EconLog
Bryan Caplan and David Henderson

You can take the boy out of Canada, but you can't (completely) take Canada out of the boy

As a U.S. federal employee, I'm going through a security clearance for the first time in years. The guy who came to interview me a few weeks ago seemed particularly concerned about my Canadian connections and wondered why on earth I would want a Canadian passport. I told him that it seemed like a good idea. He then asked me--I can't remember the exact wording--whether I considered myself an American. "I'm 98% American," I said, "and 2% Canadian. The 2% is when Canada plays the U.S. in Olympics hockey." [Notice that I didn't say "ice hockey."]

But I think I have to revise those percentages. Yesterday morning I watched a video that Canada's government broadcaster, the CBC, shared on YouTube showing the tribute that the Canadian Parliament gave Sergeant-at-Arms Kevin Vickers, the man who shot the gunman who had run into the Parliament building. My wife, who was upstairs, heard the applause and asked me what it was for. I choked up as I told her and started crying. When she came downstairs, I told her that the American/Canadian percentages were 90/10. "But you were just responding to his bravery," she said. "I know," I said, "but if this had been, say, a story about Poland, I probably wouldn't have to the same extent."

I know that among many of my libertarian friends, it's not "cool" to have any nationalism or even any patriotism in you. But one of the hardest lessons I learned early in life was not to disown my feelings. Under the influence of Ayn Rand's weird ideas about love, I told my brother that I didn't love him, in the last real conversation I had with him before he committed suicide. Of course, I did love him, but I had adopted Rand's and Nathaniel Branden's idea that you couldn't love someone who didn't share your philosophical views. And, boy, did my brother ever not share my philosophical views.

So, even if it's not cool and even if get criticized for, gasp, celebrating as a hero a government worker who was, gasp, protecting other government workers, I won't disown that feeling.

Here's the video, which CBC is making easy to share on web sites:


   


WARNING: CONTAINS FROZEN SPOILERS.

My daughter is four years old, which means we consume a lot of Disney Princess merchandise: movies, toys, etc. As one might expect, everyone in our house basically knows every word to every song from Frozen. It's a great movie, of course, but I'd love to see an anarcho-capitalist take on the Disney Princess narratives. Where did the resources come from that paid for the castle? In one of the songs in Frozen, Anna sings "who knew we had a thousand salad plates?"

Who paid for those thousand salad plates?

Perhaps Anna and Elsa's parents were the pictures of wise and benevolent rulers, trading protection of property rights for tax revenue, but who had their dreams deferred in order to pay for a thousand salad plates collecting dust in the palace?

The "benevolent ruler" view comes into question toward the end of the movie when there is a royal proclamation that the kingdom of Arendelle will no longer do business with "Weasel Town." Granted, the Duke of Weselton is a scoundrel, but why should the queen stand between her subjects and willing trading partners in Weselton? How is the edict to be enforced?

I suspect there are much darker histories behind the princes and princesses than Disney (or the original authors of the fairy tales on which Disney movies are based) is willing to admit. What happened before "once upon a time"? How did the royal families get their power? And how, for that matter, would they respond to competing providers of security services in their jurisdictions?

A friend once said a fish doesn't question the water in which it swims, so we can perhaps expect Anna and Elsa to be oblivious to the (likely) immoral ways in which their ancestors obtained power. One would hope, though, that if they were truly the paragons of virtue the movie makes them out to be, they would seek to make amends for the sins of their fathers post-haste.


   


Using compulsory attendance laws to estimate the causal effect of education on outcomes has been hot in economics for over a decade.  But I was always a skeptic.  The idea that minimum schooling leaving laws are exogenous is bizarre, yet the political and social processes that generate these laws are fuzzy at best.  Hence, these laws are bad instrumental variables.  Disagree?  How far would this literature have gone if it readily reached the "wrong" conclusion that education is a waste of time?  

Even worse, recent compulsory attendance laws don't even predict attendance!  Raw data from Philip Oreopoulos, one of the IV's biggest champions:

oreopoulos.jpg

As a result, researchers have to make a bunch of statistical corrections before they can even begin to use compulsory attendance as an IV.  Not good.  IV's chief rhetorical purpose is to sequester doubts about the complexity of the world - not foster new doubts aplenty.

Until recently, though, I was under the impression that virtually every active researcher in labor economics was against me.  When suddenly... the American Economic Review published Stephens and Yang's crushing critique of the entire compulsory attendance IV literature.  Highlights from their "Compulsory Attendance and the Benefits of Schooling":
These state-level changes in schooling requirements are used as instrumental variables to examine the impact of increased schooling on a wide range of outcomes including wages, mortality, incarceration, and the social returns to schooling Acemoglu and Angrist 2001; Lochner and Moretti 2004; Lleras-Muney 2005; Oreopoulos 2006). Identification of these effects is achieved by exploiting variation in the timing of the law changes across states over time such that different birth cohorts within each state have different compulsory schooling requirements. Key to this identification strategy, typically implemented in specifications that include state of birth and year of birth fixed effects, is that all other changes which occur across states during this period are uncorrelated with the law changes, educational improvements, and the outcomes under investigation.

