and Ann Durand (2000, Sociology of Education) show a convincing relationship between time spent studying and working on classwork and grades. They also show that things like class rank/high school GPA/SAT scores/other preexisting characteristics have a strong effect.

One thing I found interesting is this: verbal SAT scores (satv) may have a stronger impact than math SAT (satm). Check it out (data analyzed using STATA):

Variable Mean Std. Dev. Min Max
gpas 2.797741 .368208 1.787 3.555
satm 584.1852 42.62034 484 730
satv 573.4815 38.59501 507 668
satc 1157.685 67.05358 1008 1330
------------------------------------------------------------------------------
. reg gpas class satm ecbu [aw=n], beta
-------------+------------------------------ F( 3, 50) = 12.71
-------------+------------------------------ Adj R-squared = 0.3986
------------------------------------------------------------------------------
gpas Coef. Std. Err. t P>t Beta
------+----------------------------------------------------------------
class -.125275 .0250027 -5.01 0.000 -.5486035
satm .001759 .0010401 1.69 0.097 .1894219
ecbu -.1364445 .0820951 -1.66 0.103 -.1812849
_cons 253.4883 50.38878 5.03 0.000
------------------------------------------------------------------------------

. reg gpas class satv ecbu [aw=n], beta
-------------+------------------------------ F( 3, 50) = 16.97
-------------+------------------------------ Adj R-squared = 0.4749
------------------------------------------------------------------------------
gpas Coef. Std. Err. t P>t Beta
------+----------------------------------------------------------------
class -.1028173 .0248065 -4.14 0.000 -.4502567
satv .0033683 .0010379 3.25 0.002 .3962096
ecbu -.0308692 .085759 -0.36 0.720 -.041014
_cons 207.4469 50.09281 4.14 0.000
------------------------------------------------------------------------------
. reg gpas class satm satv ecbu [aw=n], beta
-------------+------------------------------ F( 4, 49) = 12.98
-------------+------------------------------ Adj R-squared = 0.4748
------------------------------------------------------------------------------
gpas Coef. Std. Err. t P>t Beta
------+----------------------------------------------------------------
class -.0999089 .0249782 -4.00 0.000 -.4375205
satm .0010047 .0010068 1.00 0.323 .1081956
satv .0030886 .0010751 2.87 0.006 .3632994
ecbu -.0250653 .0859596 -0.29 0.772 -.0333027
_cons 201.1831 50.48664 3.98 0.000

Based on this, a one-standard-deviation increase in verbal SAT (about 38.6 points) increased these students' semester GPAs by about 0.13 points; math SAT was insignificant. Your choice of major does not seem to have a substantial impact, except perhaps on your salary when you're finished.

Finite Simple Group (of Order Two)

For no particular reason, something I got about a couple years ago that needs some new life.

Farm Programs and the Poor in LDCs

Last week there was a good article on farm programs and their focus as part of the Doha Round. I think it's an interesting question – The farm programs are bad, but mainly from the standpoint (in LDCs) that they are second-best solutions to their hunger problems. Export controls, etc. do lower the domestic price and may lead to more affordable staples for the world's poorest, BUT they are by far the second-best way to go about helping those who are hungry and in poverty. In addition to the usual reduction in output and economic distortions, these programs sometimes lead to producers in these countries hoarding of crops to try to hold out against the government and pressure for assistance, as has been the case in Thailand. Therefore the trade negotiations tread a fine line: Removing the trade restrictions is good on average, but doing so without replacing the trade controls with more sensible and direct ways of helping the hungry and poor could hijack what small measure of political support for trade liberalization we may have built over the last 20 years.

Beeronomics and the Terms of Trade

When Mark Thoma was in high school the price of a sixer was $1.25 and the price of gas was $0.25/Gal, so the relative price of beer to gas was 5. Now, the price beer of gas is $4/gal and the beer Prof. Thoma drinks these days is $5.50. I susupect what he drank in high school (Old Style, PBR) is more like 3.60 these days, so I'm going with that here, so now the relative price of beer to gas is about 0.90.

So what am I talking about? Are we better off, worse, or about the same as back then? Indubitably, most of us are better off. Real income has risen, and even more goods can be purchased in the typical household bundle now than was possible in 1971 (partly because many goods didn't exist then). Many households in the US today are 2, 3, or more car/TV/computer households, we eat more more and better foods than we did, proportionally fewer folks worldwide are poor, poverty is less severe, there's less war and other conflict, lower crime rates... you get the idea.

So... on average we have more income to spend on more and better things and we still bitch and moan about a few bucks a week on gas. So now, prices are going up, wages are stagnating, and things are starting to hurt more, but some people are better off, namely those of us who drink beer but almost never drive as a bike-rider, and occaisional beer drinker with a steady job, I'm pretty ok with the changes (my terms of trade have improved as a consumer), considering that the prices of some other things are not also rising rapidly. THE MARKET IS GIVING A CLEAR SIGNAL HERE (for those of you out there who are bitching and moaning but still claim to be pro-market) -- DRINK MORE AND DRIVE LESS (especially after drinking)!

The bigger danger is that fewer farmers are planting hops in favor of corn and other grains - this must be stopped to keep the price of beer down; I think we should get the government to intervene.

Blogging

This link's for you, Atin (and anyone else who wants). It follows along with the ego-hypothesis of blogging (with correlary 1: economists are egotistical pricks).

Ethanol, Food Prices, and More Bullshit

Virginians love to BM&G about how the corn conspiracy and ethanol subsidies are driving up the price of a steak and driving down demand for other locally-produced commodities from beef to coal. I say let 'em - they're just flat wrong.

There's a new study out on the increased food prices we're seeing, as summarized by the NYTIMES (the official summary of the OECD/UN report can be accessed here). The overall impact of ethanol on food price increases seen recently is about 2-3%. So, that loaf of pound of hamburger that went up by about a quarter at the grocery store had about a penny to do with ethanol. Anyway, as it turns out the reason food prices are rising is not this complicated, general-equilibrium of energy, housing and ethanol, but one of simple supply and demand (mostly just demand) in the food market alone. Basically, the reason food prices are rising is because people around the world are busting out of poverty and can now afford higher quantities and quality of food (which, by the way, is a GOOD thing). See, most of the corn in the US goes to cattle feed. Therefore as people get richer and consume more protein, badda-bing! Higher corn prices, which leads to higher plantings of corn relative to non-feed grains (soybeans, wheat, etc.) and those prices rise accordingly.

If you're looking to goat the government for grain prices in the US, look first at sugar policy. Sugar policy affects corn prices much more than ethanol for one simple reason: After feed grain, the highest end-use of corn is high-fructose syrup. Understanding this requires a pretty high-tech econometric techinique: Drink a Coke (you COULD drink a Pepsi and reach the same empirical conclusion, but I wouldn't recommend it), then look at the label. Then, go to Europe, and repeat. The second ingredient on the US can (after H2O) is high fructose CORN syrup; on the European can it is SUGAR. Ever wonder about this? Everywhere else it's cheaper and to put sugar in as the main sweetner in most things, but here it's not because the in the 1930s the us put a quota on sugar imported to the US, mostly to keep CUBA friendly (see how well that worked???).

Now the Sugar quota has a second, indirect effect on prices. You see, sugar isn't just a better way to sweeten drinks, IT'S ALSO MORE EFFECTIVE FOR MAKING ETHANOL! To make ethanol you need to start with SUGAR! In the US, guess what the main ingredient used to make the sugar for ethanol is! CORN (NOT actual SUGAR)! Ever wonder why Brazil is making and using ethanol more efficiently and with fewer subsidies? BECAUSE THEY MAKE IT SMARTER THAN WE DO!