[...]

In this paper, we examine the importance of the common trends assumption for estimates of the benefits of schooling when using schooling laws as instruments. In samples commonly used in the prior literature (the 1960-1980 US censuses) and across a number of outcomes including wages, occupational status, unemployment, and divorce, we find statistically significant causal effects of increased schooling when using the baseline specification which includes state of birth and year of birth effects. However, these estimates become insignificant and, in many instances, "wrong-signed" when using specifications in which the year of birth effects vary across the four US census regions of birth.
Stephens and Yang go on to point out a big pile of other compatible papers I've hitherto overlooked:
As a point of comparison, the recent empirical literature which estimates the returns to schooling using compulsory schooling law changes outside of the United States finds either small or zero returns. Since, unlike in the United States, these reforms affected a substantial share of the population, we view many of these studies as providing compelling evidence of the impact of compulsory education. Black, Devereux, and Salvanes (2005) find returns to schooling of 4 and 5 percent for men and women, respectively, due to Norwegian schooling reforms in the 1960s. Devereux and Hart (2010) find that the 1947 schooling reform in the United Kingdom yields estimated returns of 7 and 0 percent for men and women, respectively. Meghir and Palme (2005) find an overall small and insignificant return to schooling due to Swedish schooling reforms in the 1950s although they do find evidence of heterogenous returns by father's education level. Pischke and von Wachter (2008) find zero returns to schooling in Germany following a post-World War II schooling expansion and Grenet (2013) finds no returns to schooling following a 1967 education reform in France. Although the identification strategies in these studies either exploit variation across states, similar to the United States, or variation induced by a national reform, our estimates of the rate of return to schooling are comparable to the growing body of international evidence on the returns to education.
If you're tempted to remain agnostic, consider this: Top economics journals almost never publish critiques.  To get through the refereeing process, Stephens and Yang almost certainly had to overcome strong resistance from a series of elite referees who authored the very research they're taking down.  If these meta-considerations don't win you over, nothing will.

HT: I owe my view of the quality of critiques in top econ journals to Tyler Cowen.


   


I was on the road from Sunday a.m. to late last night and thus my sparser than usual blogging. I taught classes in Patuxent River, MD on Monday, Norfolk, VA on Tuesday, and Arlington, VA on Wednesday, with lots of driving in between and a flight home last night. I'm one tired puppy.

Now to an interesting study that caught my eye.

Our study is the first to use data on minimum wage changes for over 2400 counties in China. We combine the information on minimum wages changes with employment data from the Annual Survey of Industrial Firms, which covers over 70 percent of China's manufacturing employment. While China instituted a minimum wage system in 1994, enforcement of compliance with the law was significantly tightened only in 2004; the results described below are based on post-2004 data.

So what does the evidence show? On average across all firms, we find that an increase in the minimum wage leads to a small decline in employment: a 10% percent increase in the minimum wage lowers employment by a little over 1% percent.


This is from Prakash Loungani, "Does Raising the Minimum Wage Hurt Employment? Evidence from China," October 23, 2014.

Loungani concludes:

But if raising the minimum wage lowers employment, and ends up excluding low-wage workers from employment prospects, it may have adverse effects on both welfare and efficiency.

Why does he say "may?" If "raising the minimum wage lowers employment, and ends up excluding low-wage workers from employment prospects," it will "have adverse effects on both welfare and efficiency." For that matter, why does he say "If?" Does Loungani not believe his own results?

Notice, by the way, that the results he gets accord with the consensus view among U.S. economists for the United States circa 1981.

HT to Mark Thoma.


   


The title is my pathetic attempt to imitate Miles Kimball and Noah Smith, who sometimes post on religion. This won't be about religion; it's about monetary policy. Oh wait . . .

In the 1970s, US policymakers knew that inflation was too high, but weren't willing to bring it under control, as they worried about the effect on unemployment. And in some cases (such as 1972 and 1980) worried about the next election. Britain had the same problem, but far worse than the US. German policymakers did somewhat better (but still rather poorly in absolute terms) because they had more self-control than policymakers in the English-speaking world.

Thus the great sin of monetary policymaking is a lack of self-control. It's putting the "one marshmallow eaters" in charge of the central bank.

OK, if that's the great sin, then what is the even greater sin? The even greater sin is fear of a lack of self-control.

In the late 1920s and the early 1930s, policymakers feared what would happen if money was not backed by gold. They had seen the German hyperinflation, and not surprisingly had a rather low opinion of fiat money. The gold standard was seen as disciplining irresponsible policymakers. Something similar occurred in the 1990s in Argentina, when they set up their currency board. They also had memories of a hyperinflation about a decade earlier. And something similar happened when the euro was set up, without enough flexibility to easily prevent deflation, and without allowing the safety valve of devaluation. The architects of the euro recalled the irresponsible monetary policies of some of the Mediterranean countries, in the previous few decades. They wanted to make that sin impossible. And so like the greatest of the Mediterranean heroes, they tied their hands to the mast.