Recycling is Still Garbage...For Now

I've always kinda liked this old article, entitled "Recycling is Garbage" from the NYTIMES on recycling. There's plenty to dispute in such cocktail-napkin calculations of such important stuff, but it hits it head-on (apply directly to the forehead): Recycling is no free lunch. In fact taking into account land prices, alternative uses of resources, and energy burned in recycling, it is usually more costly (even in environmental terms) to recycle than it is to pitch things like glass and plastic. Paper and aluminum usually do better in terms of cost-effectivness and energy use. In fact, given the higher energy use and carbon footprint of recycling we might be shooting ourselves in the proverbial foot.
But, in a long-run sense, maybe doing all that recycling earlier is beginning to pay off. Technologies for actually doing the job are improving and the NYTIMES now touts: "In Economic Terms, Recycling Almost Pays" (keyword: almost). Anyway, it teaches us to: 1. be sceptical of the "free lunch", and; 2. think dynamically and long-run, not short run. (Similar arguments can be made for ethanol, by the way: Initially we were burning more energy to make ethanol than we were getting out of it, now we've tipped that, and it's beginning to pay for itself. However, in the case of ethanol, who are we really kidding to think that it is a best long-run solution?)

Wire Hangers and Rubber Rooms

Sooo, I always like to cite a couple of back-of-the envelope calculations (as well as harder-core ones) about the gains from trade. 6-8 years ago there was something floating around about the gains from trade that put it at about $50-60,000 per job saved. So we could have levied a small non-discriminatory consumption tax on all goods sold (regardless of country of origin), redistributed every cent to those "hard working ... American" (wink-wink) that would have been laid off by the "great sucking sound" and we'd all have a little more than we did with the trade restrictions.

Another story has to do with rubber rooms. Because of labor obligations, most US-located assembly plants for US-label cars "employ" a certain number of workers in rubber rooms, where they essentially drink coffee and... (???).

But check this one out. In the US wire-hanger industry about 250, er, Americans are currently employed, facing competition (mostly from China) and are protected by a tariff. The Economists blogging staff estimates that the cost of the tariff to US dry-cleaning firms is about $212,000 per job saved.

The Energy (Sub)Burble

Check this out from Krugmania... Keep in mind this is about Sydney, not Dallas, but it tells us a lot about the problems of urban planning in the US. Then there's this article about Los Angeles... Sooo, it got me thinking about an energy-economics article from a few years ago in the Quarterly Review of Economics & Finance (I have it in my office but I'm on the road now) that basically said that we are almost completely unresponsive in our long-term capital investments to the current price of fuel, but more responsive to the real historic high price. We only hit historic highs for gasoline a few months ago, so sometime in the next 10-15 years we might be beginning to reorganize our lives to manage the prices we're seeing now (and that's the good news...).

Cool It!

Just when I thought I was saving the earth by taking most of my news from online sources instead of getting print subscriptions to most things, I had to see this article. I hate it when being well-informed about things makes you think carefully and comprehensively about them. There has to be some quick easy free-lunch out there like a gas holiday that will make all of our problems go away...

Canary in the Coal Mine

It's always good to be on our toes and be in this economic struggle of scarcity, but let's not lose our heads. I've been saying it for a while. In Malthus' time of writing his Essay on the Principle of Population, it was that we would run out of the ability to feed our growing population. Then, it was that we would run out of coal in the late 1800s and that we would run out of oil in the 1970s. Now, we worry about Oil and Food, and this week the Economist Magazine urges us to study history more carefully and not go nuts. There is no imminent danger of running out of oil; there is no imminent danger of running out of fuels to run our economies; there is no imminent danger of running out of food. There is a greater risk from climate change than from either of these problems, and we can probably even come up with clever ways of managing through that with some innovations in technology.

Life is good.

No Monopoly on Stupid

Once upon a time there was a debate between certain Republicans and Democrats about a handful of barrels of oil. One side puffed its populist chest out and claimed how much it would help the honest workin' man by lowering the price at the pump. The other side took a careful look at the proposal and keenly pointed out that it would make almost no impact on the world price of oil. Both side seemed to have ulterior political motives at heart. Heard this story before? It took place in 2000 and the debate was over the opening of ANWR in Alaska to drilling for oil. George W. Bush on the one side claimed that releasing the reserve to drilling would push the price of oil down and help good ole workin folks; Al Gore on the other side claimed that it would have little or no effect on oil. Bush was receiving money and political support from the oil lobby who stood to gain from the deregulation of drilling and the subsidized pipeline; Gore was receiving money and political support from environmental lobbies who opposed all forms of environmental damage.

Now the roles are reversed as the debate rages over the strategic oil reserves. Bush is out there claiming that the price would go unaffected; democrats are making wild claims about how much halting the stockpiling of oil will save blue-collar Americans. The release of the oil (or the stopping of its stockpiling) would be mildly detrimental to the oil lobby by slightly reducing the demand for their output; passing the moratorium would give the appearance that the democrats have done "something."

Bottom line: Like I've always said, "no political party has a monopoly on stupid economic ideas." Its corollary is probably that when they stumble on a good one it's either unintentional or for the wrong reasons. When will folks realize that if oil is as scarce as some claim then higher prices are the appropriate outcome?

The Great Contrivance

I thought this article from a few months ago was interesting, and frustrating. People will lobby for anything – even the price of gold. I just don't get it. We don't back our internationally-exchanged currencies with gold because we've seen how it can, at times, put internal equilibrium on a flimsy house of cards, yet we hold gold in our vaults. Still more confusingly, we let the world gold council lobby the IMF, World Bank, and even individual governments to further their own interests and prevent the further sale of sovereign gold reserves (something that would depreciate the market price of gold) - successfully. Some of the things the World Bank and IMF did to try to bring transparency, credibility and market reforms to the countries the lent to was very helpful, but I can't imagine why anyone should give a rat's patoot about gold in a post-Bretton-Woods world.

Cases like this is what lead the "antiglobalizers" to feel as if there's a vast conspiracy against the developing world. When the ideology of the IMF and World Bank changed in the 1980s, it seems like all we really did was trade one form of corruption (one that was known) for another (that was shrouded in "credibility" and "austerity"). The strange habits of these institutions in these areas discredits unambiguously win-win reforms like trade liberalization and distorts public opinion against globalization.

Bill O'Reilly goes nuts on Inside Edition

Normally I try to post things that are more constructive than this, but I needed something fun today. Bill-O going nuts is too much to pass up.

Happy Cows and Bullshit

Seen the Happy Cow Commercials? Happy cows may create better cheese, but the ads seem to imply (no, state) that happy cows come from California, mainly because it's so much warmer on average than it is in Wisconsin (doncha-no?). Don't be fooled!

Numerous studies show that cows are happy at much lower temperatures than humans are. Ideal temperatures for cows in terms of comfort and milk output range in the 50's (the range strictly for milk output is 41-77 according to some studies like this one). Cows are much more burdened by hotter temperatures in terms of comfort because they expend a lot more energy digesting their food than humans (or even cats or dogs), which creates a lot of heat. Cows in temperatures above 80 degrees Fahrenheit produced around 25-30% less milk than cows in much cooler temperatures. On the low end of the scale it seems that the main concern for conditions that really hurts the cows and their productivity are: (1) wind, and; (2) teat frostbite (usually isn't a problem until temperatures drop below single-digits).

Better yet, this is a great example of comparative advantage. Even if cows in Collie-fornya are more productive in the absolute sense, it seems that Wisconsin or Vermont or Ohio would be better-suited for dairies anyway, on the basis of the basic Ricardian model of trade. If California and Wisconsin can both produce either wine or cheese, and California's land and labor resources are better-suited for both, that wouldn't mean that California would ideally end up producing both, or that Wisconsin would produce neither. Even if we concede the point that Cows like warmer climes (which is not clear cut at all), then we would still be better off if California did not try to promote and export its cheese, because there are higher returns for them in the wine sector. In other words, grapes are pickier about cold weather than cows are. And there you have a big bright example of comparative advantage at work.

Have a good summer, kids.

Scooped?

Sometimes it's frustrating for economists. We revel in the fact that we can pin down theoretical proposals in an airtight mathematical argument, and test them with some of the most sophisticated statistical techiniques. Even as we toil in the fuzzy world of "social" science, we push for and challenge the other social sciences to be "harder" in their scientific approaches, and we're just arrogant enough to think that we're better at what "they" (political scientists, sociologists, etc.) do than "they" themselves are. It's not surprising then that "we" get so jealous when one of "them" gets all the attention for saying what we've been saying – studying, measuring and quantifying – for quite some time.

That's why I'm jealous of Fareed Zakaria this week. His feature article this week has the indifference one would normally expect from an economist on the issue of "The Rise of the Rest." The nuts and bolts of it is that when you pose the question of rising China and India, offshoring, growth in Africa, and declines in certain manufacturing sectors of the U.S., the typical economist like myself says "So what?" I would then usually go into some boring, but well-vetted explanation of comparative advantage, non-zero-sum games, obscure empirical facts, and nearly put my audience to sleep.

Then here comes this… journalist, who has his fancy "words" (much like I have my fancy "models") and he gets the limelight. It's disgusting really. We do all the hard work, howl at the moon to anyone who might listen, and in swoops this very bright wise guy and publishes it all in a sexy multi-page spread in Newsweek. But, that's the way it goes. Bottom line: the rest of the world's rise is not our loss. In fact if the rest of the world has greater prosperity and economic freedoms, then the influence of extremist factions will probably wane, which is a win-win. But don't take my word for it – go to the library and read Mr. Zakaria's version – his way sounds better (jerk).

No Trust in the Invisible Hand

People out there seem to have the misconception that Adam Smith had a lot of faith and confidence in the self-interested actions of individuals in the free market. A more realistic way of summarizing the Wealth of Nations, as PJ O'Rourke might put it, is that Smith had even less faith in politicians and bureaucrats. In fact, from Smith's Moral Sentiments it's pretty clear that he trusted a businessman about as far as he could throw one and didn't think that businessmen should be allowed to do so much as have a cup of tea together.

So how do we manage collusion and cartels? The European model usually involved an adversarial process – the government investigates and anyone and everyone touching the misdeed is prosecuted with the full force of the law. The new model, coming from the US and what it has learned from Enron and other scandals involves protecting and helping whistle-blowers. What this may do, more than anything, is help the investigators know what exactly it is that they should be looking for when they go in, which is the lesson now being learned by British regulators.

Getting the incentives right is important, which means that on the one hand regulators need to help and give protection to the informers, but also that the pendulum not be allowed to swing too far the other way. In other markets where Consumer Protection has become involved the incentives have been skewed to the point where frivolous accusations cloud the investigative process and discredit the government's involvement in the monitoring process. Such has been the case in Consumer Protection areas from medical malpractice to spilled coffee.

Dumb and Dumber

Usually, the empirical impact of a policy proposal on relative prices or incentives has at least some bearing on its efficacy. In the case of the Gas Tax Holiday proposed by Hillary Clinton, it doesn't. Simply put, this proposal is a lose-lose. Let me explain.

If you remove the tax on gasoline for the summer, the policy will either reduce the pump-price of gasoline, or it won't. If it does, then by all accounts it will benefit average users by $70, using the most generous estimates of the Clinton campaign (which she even admits to some extent defies the estimates of the "quote-unquote experts" – and that would be spread out over all three months of the holiday). But wouldn't this contradict the other goals of Ms. Clinton's platform? Wouldn't it (among other things) make us more dependent on foreign oil, make the terrorists richer, encourage people to continue driving at their current levels, increase emissions, and create a strain on the federal budget in a time of unprecedented deficits?

But, OK. Demand for oil is pretty inelastic. Maybe it won't affect the price at all. But wait, since the price would then be unaffected, wouldn't that raise share of the end-user price that the private suppliers get, increase the record profits of gas companies, increase the revenues of oil-rich regimes that support terror, have no impact on households, and still create a strain on the federal budget in a time of unprecedented deficits?

In the end, we all lose. Another reason not to vote for a desperate lying woman who thinks she is entitled to the nomination because she stuck by her philandering husband and doesn't even have an economist heading her economic policy team of advisers.

Happy holidays.

The Gains from Trade and Migration

I've always told my class that the gains from trade are large, about ten years ago (dating myself here) people were estimating the welfare costs of trade restrictions in the United States to be about $55,000 per job saved, assuming that the short run job losses literally vanish … forever… It puts a little perspective on the trade gains and welfare losses from restricting trade.

I've always believed the gains from migration to be smaller, but still positive. For example, some studies estimate the per capita gains for native US citizens to be about 0.25%, and a fair argument could be made that migration to the US is much more disruptive to the distribution of income than trade is. What's left out of this calculus is the huuuuuuge benefit per capita to the world on the whole, and to developing countries in particular.

Last week's Economist discusses this issue, citing an article by Kym Anderson and L. Alan Winters. What surprised me was that they estimate the global gains from migration to be much larger than the global gains from trade. The authors cite models that have predicted the gains from trade to be around $300billion per year worldwide. Similar techniques estimate the gains from just 3% of the worlds workforce migrating across borders to be about $675billion per year by 2025. These numbers are mind-boggling, especially if you consider the fact that just 3% of the world population currently resides in a country other than the one in which they were born – with existing controls and restrictions on immigration. So, taking the combined gains from trade and migration, we're basically looking at welfare gains of about a trillion, or about $150 per person per year – a sum that's far from trivial for the 60% of the world's population living on less than $2 a day.

Not only that, but the article mentions that the gains from trade of $300billion may be understating things. Computational models estimate the global cost of trade restrictions to be as high as $2.5 trillion.

Getting Tanked on French Air

Boeing's steamed this week (and for that matter, since early March) over recent developments in the Air Force's contracts for new midair refueling tankers. Basically, their beef is that that the Air Force awarded a 35 billion dollar procurement contract for new tankers to replace the KC-135 (which, as it turns out my father piloted). The subtleties of their complaint accuse Airbus/Northrop (parented by EADS) of insider trading and that there were illegal actions in the procurement of the contract. There couldn't be a thicker slice of baloney in the books.

Procurement contracts for government spending are one of the most common non-tariff barriers employed by the United States and countries in Europe (ever see a state trooper driving a Honda instead of a Crown Vic?). So if they can pitch a fit and claim wrongdoing in some way, they will. I'm a little surprised, however, that they tried to be creative by alleging illegal trading practice instead of invoking the usual "American Jobs" argument (perhaps because Airbus is going to be doing most of the assembly that normally occurs in France at plants in Alabama, USA). This shows some real ingenuity in the lobbying process! What's funny is that if anyone has insider status for such contracts, it's the Boeings and Lockheeds, not the Airbuses and Embratels of the industry.