In each of those three cases, policymakers who feared a lack of self-control set up a policy apparatus that was extremely difficult to dismantle, with the euro coming closet to a true "doomsday machine." These regimes did successfully prevent high inflation, but they all had a fatal flaw. None of them could adapt to a circumstance that was not anticipated by the creators of their regime---a sharp increase in the demand for the medium of account (gold, the US$, the euro, respectively), which led to falling NGDP. And because nominal wages are sticky and debt contracts are in nominal terms, these regimes led to mass unemployment and severe financial crises.

Why is fear of a lack of self-control a worse sin than lack of self-control? After all, in ordinary life it would be a lesser sin. But monetary economics doesn't follow the rules of everyday morality. The damage of being "too responsible" is far greater than the damage of being "irresponsible." That's because wages are much stickier in the downward direction. Hence the German deflation of 1929-33 did more damage than the hyperinflation of 1920-23, even if one ignores the elephant in the room (Hitler.) The Great Inflation of 1965-81 did less damage than the Argentine deflation of 1998-2001 or the recent euro depression. That's just the way the world works.

Are those our only two choices? No, fortunately there is an enlightened path. The first step is to recognize our ignorance. (I believe NGDP level targeting is best, but might well be wrong.) In that case policy should be conducted from a "timeless perspective" and the policy regime should be occasionally updated to reflect new macroeconomic knowledge. Thus the policymakers of the 1970s should have realized that from a timeless perspective low inflation is better, because there is no long run trade-off between inflation and unemployment. But maybe that (natural rate model) is slightly wrong. Some studies suggest that below a certain level (say 2%) there is a permanent trade-off. So maybe you aim for 2% inflation rather than 0% inflation.

Then new knowledge might show that inflation is not the best target, NGDP is better. Which NGDP target is best? Consider the cost of transition. People made plans based on 2% inflation, at least in the long run. So have the changeover occur at a NGDP target path that is expected to produce 2% inflation, on average. Perhaps 4% NGDP growth. That way debtors and lenders won't feel robbed. You can write up models where those sorts of sunk costs don't matter, but those models only make sense if NGDP is the final policy adjustment. But it isn't. If you mess around with the average inflation rate this time, people won't believe your promises about NGDP.

Don't think of these policy changes as constantly changing direction, but rather as iterating in closer and closer to an optimal policy. Of course we will never arrive, it is always about making policy less bad. Money is useful for transactions, but monetary systems are always more or less harmful in a macroeconomic sense---they always move you at least some distance away from a frictionless world with a Walrasian auctioneer.

To summarize:

1. Show self-control; use a timeless perspective.
2. Don't show too much self-control, shift course when you discover your policy regime is fundamentally flawed.
3. Always recognize that your (and my) favorite policy is wrong, and always be on the lookout for "less wrong" policies. Just as Einstein's general relativity is less wrong than Newtonian mechanics.

PS. I am indebted to Eliezer Yudkowsky for the phrase "less wrong."

PPS. You might think this is hopelessly utopian; real world policymakers are not enlightened. I don't fully agree. We have moved from a bad rule (gold) to a discretionary policy regime (also bad), to a sort of Taylor Rule (better) and don't see why we can't then move to a NGDPLT policy (still better), and then perhaps a total nominal labor compensation target (if we were to assume that was still better.) Despite everything, I remain an optimist.


   


Minecraft has spawned a lot of imitators. One is Survival Craft, which we heard about a few days ago and downloaded. Our oldest has been playing it virtually non-stop for a couple of days, and he prefers it to Minecraft Pocket Edition because it has more stuff in Creative Mode (buttons, a crossbow, and other cool stuff).

In light of Tirole's recent Nobel for work in Industrial Organization, I've been wondering about the forces that break market power. In 2007, people were writing that MySpace is a natural monopoly, but the last few years have taught us that this isn't the case.

How should we expect to see this evolve? Should Minecraft mind the competition, or does a larger market for Minecraft-like games mean a larger market for what I assume is the original?

CATEGORIES: Microeconomics

   


How is blogging different from traditional media?  My knee-jerk answer is, "It caters to a higher-IQ audience," but that's not really true.  The real story is that blogging lets a million voices bloom - including but hardly limited to voices aimed at high-IQ audiences.  The good news is that if you're so inclined, you can now find intelligent, candid defenses of almost any idea.

Now consider the following counterfactual.  Something like blogging (but no full-blown internet) came along decades or centuries earlier.  How would the cream of the proto-blogosphere have reacted to...

1. Apartheid in the 1980s

2. The civil rights movement in the 1960s

3. The Great Depression

4. World War I

5. The anti-slavery movement in the 1840s, 1850s, and 1860s

Please be civil and show your work.  I'll repost the best answers in a followup piece.