Export Taxes and Hunger

Last week I lectured on trade policy to my undergrads. I mentioned that the United States Constitution prohibits Export Taxes, and I got a predictable response. "Why would a government want to tax exports?" one clever student asked. I used it (as was my intention) to explain the concept of Lerner Symmetry, which basically illustrates that in terms of relative prices, output and welfare, an export duty is equivalent to an import tariff in the way it affects (damages) an economy. The basic idea is that both of these instruments limit trade and so it doesn't matter which end you limit it from: coming or going. A tariff de facto restricts exports as well as imports. I then gave a couple of examples of how countries use export taxes to advantages in a similar way to tariffs: for example, when the US threatened tariffs if Canada didn't limit soft lumber exports, the Canadians brilliantly achieved the limitation with a tax on exports. The net result was the same as if the US had imposed the tariff, except the Canadian government got the tax revenue instead of Uncle Sam.

The more real answer is that once a politician gets something in his (her) head that something is a good idea for accomplishing some political end, there's virtually no stopping him. No matter how noble the cause, politics can be pretty nasty about finding a way to blunder it, but it's not always their own fault. Developing countries have been applying duties for some time now on food exports, with the goal of retaining greater quantities of food for a hungry domestic population. The issue was discussed in this week's Economist. But the question is: "Does this do the job?" In short, yes, if Lerner symmetry holds theoretically. The whole point behind these policies, and behind the principle of Lerner Symmetry is that the change will not impact the world price much. In effect, in order for producers to continue exporting with the duty, the world price must be able to cover the domestic costs (domestic market price) plus the tax (otherwise, continue supplying the domestic market to avoid the tax). So, whereas taxes on imports increase the domestic price of imports, taxes on exports decrease the domestic price of the exported good. It is exactly this that policymakers rely upon when they impose such a "recipe for trouble" on the economy. Sure the adverse effects outweigh the good they do, but the duties do make food cheaper. And, conveniently for a eggheaded economist like me, they illustrate and rely upon a theorem that seems counterintuitive at first blush.

Basically, the policies boil down to a second-best solution: they do the job, but of all the options that could do it, trade taxes are among the worst. Better would be to subsidize consumption directly, perhaps by taxing non-food goods and transferring the revenues to poorer households in the form of in-kind transfers. The reason the duties are laid on, the Economist correctly points out, is political expedience, but I think that this keen observation oversimplifies the issue. Many countries have extreme difficulties collecting taxes other than those from trade, and many solutions that would be best solved by direct subsidies are often more than inexpedient; they're infeasible. In nerdy terms, there's an important political constraint that the writers at the Economist isn't taking into account. Then again who am I but a bookish economist who only knows abstract inapplicable theories?

Free Trade and the Liberal Bourgeoisies

I blogged last week about two groups cited as opposing free trade. The first were the working class of developed countries – this group is correctly concerned about their own jobs, incomes, families, and livelihoods. Although trade is good overall, it hurts some groups because the gains are uneven, and this group is the most likely to suffer in the short run.

The second group consisted of "liberal hippies" who are sort of caricatured as English professors (no offense intended to the English professors in my own college) and their idealistic young students. Their ideas are romantic, and their ends are admirable and include: reducing global poverty, saving the environment, ending armed conflict in the globe, child labor, gender and racial discrimination (er, reducing them, that is), and so on. Their means for accomplishing them on the other hand are somewhere between self-conflicting and patently stupid because they almost always include imposing trade restrictions on countries who appear to be behaving in an unsatisfactory way or tying these issues to trade negotiations. Oh, what a tangled web they weave…

Let me start though with the empirical evidence on such issues:

Poverty: With a few exceptions, trade has been found to alleviate poverty in most countries that are "open." Viet Nam is a good example, where textile industries boomed as a result of trade, which was paired with the adoption of better technologies in the rice sector and a win-win or poor families. Here's another story from NPR on China, and a complementary piece, also from NPR. It's an interesting tale of factories in China shutting down, which seems sad at first, but digging deeper, much of the jobs lost are due to the fact that labor markets are becoming more competitive, workers are seeking jobs with other firms, and wages and labor standards are increasing.

Environment: The effect of trade on the environment is tough to pin down. The only thing that can really be said is that assuming trade leads to greater productivity, higher incomes and a "growth spurt" in developing countries, then it will also lead to increased demand for energy resources, and put greater strain on the environment. There are two problems with this proposition. First, even if it is valid, liberal hippies have to concede the point on poverty to make it true. If trade leads to growth and increases household consumption of carbon-emitting fuels, then it is probably because they are less poor. To restrict trade would be to deny poor families the opportunities that greater wealth brings and we would be inflicting poverty on 60% of the world's population in an attempt to put a band-aid on environmental harm. Second, the proposition above assumes that with growth these economies will stupidly continue to use the same harmful technologies and not adopt cleaner ones. Even China has recognized that they need to resolve this issue, with an increasing number of "zero energy/zero emissions" skyscrapers being built and carbon capture technology being better investigated.

Child Labor, Social Issues, etc.: Globalization brings these issues more to our attention than anything else. These things have always been problems, but they have been greater problems in closed countries, and in poorer countries. Even the United States and Britain, when they were first industrializing, struggled with problems of child labor and various forms of wage and employment discrimination. These problems tend to be more effectively alleviated by extending economic freedom, which is what openness to trade does, not denying it, which is what restrictions do.

A good book on the "human face" of globalization is In Defense of Globalization by Jagdish Bhagwati. It should be required reading for anyone considering opening their pieholes on the topic of trade and globalization.

It's actually going to be a fun week – I see two good articles on trade and globalization in this week's Economist, so you'll get to hear my thoughts on them.

Bang

Following the Market

Prices serve their purpose! If you want people to conserve gas, let the price go up. (Further, some research suggests to let it push past historical highs if you really want changes in fixed investments like automobiles and furnaces, etc. to make the conservation behavior more permanent.)

Check this out from the New York Times. America's Biggest news publication, USA Today, has stopped following the campaign busses on the campaign trail. Which is what economists have been saying all along – if oil is truly scarce (or costly to the environment) then the price should be allowed to climb to let the market ration it to valuable users. In this case we get a double-benefit: less gas consumed and fewer voices chattering about the election! Yipee!

Bang

The Chasm between Trade Economists and the Public

Arrogant economists (myself included) too often talk down to the working public about the gains from trade. Take this, from a New York Times Article by Gregory Mankiw:

NO issue divides economists and mere Muggles more than the debate over globalization and international trade. Where the high priests of the dismal science see opportunity through the magic of the market's invisible hand, Joe Sixpack sees a threat to his livelihood. This gap in perspective grows especially wide whenever the economy experiences short-run difficulties, as it is now.

Now, if I just lost my middle class job, and met this guy in a bar, I'd probably call him an asshole and punch him in the nose. It points out two things about economists: 1. We are arrogant S.O.B.'s, and; 2. We have an awkward sense of humor. I think his point would be more well-taken if he were more deprecating of economists, like so:

NO issue divides pinheaded economists and working class heroes more than the debate over globalization and international trade.

In either case, the globalization debate is trivialized by viewing it this way. First, there are multiple groups in opposition to trade and outsourcing. First you have the "working class heroes" who work hard, earn their keep, and view their jobs as under attack. This group tends to be socially conservative, vote republican (especially as the influence of unions has waned in their ability to prop up democratic candidates) have 2.2 kids to worry about, and be influenced by their own interests (with some help from Lou Dobbs). These folks want a better life for their children. Secondly, there is the "liberal hippie" crowd. This group opposes globalization for a diversity of reasons including a genuine concern for workers in foreign countries, poverty, the environment, women's rights, genocide, public health, and so on. This group tends to be pretty well educated, socially liberal, vote democratic, not have kids, and be influenced by English and Sociology Professors.

The arguments against free trade are not stupid or ill-informed, but on the national stage they rest on two common logical fallacies: 1. The fallacy of composition, and; 2. The "post-hoc ergo propter hoc" fallacy. The fallacy of composition is basically arguing that what's true of part of the economy is true of the economy at-large. In other words, it is a poor argument to say that a declining steel sector means a declining US economy, or that job losses in one area mean job losses in the aggregate. The second is the fallacy of assuming that correlation implies causation. For example, we trade with China and I lost my job does NOT imply that trade stole my job (it also doesn't mean that I won't find a job doing something else, or that my wages must fall).

Which group has more valid concerns, and ones that are better-supported by economic theory and empirical evidence: the Joe Sixpacks, or the English Professors? Well, as it turns out (and as much as I HATE Lou Dobbs), it's the Joe Sixpacks and their hero, Lou Dobbs. Let me set one thing straight: TRADE IS GOOD – THE GAINS FROM TRADE ARE POSITIVE IN THE AGGREGATE AND ON A PER-CAPITA BASIS. But, the distributional consequences of trade (and ANY major change in policy that impacts relative prices for that matter) are severe and the negative effects (though "small" in the aggregate) are highly concentrated among a relatively small number of people who bear none of the fault for their situation. But these consequences usually only last for the "short-run," and workers who seek employment in expanding (export-oriented) sectors can sometimes put themselves in a better position than the one they were in before the layoffs, but not always.

With trade, low-skill wages may fall in a country like the United States even in the long run, which is unfortunate. And it would be heroic to ask the Joe Sixpacks to sacrifice their own well-being to raise the living standards of people in China or Indonesia. But the skill intensive goods (and services) that we export will more than compensate and we may be able to subsidize low-skill wages to compensate for the losses. In addition, the impact of offshoring on wages (even with the goods simply shipping back to WalMarts in the US) is not clear. If the offshoring is able to reap gains in the form of scale economies in a vertically-integrated global supply chain then wages in the US may rise.

Diamond-Water Paradox, Revisited

How much diamonds cost relative to something as essential as water is one of the oldest puzzles in economics. The simple answer at first was scarcity – diamonds are scarcer than water, right? Well, that's not the whole picture, because the diamond market is riddled with a small number of people willing to pay a whole heckuva lot for a really pretty rock, all water is pretty homogeneous, and the diamond market itself is well-controlled by the DeBeers cartel. What's more, scarcity or not, not everyone is willing to pay even amount of their income for a diamond, whereas they would gladly give their own lives for more water.

I've blogged before about ethnic conflict and economic incentives (new path to victory and economic development in Iraq), and I kept wondering about some of the ethnic conflict and genocide. Basically, I'm running out of examples of conflicts that are purely ethnic in nature – the only one I can come up with is Palestine.

While most of Africa's famous conflicts and genocides revolve around diamonds and the high rents that can be captured by controlling their extraction, and much of the middle east fights over oil, some places have been a bit more difficult to understand. The answer might simultaneously explain their underdevelopment, difficulty developing institutions, and propensity for conflict. What might turn out to be the case is that they aren't really fighting over ethnicity or differences in traditions, but they're fighting over water, that essential resource (and arguably "public good") that every agrarian culture needs to break out of the Malthusian Trap. The sides of the fight are simply lining up on ethnic lines, which is interesting enough, but won't contribute to a solution (and neither will the military might of the US and Europe). By focusing on ethnicity instead of economics, we make the mistake of patching the problem with a band-aid (at best) by policing the conflict rather than driving to the root of the problem.

Clearly I've done some over-simplification of the problem here, but although the problems of the moment are complex, the solution is simple – water is coming at too high a price.

Not Institutions???

I was baffled last week when it was suggested that incentives and institutions mean very little in struggling economies because of some sort of genetic selection bias. How bout this from the WB, posted on the economist: http://www.economist.com/daily/chartgallery/displaystory.cfm?story_id=10835590

Institutions don't make the difference? Perhaps a handful of ability bias (maybe harsher conditions in Britain stirred innovation and made it more difficult to produce surviving progeny for low-ability low-income types – that would be somewhat consistent with the story). But, it's no secret that ability, reward for merit, and success can generate a virtuous cycle – successful entrepreneurs and a growing upwardly-mobile middle class creates demand for better institutions which fosters growth.

Incentives don't matter? I'll ask the question I posed over lunch: Why does corruption WORK then. Why would a bribe in these countries (which are just genetically predisposed to value leisure and be less patient) WORK in greasing the wheels to accomplish anything? You could MAYBE make the argument that you're paying for people NOT to work, but really? People DON'T work on a constant basis; that's why stuff doesn't get done to certify business licenses, zone, approve loans, enforce contracts, etc. That's why it fails.

Cocky Economists

I perused some quotations of econmists recently, and there were some interesting ones here's one from JM Keynes:

"If economists could manage to get themselves thought of as humble, competent people on a level with dentists, that would be splendid." The Future, Chapter Five.

Here's a related quote from a journalist for the KC Star (which I have to credit to Adam McKinnie as well because he signs his emails with it:

"For the person who stands steadfast in the face of life's big questions, the movies or music or painting or poetry is nothing more than a pleasant diversion, something to pass the time. The person who is rock solid in his or her beliefs, who never battles with doubt, who feels he's on the one true path and sees no point in exposing himself to the thoughts of others -- that person has no need of art. That person should buy a bass boat." -Robert W Butler, KC Star

I think the world is telling me to shut the hell up for a couple of days.

Bang!

Are We All Keynesians?

This week, The Economist has an Economic Focus article on Keynesian stimulus. In 1971, Richard Nixon, the former budget-hawk, strident anti-communist, and all around grumpy conservative, said, "I am a Keynesian now." To put his remark in context, Nixon's 1971 statement of faith was an eerie play on a 1965 headline from (what most of his Republican supporters would call) a liberal commie rag (Time Magazine) stating "We are ALL Keynesians now." In fact that headline was merely a quotation of Milton Friedman, monetary economist at the University of Chicago, and author of the anti-interventionist treatise, "Free to Choose." I guess the implication was that here was the last bastion of conservative economic thought, conceding that the Keynesian approach had won out.

But before long, supply-side ("cost-push") inflation (mostly from oil prices) created a resurgence of classical ideology favoring low taxes, balanced budgets, and laissez-faire. And this new blood in the field of economics, led by the likes of economists Robert Lucas, Robert Barro, Thomas Sargent, Arthur Laffer and journalists Jude Wanniski and Robert Bartley, had a valid point about the long-run implications of Keynesian policies. In fact, the Supply-side movement got its inspiration, not from disdain for Keynesians (although this was not wonting), but from the Austrian school of thought and Joseph Shumpeter (who predicted the eventual collapse of communism in the 1930s). This school of thought was acutely aware of the importance of politics and institutions in the efficacy of any type of economic system, but generally supported market capitalism. Their political voice was Ronald Reagan, at least rhetorically (most people debate how "conservative" Reagan really was – he ran humongous deficits, and pulled unprecedented amounts of executive "discretionary spending" out of congress).