   


Krugman on Amazon

Alberto Mingardi

What does it mean that Amazon has "too much power"? Paul Krugman has published a vehement column on the online retailer, arguing basically that Amazon enjoys a significant "market power" vis-à-vis publishers. He refers to the feud between Amazon and Hachette, that originated from a contract dispute in April. It seems to me that the story can be summarized this way: Amazon wants to sell e-books at the price which it considers most attractive, presumably having the goal of further establishing its Kindle as a standard for readers of electronic books. Hachette wants to keep prices higher, presumably because it doesn't want sales of paper-books to be eroded by ebooks' sales.

Amazon did not take Hachette's "no, thank you" in the kindest of manners, and retaliated somehow. Well, a business strategy may be unpleasant - but that doesn't make it illegitimate.

Amazon is a shop: a gigantic, beautiful, incredibly developed shop - but a shop. Shopkeepers retain the right of deciding what should be on the shop's shelves. They make deals with different suppliers, and can thus be convinced in promoting with more energy this rather than that particular brand of a given good.

Should the government interfere? Perhaps if we're talking about the only shop in town - which is something Amazon, no matter how big, definitely is not. Amazon's "market power" is the result of consumers choosing to buy from Amazon, and not from other online or physical bookstores. Amazon has been rather successful, in growing its customer base, but not so much in scoring profits, and of his business model we may say what Chou En-lai said when he was asked of the impact of the French Revolution: "it is too early to tell".

Paul Krugman has a different opinion. He acknowledges that "Amazon has not tried to exploit consumers" but, if "it has systematically kept prices low,", it was just "to reinforce its dominance". Stupid you, world customers, who fall into the trap.

So, it is not important "that Amazon is giving consumers what they want". What really matters is that it has "too much power".

How does Krugman prove this assertion? Well, he vaguely suggests that there is a political vein, in Amazon's retaliatory practices against Hachette. He writes:

Last month the Times's Bits blog documented the case of two Hachette books receiving very different treatment. One is Daniel Schulman's "Sons of Wichita," a profile of the Koch brothers; the other is "The Way Forward," by Paul Ryan, who was Mitt Romney's running mate and is chairman of the House Budget Committee. Both are listed as eligible for Amazon Prime, and for Mr. Ryan's book Amazon offers the usual free two-day delivery. What about "Sons of Wichita"? As of Sunday, it "usually ships in 2 to 3 weeks." Uh-huh.
Now, in the same post from the Bits Blog, it is mentioned that other Hachette books are shipped immediately and heavily discounted, on Amazon: the examples given are "13 Hours: The Inside Account of What Really Happened in Benghazi" and "How Google Works". I didn't read either, but I've checked and they are both heavily discounted and quickly shipped as of today.

Indeed, "Sons of Wichita" is not. I don't know if Professor Krugman read the book. I did, and I can say that it is a far less biased, and more nuanced, "collective biography" of the Koch brothers than many readers expect (if you don't trust me, check out this Reason interview with the author, Daniel Schulman). Actually, Amazon tells consumers that it is "frequently bought together" with "The Science of Success", the book on "market-based management" authored by Charles Koch - which may suggest that word of mouth is marketing it better among Mr Koch's admirers than among those who despise him.

I don't know why Amazon is favoring some of Hachette's books over others, but I would suspect demand has more to do with it than politics.

Perhaps before resorting to chastise Amazon for its "market power", and calling for political intervention, we should remember that we are in terra incognita. E-commerce is a relatively new trade and e-books are new products. We need some learning by doing. What needs to be "discovered" includes prices readers are happy to pay, which depend on a lot of factors. Amazon has just announced it made a deal with Simon & Schuster. The company said that "the agreement specifically creates a financial incentive for Simon & Schuster to deliver lower prices for readers."

Are "lower prices" to be sacrificed on the altar of fighting "market power"? I think you'd need some better arguments to say they should.

CATEGORIES: Business Economics

   


Here's Matt Yglesias on fiscal stimulus:

What the country needs is a stimulative process that has the bureaucratic properties of monetary policy, but the heft and comprehensibility of fiscal stimulus. If we had a national sales tax like Japan does, letting the Fed set the rate up and down to boost the economy would work. One alternative would be to enact temporary cuts in the payroll tax, and have the Fed fill the resulting gap in the Social Security trust fund with printed money. Another alternative would be to print money and mail it directly to American households. But barring broad Federal Reserve reform, Congress could act on its own. Back in 2008, Nancy Pelosi and George W. Bush teamed up to enact a cash in the mail stimulus program and it was highly effective. And in the winter of 2010, Barack Obama and congressional Republicans agreed on a payroll tax holiday that also boosted the economy.
I'm very dubious of all this. When the payroll tax cut was rescinded at the beginning of 2013, Keynesians predicted that growth would slow---especially since lots of other austerity measures were imposed at the same time. In fact, economic growth (2012:Q4 to 2013:Q4 nearly doubled over the previous 12 months. That was due to monetary offset. The Bush tax cuts were also ineffective, for two reasons. One is the normal "permanent income theory" argument, people mostly save temporary tax changes. Here's a graph from an article by John Cogan and John Taylor: Screen Shot 2014-10-21 at 7.23.57 AM.png Notice that the tax rebates of the spring of 2008 boosted disposable income sharply (but only briefly). Consumption rose only modestly, suggesting that most of the tax cuts were saved. Nonetheless, I'd guess that some borrowing-constrained households spent more, so let's assume that the faster NGDP growth in 2008:Q2 was due to the rebates:

Annualized NGDP growth:

2008:Q1 - 0.5%
2008:Q2 +3.9%
2008:Q3 +0.8%
2008:Q4 -8.0%

Remember, these are nominal figures, the real numbers for the first three quarters are much worse. My claim is that even if the strong Q2 number is due to the tax rebates, it merely stole growth from later in the year.

Let's consider the Fed minutes from 2008. They show worry about the high inflation rates of mid-2008 (largely due to oil), and also some complacency that the Fed's aggressive moves in early 2008 had worked. As late as mid-October, the Q2 figures were the last GDP data available. Even as late as the meeting 2 days after Lehman failed (September 16), the Fed saw risks of inflation and recession as being roughly balanced. Thus they did not cut interest rates (from 2%) at that meeting. Indeed there were no rate cuts at all between the beginning of May and early October. That's pretty shocking given the severity of the 2008 recession. In retrospect, the Fed was clearly offsetting the growth in spending in Q2, which was produced (perhaps) by tax rebates. It's a nearly perfect example of monetary offset.

Indeed even an economist as Keynesian as Paul Krugman concedes the Fed steers the economy in normal times, and that fiscal stimulus is only justified when at the zero bound. So my argument here is just as much new Keynesian as market monetarist.

However Yglesias does raise one good point, which calls into question my earlier grudging support for the Japanese national sales tax increases (3% this year, another 2% planned for next year.) Matt says that stocks rose sharply on the news the second increase might be delayed. I'm not sure if that's why stocks rose, but let's say it is (did they rise right after Abe's comment?) In that case, I may be wrong about the sales tax increase. Perhaps it has more of a negative effect on AD than I assumed. Or maybe stocks rose because investors like low tax/smaller government policies (an argument one of my supply-sider commenters tried to sell me on.) It might have also been a subtle signal of more monetary stimulus. That later claim may seem far-fetched, but is testable in principle. Fiscal growth measures strengthen a currency while monetary stimulus weakens it. How did the yen move on the Abe statement?

CATEGORIES: Fiscal Policy

   


Crime and Sheepskins

Bryan Caplan
Criminals are poorly educated.  About 68% of state inmates dropped out of high school.  Many researchers study whether this effect is causal.  As usual, though, I'm more interested in whether the causal effect stems from signaling.  

Education could reduce crime by enhancing students' job skills.  But it could just as easily reduce crime by certifying students' job skills.  If you only want to stop your kid from pursuing a life of crime, the mechanism is a red herring.  If you want to stop kids in general from pursuing lives of crime, however, the mechanism is all-important.  In the signaling model, to paraphrase a great meme, "When everyone has a diploma, no one does." 

Empirically distinguishing human capital from signaling is notoriously tricky, but sheepskin effects -  discrete benefits from crossing academic finish lines - are a strong symptom of signaling.  Sheepskin effects for income are enormous.  Are there comparable sheepskin effects for crime?  The literature is sadly thin.  But these figures from Lochner and Moretti's influential  2004 AER piece reveal big sheepskin effects of high school graduation on incarceration, with graduation year providing roughly 2/3 of the benefit. 
crime2.jpg

Anyone know of other sources on sheepskin effects and crime?  Google Scholar, for all its wonders, hasn't been too helpful so far.


   


In February 2012, I posted a proposal that the federal government allow contraceptives to be sold over the counter. I wrote:

Nevertheless, there is a way that the federal government now cuts access to contraceptives in a way that substantially raises the cost. Were the government to get rid of the regulation that does this, women's access to contraceptives would rise and the cost would fall.

What is the regulation? It's the one that requires contraceptive pills to be prescription drugs. If, instead, drug companies were allowed to sell contraceptives over the counter, access would rise and cost would fall.


In December 2012, I posted about other commentators who agreed with my proposal.

Recently, polling data showed that a supermajority of Americans now agree with this proposal. Emily Elkins writes:

The latest Reason-Rupe poll finds 70 percent of Americans favor legalizing over-the-counter birth control pills and patches without a doctor's prescription, 26 percent oppose such a proposal, and 4 percent don't know enough to say. There has been a slight uptick in support for OTC birth control, rising from 66 percent in May of 2013. Moreover, Reason-Rupe finds that women across income groups highly support legalizing OTC birth control at about the same rates.

I asked back in December 2012:
Could this be a case such as the ones Wayne A. Leighton and Edward J. Lopez talk about in their new book, Madmen, Intellectuals, and Academic Scribblers, in which the moment is ripe for change?

I think it is.