Now, we've come full-circle. Clinton (William Jefferson) signed entitlement reform, balanced the budget, began talking about "market incentives," and promoted free markets through globalization and the WTO. For him it was a luxury, for the economy was doing well through no fault of the government, yet he deserves praise for not screwing it up. "W" did his part for the conservative cause by lowering taxes, but has done very little to balance the budget, promote market competition, or improve transparency and independence in the bureaucracy, all of which "true" supply-siders would say are as essential as tax cuts themselves for promoting long run economic health.

So where do we stand on the intervention issue? Does Keynesian intervention "work?" Yes. The short run is important, from both an economic and a political perspective. Intervention can smooth the business cycle and ease the pain of recessions, but not as much as the "old school" Keynesians thought, and it is usually poorly implemented, as The Economist points out. Two aspects are especially key: Timing and Targeting. Often times fiscal policy fails (or does more harm than good) because the political process cannot respond in time, and the "stimulus" hits as the economy is already recovering on its own. This causes the economy to overheat and produce inflation. In addition, governments need to have the discipline to reign things in during a boom. This usually doesn't happen because spending and other interventions create "rents" for interest groups and entrenched bureaucracies, who then lobby and pressure to have these benefits continued. Good targeting requiress that spending should be distributed in a way that maximizes impact. This is a political hornet's nest: Is the "right" target one that creates private sector externalities such as infrastructure and public goods, or is it one that eases the pain for workers and families impacted by the downturn? So, I'll leave it at that, and hopefully each of the 3 readers that see this might have some thoughts.

Bang!

Income Inequality and Statistical Lies

The NY Times (of all publications) is making the case this week that income inequality ain't so bad, and the Economist has latched on in its free exchange blog. (Some of my readers might be shocked that a pinko-liberal-hippie-commie rag would say such a thing. Personally, I like the NY Times, and I think it's a heckuva lot more objective than some of the alternatives out there, while still actually saying something.) The basic case is that household income statistics don't tell the whole story, and that's true enough. Their answer: consumption statistics, an equally silly figure. They note that among the bottom 1/5 of incomes, consumption (on average) is about twice their taxable income. So what? If retirees, students, recipients of government transfers, and the disabled are consuming more than what they report as taxable, isn't that kind of the point? Should we just tear down programs so the statistics will better conform with the "true" extent of income inequality? Hmm. In addition, most of the disparity in the consumption averages versus the income averages comes from change in net wealth. All it really takes is a handful of really wealthy retirees who earn nothing and spend a million dollars to throw that part of the statistical accounting totally out of whack.

Basically, what I'm saying here is that you can't just look at income, and while consumption may be a better measure of welfare for "most" families, you can't focus on that either. Statistically, the means don't justify the ends (of the distribution). In this case, you have to treat zero-income households differently (in statistics we call it "censored" data), which means you have to actually do some dirty work with the data.

Bang!

Counting at the New York Times

Does anyone find it a coincidence that the NY Times is pretty much the only major news source that has a way of "counting" delegates earned by each democratic candidate so that Hillary ends up ahead of Obama thus far? CNN, NBC, and the AP all have Obama in the lead in some fashion, but the Times seems to think that some of the caucus results don't "count" yet.

Obama Defeats Clinton!

It's over! The votes are all in! Obama defeated Clinton this week. Obama defeated Clinton with his Audacity of Hope – Bill Clinton… in the Grammy's I waited a bit too long on that one, but it's all in good fun.

The Incentive of the Stickk

I've got plenty bugging me this morning, as I learn of new bits of stupidity surrounding the credit crunch and bond market. I want to, instead, focus on a lighter bit from the economist this week on incentives to keep yourself to your own everyday commitments. Then-MIT Economists John Romalis and Dean Karlan (each has moved on - to Chicago and Yale, respectively) wanted to lose weight. So each set a goal, and if one made the goal and the other didn't he had to pay a hefty $10,000 fine; if neither made it the one farthest from their goal had to pony up $5,000.

So they brought the idea to the masses: http://www.stickk.com/ lets people put their money (or simply their pride) where their mouth is. All monies go to charity (if you really want to make it an incentive, choose a charity you don't particularly like such as an opposing political party). The catch is that you have to have a credible monitor who will report you when you fail and you should make sure what ever "stickk" you choose, it is sufficient to motivate you. We should remember the example from Steven Levitt's Freakonomics where daycare companies charged a fee for late pickups... and tardiness increased, proving that pecuniary incentives can sometimes be weaker than our own consciences.

Bang!

The New Path to Victory

The Pentagon is revising its plan for "winning" military engagements around the world. An important part of the new plan is politics: "The most important tasks we are doing in Iraq and Afghanistan are building host-nation institutions, including security forces and governance. We need to attract the very best officers into these specialties to be successful at these tasks,” said LTC Yingling, a vocal internal critic of current tactics. The generals for their part are listening to some of the discussion: I would propose that more discussion is needed, because there is little evidence that strong governance and democratic institutions can lead to moderation, compromise and economic freedom.

One thing that is clear is that a military presence is insufficient in ensuring that the Iraqi and Afghani people are able to support themselves. This has lead to the conclusion that a political solution is needed. It is argued that political freedom and democracy are a necessary condition for stability and prosperity in the long run. But, while this may the case, basic economic needs must be met. Our experience with "transition projects" such as those undertaken in Eastern Europe have shown that democratic institutions in the absence of economic opportunities in the private sector fall flat on their face. In short, people could give a damn about democracy if they feel that the result will fail to provide them with the opportunity of the "pursuit of happiness." Corruption and ethnic divisiveness all qualify as examples of things that can erode these opportunities. Furthermore, oil profits and other assets of the state emerge as focal points of infighting which democracy cannot solve by itself. What is needed is a strong judiciary, which is fair and blind to race, ethnicity, or politics, and this takes time to develop.

I fear that the plan that may result will resemble the strategies brought to Russia (which our Washington Consensus fouled up roally) rather than the slower grassroots approach taken by Hungary, but it may be too late. The disintegration of the rule of law, as well as the laws themselves has left a vacuum that cannot allow the much-needed private economy air to breathe.

Economic Development in Iraq

Yesterday, VMI hosted Hon. Robert M. Kimmett, Deputy Secretary of the Treasury to give some "remarks" about the Treasury's involvement in economic development in Iraq. His speech was dignified, and well-written, but clearly had been vetted for reasons of security, and probably politics. He remarked how the Treasury has taken an elevated role in helping develop Iraq economically, as our military helps them remain secure militarily.

One important issue in the development of Iraq is the role of oil and natural resources, and the risk of contracting a "Dutch Disease" or "resource curse" whereby profits generated by high prices and favorable terms of trade in the resource sector for exports essentially "crowds out" private investment in the manufacturing sector. So, when we met, I asked him about it whether this was a risk for Iraq, and answered, "no…" and went on to list a number of sectors in which Iraq has seen substantial progress. They included (in no particular order): the construction of roads, the building of schools, hospitals, and agriculture. But, with the exception of agriculture, sectors mostly represent "public goods," and most countries for which the resource curse is applied DO see impressive development in the provision of these public goods. Examples include Dubai, Saudi Arabia, and even Norway.