   


Ebola Bet Followup

Bryan Caplan
I'm pleased by the high quality of comments on my Ebola bet, as well as the unusually high number of people willing to put their money where their mouth is.  First, the takers:

Troy Barry:
I'll take the bet (first form), not because I have any particular expertise or strong concern about ebola. (I do not believe closing US borders is justified by the threat, and wouldn't even if we knew 300 resultant deaths were a certainty.) But I am sceptical of some of the comforting assumptions of your mainstream scientists...

I acknowledge my reputation is insufficient to give you confidence in repayment, therefore I propose to transfer $100 to you on your acceptance. If you win the bet, you need never repay it. If you lose the bet you transfer me $251 in January 2018. (Or suggest your own estimate for the future value of the 2x$100 - which would be worth hearing in itself. :)
Troy's payment proposal seems fair enough to me.  Troy, please email me and I'll send you my address or Paypal info.

Mike Lorenz:

Bryan - I'll take that bet. Figure out a way to determine my reliability as a counterparty.

I hope you win.

I'm happy to offer you the same terms as Troy.  Is that amenable to you?

Next, the counter-offers:

MikeDC:

I would take the bet with the proviso that it be cancelled in the event significant travel restrictions are imposed, since that would render the bet moot on settling the underlying policy question.

Can you propose a neutral measure of when travel restrictions become "significant," Mike?

James Miller:

You win $30 if by January 1, 2018 Ebola has killed less than ten thousand people in the United States. I win $3,000 if by January 1, 2018 Ebola has killed ten thousand or more people in the United States. To avoid bad publicity if I win pay the money to one of the top Givewell charities. If you win I will pay you directly. I offer you this bet for 48 hours.

I'll offer you $1000 against your $30, James.  Interested?

Last, what appears to be a hypothetical bet rather than an offer:

Lemmy caution:

The Ebola risk is a small risk of a high number of deaths.

Consider the bet

less than C number of Ebola deaths (x):

I pay you C-x

more than C number of deaths:

you pay me x-C

What C would you be willing to accept under these terms. My bet is that it would be pretty high. Who would risk their life savings?

This is a wonderfully creative offer.  If I were single I'd entertain it, and probably set C=1000 or so.  Being married, I'm not going to make an open-ended bet.


   


The world is a pretty complex and mesmerizing place, and people (and firms) do a lot of things that are, at first glance, hard to understand.

Consider airlines. I've heard on numerous occasions complaints about how major carriers board their planes inefficiently: by using alternative loading and unloading schemes, they can turn flights around more quickly and earn more money by operating more flights.

And to be sure, turnaround time is important. However, it isn't everything. In the last few years, airlines have aggressively unbundled a lot of what they offer. On many carriers, you have to pay to check bags unless you have elite status or a special credit card. Flyers with elite status get preferred boarding and seating. There are a lot of ways in which flying as an elite differs from flying as a non-elite traveler.

This, I think, explains a lot of the differences. Business travelers and frequent flyers pay the bills, and competition for their loyalty is pretty fierce. I didn't realize just how great elite status was until I achieved it. I get to breeze through check-in (and security at some airports), I have virtually guaranteed overhead space that comes with priority boarding, and I can get some work done between when I board and when the door closes. These added layers of convenience make it a lot easier to pick my preferred airline, even if I have to pay a few dollars out-of-pocket on a trip for which I'm being reimbursed.

I haven't studied airlines in detail, but my impression is that the major carriers are serving a different market than the discounters.* Hence, we see these fairly substantial differences. Am I right, or am I missing something?

*-When we moved back to Birmingham, I was excited to be back in a Southwest Airlines-served city. Delta and others usually offer more convenient schedules and are extremely competitive on price. I recall reading in the SWA magazine when I was in grad school that they see themselves as substitutes for driving.

CATEGORIES: Microeconomics

   


Sometimes I argue that nominal GDP is like Coke, it's the "real thing." By that I mean it's a well-defined concept, the dollar value of all output of final goods and services. Of course I exaggerate, there are some conceptual problems in how to define NGDP. But real GDP has all those problems, and much deeper ones.

Some government statistics define real GDP as "volume" of output. But that's nonsense; it would put a country in the midst of heavy industrialization (like China) far ahead of a high tech society like ours. The next defense of real GDP is the price index, but how is that to be measured? The change in the price of a given basket of goods? But which basket, and how to we address new goods, and changes in quality? There are no good answers to these questions, which is why no one agrees as to whether US living standards have stagnated since 1970, or risen rapidly (as I claim.) On the other hand, we all pretty much agree as to what has happened to NGDP since 1970.

But there is another sense where real GDP really is very much real, and NGDP isn't. RGDP is something that can be pictured in one's mind---"the economy." You can picture all those factories churning out cars, all those homes housing people, all those barbers cutting hair. But NGDP can't really be pictured. Don't believe me? Try to picture the explosive growth in Zimbabwe's NGDP during the early 2000s in your mind's eye. My claim is that either you cannot, or you end up picturing bushels of worthless currency. And that's because NGDP is essentially a monetary concept, not real.