What is more troubling is how this economic structure might contribute to perpetuation of ethnic tensions. Put in broad terms, when there are factions in a society that identify on ethnic grounds, violence and tensions tend to arise on two fault lines: (1) they arise on the basis of control over the rents received from some strategic resource, and; (2) the ability to control the provision of public goods and confiscate their use for your own faction (and, exclude their use from the other).

The State of Trade in the Union

Mr. Bush, like a number of other closet isolationists out there called tonight for us to "level the playing field" with respect to trade. Essentially what he means by this is that we should negotiate trade agreements and push other countries to open their own economies to us before we'd be willing to open our own. I think that this is a good idea in principle, and it is a well-documented fact that developing countries (those "cheap labor" countries Lou Dobbs reviles so) have higher levels of trade restrictions than the US and other high income countries. However, making the ultimatum that we will not open if you do not match us misses two important points: First, trade is not a zero-sum game and even unilateral openness improves welfare both at home and abroad, and second, his insistence that developing countries reciprocate ignores the historical foundations of GATT (now the WTO) and the provisions and principles of the treaties on trade entered into by the US since World War II.

I'll pass on the virtues of unilateralism versus multilateralism, because it will bore those who have read past posts on trade. The basic history of trade restrictions in developing countries goes roughly as follows. A lot of people rightly worry that export-biased growth can lead to lead to a secular decline in export prices (a deterioration in the terms of trade), especially for developing countries whose comparative advantage is typically in primary commodities like sugar, coffee, bananas, oranges, or even oil (before OPEC). This deterioration can lead to a welfare reduction for these countries, even when real output (physical quantity of goods) is increasing. This is the basic "Prebisch Thesis." It was thought that restricting trade, and therefore substituting industrial imports from rich countries for domestic production, would help in the industrialization and development process. It was a fancy version of the old "infant industry" argument for tariffs, but it was much more convincing and coherent because the Prebisch Thesis was well supported by empirical evidence. But as with the old infant industries, these babies essentially never grew up. In addition one thing that was neglected was that growth (even in a primary commodity sector) can have the potential of freeing up economic resources to expand and diversify the economy. The eventual result, in the best case scenario, can create enough momentum for a developing economy, that auto makers in India eventually begin outsourcing to the US and the UK (which actually happened a couple weeks ago, by the way).

Bang!

This Little Piggy…

For the second year in a row, President Bush is on the warpath over "earmark spending" commonly known as "pork projects." These add-ons are frustrating and are a nice straw man for a grouchy executive. Yet how significant are they?

Earmark "pork" spending was about $17 billion in 2007; the federal budget deficit was $450 billion, give or take a billion here or there. Discretionary spending is budgeted money that the President negotiates into the budget and over which he (or perhaps she at some point in the future) has discretion. In 2000, federal discretionary spending was about $584 billion; by 2007, it was $1.05 trillion – George Bush, defender of small government has almost doubled his own personal corner of the budget, according to the Economic Report of the President. By contrast, Bill Clinton, that tax-and-spend liberal, entered office with discretionary spending at $531 billion; when he left it was $584 billion. That amounts to a 12.5% increase in 8 years compared with Bush's 90%+ increase in just 7.

Mr. Bush says he favors workers and small business, yet the combined budgets of Commerce, Labor and the Small Business Administration fell (in nominal terms) from $18.3 billion to $17.8 billion. Facing threat from climate change, wildfires, and rising energy prices, the combined spending on the Interior, Energy and the EPA went from $33.8 billion to $23.5 billion. Of course the 800 point elephant in the room is international discretionary spending, which is largely going to the war in Iraq. I've consistently believed that regardless of what you believe about the war in Iraq or the global war on terror, I've never thought that Iraq was the theater that gave us the most "Bang" for our federal buck – I still do, and the explosion in discretionary spending underscores that point. I'm not saying that I disagree with Mr. Bush (and other tax-cutting, big-spending republicans like Richard Nixon and Ronald Reagan) in principle that smaller government is good. Rather, I'd say that I want conservatives to start being true to their rhetoric.

Be Cheery

Be cheery, says The Economist magazine. Extreme poverty is plummetting world wide. I agree.

Marriage, Outsourcing, and the Gains from Trade

Here's a fun post from Friday's "Free Exchange" blog at www.economist.com. It talks about the "old days" marriage based on specialization and domestic division of labor: it turns out there were economic gains from the chauvanistic structure of men bringing home the bacon, taking out the trash and fixing the car but women staying home with the kids, cooking, and cleaning house. People got married, according to The Economist, and real-life economists Betsey Stevenson and Justin Wolfers of Penn, to exploit gains from trade and specialization on the production side.

But now we trade more. We outsource a lot of responsibilities, such as child care, car repair, and food preparation (people seem to eat out a lot more than my parents did). I have a trade deficit with my mechanic, but am I worried that his shop will become all-powerful and gradually begin to overtake and crush my very existence? No: as long as the economic value of what I produce is about the same as the value as the economic value of what I purchase, things will peter along allright. So what's the value of families and spouses (try not to chuckle, married readers)?

Well, the above-referenced authors boil it down to "complementarities in consumption." Actually, they are more "externalities in consumption," because they are explained by the fact that somethings are just more enjoyable with a partner or group. In other words, we get married, now more than ever, because we like it and because we like our mate (stop that sophomoric chuckling!).

But I think there's more to it. Yes, all of the things above are great things, but why did we evolve this way and what else has it done for us. First, things probably evolved this way because our incomes were rising over the last 200 years. With higher and higher market wages and smaller and smaller family sizes, the benefits of market production began to tip over the benefits of remaining "self-sufficient" in "home production," so women entered the workforce in droves during the 1970s. Second, it's made our lives better, on the whole. Amazingly, labor markets have absorbed women who "immigrated" into the labor market and managed to sustain wage growth. Finally, life is somewhat less risky for women. They are no longer as beholden to their marriage contract for their economic well-being (in terms of income) because they have marketable skills. So, if the louse cheats (or something tragic happens) he's more expendable.

Globalization and Syphilis

This article from the NYTimes Caught my eye. Basically the celebrated discoverers of the New World are partly to blame for the 1494 epidemic of syphilis in Europe. Similar issues are posed today with bird flu, HIV, and so on. It's an interesting point on the fact that "globalization" can have certain externalities, especially in the context of the environment, public health, and national security, especially when it comes to the free movement of people (in terms of tourism as well as immigration). But should this news reinforce or support our "agorophobia" (an interesting term referring to a fear of "going outside" or "fear of the marketplace") about trade and globalization? Heck no! It means we should attack the root of the issue instead of trying to avoid it through restrictions, if you asked me (not that anyone did or will).

Free Markets

For anyone who thought free-market economics was just a pile of crap...
http://cityroom.blogs.nytimes.com/2008/01/10/a-pay-toilet-opens-no-need-to-hold-everything/

Krugman Double Take

Today, we have proof that Krugman is losing it (and let me preface this by saying that I have the utmost respect for Krugman's economic work and revere him highly):

His column says we should "respect" those who "worry" about trade. I disagree, because most of the "worriers" do more than worry-- they also monger fear, distort facts, and advocate protection (like my old bud Lou Dobbs).

But here's his blog yesterday. He's saying that basically saying that the only reason that the housing snafu hasn't wrought recession and despair on the economy is... (drumroll).... TRADE!

So, we should respect people who worry about trade, but trade is the only good thing going for us? Is that anything like being on a sinking cruise ship and worrying about the safety of the life rafts?

-Bang!

Interesting USITC Dispute

Just an interesting tidbit: A Korean company (Samsung) files a complaint with a US bureaucracy (the international trade commission) over unfair trade practices by a Japanese Rival (Sharp).

Populism without Borders

I'm often dismayed at the "populist" opposition to openness to trade, migration and FDI flows. The Free Exchange Blog that I linked to in Thursday's post hits on the point of what exactly is populism. It defines populism as a ideological movement "of" or "for the 'people'." Usually "the people" represent some under-enfranchised group (the middle class or poor) whose interests are often framed to be in opposition to those of the "elite." It cites James Madison economist Barkley Rosser's charge that Lou Dobbs' brand of populism is, essentially, "economic nationalism for the poor." This is the point that I want to touch on, because it raises two important questions about the tide of protectionism that has ebbed in recent US politics.

First, who are "the people" of the populist thought? The Free Exchange authors note that in the origins of the populist movement, there was debate whether the populist movement would be inclusive of blacks, or if "the people" were exclusively white. Today the debate extends to immigrants, both legal and illegal, both present and future. Many "populists" today would like to slam the "Golden Door" of immigration shut, arguing out of concern for the working poor here. But, in effect, the working poor they are most concerned about are only the native citizens. Many economic free-traders are criticized from the left for pandering to US corporate interests to the demise of the American "middle class," or at the exploitation of the poor abroad. Yet, it is precisely out of concern for these two groups that free-traders are out there fighting the good fight.

This brings us to the second issue, which is one that I have discussed several times: Who gains from open-door policies. Abroad, the preponderance of the empirical studies suggest that trade and foreign investment benefit the poor, especially when a country's labor force is free to move internally. China has been criticized as a case where openness has failed to benefit the poor, but the primary reason it has not reached the rural poor in China has to do with how the Chinese government allocates spending on public education, where it authorized foreign investors to build production facilities, and its tight restrictions on the internal migration of labor. So, we free traders fight the free trade fight, in part, for the poor living in less-developed countries.

On this side of the border, the main groups that can be shown to be harmed by either free trade or by immigration are those without a high school education or its equivalent, not quite the lower two quintiles (40%) of the labor force. I would not suggest for a moment that we should not be concerned for these Americans. However, those truly in the "middle-class" quintile (40th-60th percentile) gain, as well as the upper and upper-middle class. In addition, the gains to these groups far outweigh the losses to the poor. Some have suggested that programs could be set up in cooperation with local community colleges to help these adversely-affected Americans acquire skills in export-oriented or non-traded sectors. They have even proposed that the programs could be entirely paid for from the gains accumulated by high value-added sectors and firms, with a wage replacement stipend toboot.

The main point I've tried to make the last couple of days is this: One can be both populist and in favor of borders that are open to trade in goods, sevices and factors. This is one point that has been made by Columbia economist Jagdish Bhagwati. In addition, even if we do oppose immigration, and especially illegal immigration, we have to come to terms with the plain fact that they are here, deserve to be treated with decency, and (along with the poor still living in the countries they come from) deserve to have some inclusion in our populist agenda.

Populism at Home

I saw this on The Economist magazines's blog, Free Exchange. I think there are a couple of debates here: (1) What is the role of "populism" in a democratic free enterprise (market) economy? (2) Can one be "populist" (of the people) and still be pro-globalization.

First, about the tides of populism in America. LOU DOBBS DOES NOT OWN AMERICAN POPULISM. There is a rising tide of populist sentiment in the U.S., and not all of it has the nationalistic xenophobic venom that Mr. Dobbs spews out. Ironically, some of it is coming from the elite (which is odd since the most traditional forms of populism embrace the masses by rejecting the elite). In fact, there is rising tide of "plutonomy" among the elite and among traditionally conservative economic journalists, like George Will (see, for example, this column by Mr. Will). Instead of touting the role of the elite as savers, investors and engines of economic growth, these elites and economic conservatives tout the role of the wealthy in promoting charity and helping the poor. With a smilar irony, I will argue over the next couple of posts that "populism" or promoting the interests of the people CAN be (and often is) mutually compatible with markets, openness to trade, and pro-growth policies, with some caveats.

Now, what is the role of populism in a free market democracy? This is an interesting point because many of the neoclassical school of economic thought talk about the optimality free markets, ignore the politics of democracy (or any other system for that matter), and scorn populist ideas. These ecnomists are right to advocate free markets (most of the time), but their naivity to the political constraints makes them blind to the important questions of income distribution that affect the political feasibility of "optimal" pro-growth policies. (In fact, neoclassical models are fundamentally flawed in this regard because they focus on the "representative agent," or essentially the "average" citizen or mean. This is one reason why their models do so well emprically.) In addition, timing, sequencing, and distributional consequences, as it turn out, all matter. Quick example: from 2000-2006 the US promoted policies that neoclassical economists supported as pro-growth. Real aggregate output increased. Real per capita output increased. Shouldn't this have been good for the "growthies?" However the real median household income declined by 2.1 percent. The middle to lower half of the population sank as the rich took off. Populism thrived. Mr. Bush, meet Speaker Pelosi.

Next up: "Populism without Borders."

Property Tax Pinch

Got this off the AP wire. On the one hand, I feel for people who have lived in a house their whole lives, and now are unable to afford property taxes. On the other hand, what about folks who wouldn't mind paying market value for it, and can afford the taxes? How about this for the solution? I've heard of child sweatshop labor, but I guess we've decided to turn that on its head! Discuss.

-Bang!

Climate Consensus Busted? - Dot Earth - Climate Change and Sustainability - New York Times Blog

Climate Consensus Busted? - Dot Earth - Climate Change and Sustainability - New York Times Blog

This is an interesting blog article from the NYTimes, dated yesterday. The interesting thing about the article is that it questions whether studies that "debunk" whether humans cause global warming may not, in fact, be anything more than normal dialog among scientists. Basically, such studies, such as those compiled on Senator James Inhofe's website on climate change, is nothing more than the usual dialog that takes place in the academic community on a subject that may not be fully vetted. By definition forecasts on climate change 30, 40, 50 years down the road cannot be fully vetted because by the time we discover the "truth" it may well be too late to do anything to "undo" whatever past mistakes might have been made. Basically, scientific fields propose new ideas (new ideas are good, by the way), test them as best they can, and if the methodology and conclusions are basically valid, it gets published. Then, others in the field (some of whom may even agree with the basic conclusions) pick at the edges of the theories, methodologies, and conclusions for the slightest inconsistencies, carving their own niche in the bigger picture. Still, the basic theory will remain in place until a better theory topples it. Furthermore, most of the picking fails to mount a replacement theory that unifies the known, valid empirical findings with an alternative explanation- the preponderence of the conflict is at the fringe of the debate: humans might not be a conclusive cause of the problem (empirical findings are seldom 100% conclusive), but no one has forged an alternative explanation that amounts to much more than conjecture.

Global warming is a problem. Left unchanged it will present huge costs on sustaining human life. The earth will continue to exist without us if circumstances become catastrophic. Curbing global warming is also costly. We can probably live with the consequences of spending resources on curbing climate change, even if they turn out to be unnecessary (making a "Type I" error). Can our children and grandchildren live with falsely assuming that we can continue on as we have been (makin a Type II error)?