By analogy, if Switzerland had used gold as its money, its NGDP would have plunged much lower since the early 2000s, although it would have rebounded somewhat in the last couple years. But that fact would tell us nothing about the Swiss economy we picture in our mind's eye. It tells us about the international market for gold, where prices soared in relative terms, then fell back somewhat.

In a recent comment section there was skepticism about my claim that a couple of small interest rate increases in 2011 could have plunged the eurozone into another recession, associated with a sharp slowdown in NGDP growth. There are two problems with that criticism:

1. I don't actually believe the higher interest rates were the best way of describing the problem. I prefer "tight money" and just threw out the interest rate increases as a "concrete step" for what Nick Rowe calls the "people of the concrete steppes." Interest rates are not a good indicator of the stance of monetary policy, and eurozone money was much tighter than the increase from 1% to 1.5% would have suggested.

2. The other problem with the skepticism is the implicit assumption that NGDP is some vast thing, and that a central bank would have trouble nudging it this way or that. No, real GDP is a vast thing, and as I said can be pictured in one's mind's eye. NGDP is a tiny thing, no larger than a dollar bill. Suppose the Fed depreciates the one-dollar bills that it has a monopoly on producing, from 1/17,000,000,000,000th of a year's output, to 1/18,000,000,000,000th of a year's output. Then they've just boosted NGDP from $17 trillion to $18 trillion.

I think the problem is that people think of the central bank as being like a tugboat, slightly nudging a huge ocean liner this way and that. This sort of analogy would be sort of OK (although not perfect) for central banks trying to influence real GDP. They can do so in the short run, to some extent. But when we shift over to NGDP the analogy completely breaks down. Now the central bank is no longer the tugboat trying to nudge the ocean liner, it is the ocean liner itself. It steers the nominal economy.

The path of NGDP is monetary policy. Through errors of omission or commission, the ECB has created the path of NGDP that we observe since 2007.

Do those shifts in NGDP also cause the truly vast real GDP to move around? Most conventional Keynesians and monetarists (and Austrians?) would say yes, but only in the short run. This is usually attributed to sticky wages and prices (or perhaps misperceptions.)


   


Economics makes many things funnier.  But econ's comedic value-added for the final scene of The Warriors (1979) is truly rich.  The first 15 seconds have the big unintended joke, but don't stop there.




   


Ebola Bet

Bryan Caplan
Mainstream scientists assure us that Ebola poses very little threat to Americans; unless you're a health worker who cares for the infected, Ebola is almost impossible to catch in a rich, modern society.  Yet many populists and borderline conspiracy theorists are convinced that the experts are seriously understating the danger.  In their contrarian opinion, we desperately need to close the border now.

Fortunately, this is an easy argument to put to a bet.  My tentative offer: $100 says that less than 300 people will die of Ebola within the fifty United States by January 1, 2018.  I'm willing to switch to "Unless the U.S. changes its Ebola-related policies, $100 says that less than 300 people will die of Ebola within the fifty United States by January 1, 2018," but then we'd have to carefully define what policy changes count.

I will make this bet with up to five individuals with sufficient reputation to make payment likely if they lose.  I'm also happy to entertain alternative bets.  Propose them in the comments or email me directly.


   


Given existing border controls, mild measures to prevent serious contagious disease seem morally acceptable.  Yet the best choice, in my view, remains fully open borders - tear down the walls and make travel between countries as free as travel within countries. 

Appearances withstanding, there is no contradiction between these views.  As I explained a while back, fixed costs imply a straightforward consequentialist case for extremism:

But what if there is a fixed cost of having a carbon tax in the first place? For example, the net expected benefits could be:

-$1,000,000 + $10,000,000*p [where p=P(Al Gore is right)]

The $1,000,000 might be the overhead of the carbon tax collectors, or the costs of every tax-payer who has to fill out a carbon tax form, or what have you. Given this fixed cost, for p<.1, the net expected benefits of a carbon tax are negative. On efficiency grounds, Arnold would be correct to council inaction until p exceeds that threshold.

Every micro textbook tells us that when the price of a good gets so low that firms can't recoup their fixed costs, it makes sense to simply close up shop - or not open in the first place. The same goes for government programs.

Thus, even a consequentialist could consistently favor marginally expanding a program yet prefer the program's utter abolition: Marginal benefits can exceed marginal costs even though total costs exceed total benefits.  On the more reasonable view that government action is only justified if its benefits heavily exceed its costs, the path from fixed costs to abolition is even smoother. 

Are the fixed costs of borders really that high?  Absolutely.  Picture what a pain it would be to erect and navigate checkpoints at every border of every U.S. state.  Imagine what even token internal restrictions would do to U.S. commerce, travel, jobs, and housing markets.  If these checkpoints were already in place, telling border guards to screen for Ebola might be reasonable.  But erecting internal checkpoints to slightly reduce the risk of Ebola is crazy.  And if this judgment is obviously right for internal borders, why is it obviously wrong for external borders?


   


More excerpts from my recently published review of Thomas Piketty's Capital in the Twenty-First Century.

For those who are worried about growing wealth inequality because their own wealth is not growing, there is a simple solution: save more and invest in stock market index funds. And, to the extent possible, do so with tax-favored 401(k) and 403(b) plans and Individual Retirement Accounts (Roth or non-Roth.) When a friend who studies saving patterns of various ethnic groups in America visited me some years ago, I told him that my wife and I normally save between 15 and 20 percent of our before-tax income. His eyes grew wide. "You're Korean," he said, jokingly. Of course, hitting that saving rate meant that we didn't go to Europe or Asia, didn't buy $40,000 cars or $200 shoes, didn't buy expensive clothes, and didn't drink alcohol when we went to restaurants. What a tough life!

Piketty does not give any space in his tome to making that point. He writes as if he is the central planner making decisions from the top down and essentially disregards the fact that people are individuals who want to deal with their individual situations.

But even as central planner, Piketty fails. The driver of his model is his strongly held assumption that the rate of return on stocks will substantially exceed the growth rate of the economy and the growth rate of real wages. Under Social Security, your benefits will grow at no more than the growth rate of real wages because your benefits are paid by Social Security taxes on current workers. So, wouldn't it make sense to let people invest their Social Security taxes in stocks rather than get only the low rate of return that they get now? Piketty says no. He makes one good argument for this, one I myself have made: the transition problem out of the Social Security Ponzi scheme is wicked. But his other argument is that investing in stocks is "a roll of the dice." What happened to his confidence about the rate of return on stocks?

Given his emphasis on--and distaste for--inequality and his conclusion that owners of capital will get an increasing share of an economy's output, it is not surprising that Piketty favors much higher taxes on wealthy people. He argues briefly that the optimal top income tax rate in richer countries is "probably above 80 percent." He claims that such a rate on incomes above $500,000 or $1 million "will not bring the government much in the way of revenue"--I agree--but will drastically reduce the pay of high-paid people. He also suggests an annual "global tax on capital," with rates that would rise with wealth. "One might imagine," he writes, "a rate of 0 percent for net assets below 1 million euros, 1 percent between 1 million and 5 million, and 2 percent above 5 million." One might imagine many things: I take it, as virtually every reviewer pro or con has, that Piketty is not just "imagining" those taxes, but actually advocating them. He adds that "one might prefer" a stiff annual tax of "5 or 10 percent on assets above 1 billion euros."

But if there is anything we know in economics, it is that incentives matter. An annual tax on capital will reduce the incentive to create capital. With less capital than otherwise, the marginal product of workers will be lower than otherwise. Bottom line: Piketty's proposed tax on capital would hurt labor.


Next: More on how Piketty handles this incentive problem--and Robert Solow's thoughts on the matter.


   


I have not posted on that sweet man, Leonard Liggio, who died this week. It's partly because co-blogger Alberto Mingardi already has and partly because, while thinking about what to say, I came across a video by Tom Palmer. The content and the tone are so beautiful that there is no reason for me to say more. It's a little longer than the usual Friday Night Video I post. When that happens, I often give highlights. But the whole thing is a highlight. This is posted with Cato's permission.


CATEGORIES: Obituaries

   


[mild spoilers]

Here's a great scene from Wes Anderson's The Grand Budapest Hotel.  Gustave, manager of the Grand Budapest Hotel, has just escaped from prison after being framed for murder.  Zero, an immigrant who works as the hotel's lobby boy, helped Gustave escape, but forgot to bring his employer's favorite cologne.

Gustave: I suppose this is to be expected back in... Where do you come from again?

Zero: Aq Salim al-Jabat.

Gustave: Precisely. I suppose this is to be expected back in Aq Salim al-Jabat where one's prized possessions are a stack of filthy carpets and a starving goat, and one sleeps behind a tent flap and survives on wild dates and scarabs. But it's not how I trained you. What on God's earth possessed you to leave the homeland where you obviously belong and travel unspeakable distances to become a penniless immigrant in a refined, highly-cultivated society that, quite frankly, could've gotten along very well without you?

Zero: The war. 

Gustave: Say again? 

Zero: Well, you see, my father was murdered and the rest of my family were executed by firing squad. Our village was burned to the ground and those who managed to survive were forced to flee. I left because of the war.

Gustave: I see. So you're, actually, really more of a refugee, in that sense? Truly. Well, I suppose I'd better take back everything I just said. What a bloody idiot I am. Pathetic fool. Goddamn, selfish bastard. This is disgraceful, and it's beneath the standards of the Grand Budapest. I apologize on behalf of the hotel. 

Zero: It's not your fault. You were just upset I forgot the perfume. 

Gustave: Don't make excuses for me. I owe you my life. You are my dear friend and protege and I'm very proud of you. You must know that. I'm so sorry, Zero.

Zero: We're brothers.


In my dreams, this is the apology the current proponents of immigration restrictions will one day make.  But I'll settle for open borders sans apology.


   


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