Thanks for many good answers on the Kim dynasty vs. the stationary bandit model.  But as far as I can tell, no one drew the distinction I was looking for: durability versus stability.

The Kim dynasty is clearly durable: it's ruled North Korea for 64 years and three generations.  But it's much harder to tell if the Kim dynasty is stable - i.e., if it could survive a diverse array of disturbances.*  The Kims have clearly weathered a few big storms: the Korean War, the collapse of the Soviet Union and drastic decline in energy subsidies, and the death of two leaders.  But for the most part, the Kims keep such a tight lid on things that no one, not even Kims themselves, knows whether reforms would spiral out of control and end their rule.

The stationary bandit model fails to clearly distinguish durability from stability.  But on reflection, the model's hopeful implications presuppose not mere durability, but stability.  A stationary bandit who knows he'll retain power whatever he does has a solid selfish motive to adopt pro-growth policies.  But the latest scion of a rigid thousand-year dynasty can't afford to be so open-minded.  He knows a formula for holding power; but for all he knows, it's the only formula.  Even if there's merely a 10% chance that reform brings the regime crashing down, that's a big deterrent.

I freely admit the relevance of many of the other stories readers told; as a few readers pointed out, I've told them myself.  A dictator is effectively super-wealthy, so the prospect of getting even richer may fail to entice him.  A super-wealthy dictator may prefer lavish parades to bigger palaces.  Etc.  Nevertheless, North Korea isn't a great test of the stationary bandit model because durability and stability are not the same.

Of course, once you take this distinction seriously, you have to ask yourself: When, if ever, do bandit rulers know beyond a reasonable doubt that they're genuinely stable?  To quote Merlin in Excalibur, "Looking at the cake is like looking at the future, until you've tasted it what do you really know? And then, of course, it's too late."

* If you want to see stability in action, take a look at the Weeble.  As the toy's jingle famously said, "Weebles wobble but they don't fall down."

Derek Thompson at the Atlantic blog argues that unpaid internships are immoral. His case? The essence of it is that because the employer gets valuable services, the employer should pay for them. Of course, the employer does pay for them, if not in money, then in the form of training and work experience. But that doesn't satisfy Mr. Thompson. The following toward the end of his post summarizes a big part of his case:

The broader effects of unpaid internships are (a) a tendency for employers to take advantage of young labor by offering the currency of experience in lieu of actual currency, and (b) a widening of the social inequality gap as lower-income students are implicitly barred from this so-called "educational" experience, which is their gateway to full-employment in the field of their choosing.

So his basic argument is that because lower-income students are at a disadvantage in that competition because they need to make money during the summer, that form of contract is immoral. Most of his argument is about why unpaid internships are immoral, not about why they should be illegal. But he seems to imply the latter. After admitting that unpaid internships are mutually beneficial for both sides, he writes:

But not every mutually beneficial relationship should be legal, and not every one is. An easy example is: It is mutually beneficial for a 17-year old to offer money to a bartender in exchange for a vodka shot, but we have collectively decided that this sort of thing ought not to happen, because we don't want to live with its broader effects.

So Mr. Thompson seems to be getting at the idea that unpaid internships should be illegal too.

He's right that students from lower-incomes are at a disadvantage. I was one of those. As far as I knew, unpaid internships weren't even around, or at least weren't common, when I was an undergrad between 1967 and 1970. But even if they had been, I wouldn't have taken one because I needed to make money every summer.

But I wouldn't have regarded it as immoral for kids from higher-income families to work for free for employers who wanted their services. And I certainly wouldn't have wanted a government to threaten people with fines and, ultimately, harsher penalties, for having unpaid interns.

Mr. Thompson says that if "internships are indistinguishable from education," then it's "perfectly permissible that they be unpaid." It seems as if we're getting somewhere. It seems that it would follow that if they're better than education, then for sure it's permissible that they be unpaid. But after admitting that some internships are better than college, he writes, "that's not a good reason to deny millions of workers salaries just because they're young." That's confused thinking. The argument he was addressing was whether it's permissible not to pay because of internships' educational value. But then he switches reasons in mid-sentence, saying that it's "just because they're young." But it wasn't just because they're young. It was because employers are getting something in return.

A little economics would have gone a long way in helping Mr. Thompson, who, according to the bio on the Atlantic web site, "oversees business coverage for the website." Consider this excerpt from his case:

Plenty of entry-level positions better prepare people for work than college. If it is relevant that an unpaid internship is "useful", does it follow that only useless internships should have salaries? Of course not. Utility and salary have nothing to do with one another.

Actually, utility and salary have a great deal to do with each other, as economists from Adam Smith on have pointed out. The more disutility there is on a job, then, all other things equal, the higher the pay on that job. Economists call this difference in pay a "compensating differential." Here's what Adam Smith wrote on the issue in The Wealth of Nations:

First, The wages of labour vary with the ease or hardship, the cleanliness or dirtiness, the honourableness or dishonourableness of the employment. Thus in most places, take the year round, a journeyman taylor earns less than a journeyman weaver. His work is much easier. A journeyman weaver earns less than a journeyman smith. His work is not always easier, but it is much cleanlier. A journeyman blacksmith, though an artificer, seldom earns so much in twelve hours as a collier, who is only a labourer, does in eight. His work is not quite so dirty, is less dangerous, and is carried on in day-light, and above ground. Honour makes a great part of the reward of all honourable professions. I.10.5

What's missing from Mr. Thompson's reasoning is the concept of equilibrium. There's a reason that some jobs pay the minimum wage or more and other jobs pay zero. It has to do with the pluses and minuses of the job (from the worker's viewpoint) and the pluses and minuses of the worker (from the employer's viewpoint). The price (wage) is what equates the amount of labor supplied and the amount of labor demanded.

Is there a way around this so that more young people from low-income families could find internships? Yes. Allow them to be paid internships but allow the pay to be somewhere between 0 and the minimum wage. As I wrote in 2011, "The government is saying, in effect, you may pay $7.25 an hour or more or you may pay 0 an hour but don't let me catch you paying more than 0 and less than $7.25."

If an internship paid, say, $4.00 an hour, then some kids from lower-income families could more easily afford to take such jobs. That would solve some of the problem that Mr. Thompson identifies. But it would do so with a reduction in coercion, not the added coercion that he seems to advocate.

Mark Thoma thinks that pundits on the left are more willing to criticize their own team than pundits on the right. My guess is that people on the right think it's the other way around. If so, then let me propose an explanation.

I think that when pundits criticize someone from their own team, it is usually complaining that the politician is too moderate or too ineffectual. That is, leftwing pundits criticize President Obama either for not following policies that are further to the left or for not championing left-oriented policies more strongly. Similarly, pundits on the right criticized President Bush for not following policies that were further to the right or for doing a poor job of articulating right-wing philosophy.

These sorts of criticisms are difficult for the other side to notice. It may be hard for someone on the right to think it is a big deal when a liberal politician is being criticized from the left. And those on the left do not always notice when a conservative politician is being criticized from the right. I mean, you may notice such a criticism, but you don't "count it" as a criticism, because it's the opposite of the criticism that you would make from the other side.

Of course, what would really be interesting would be a pundit on the left criticizing a liberal politician's liberal policies, or a pundit on the right criticizing a conservative politician's conservative policies. I believe those instances are relatively rare. One example might be the Washington Post editorial page, which has criticized the domination of the teachers' unions in Maryland politics. Another example would be conservative pundits who have criticized Grover Norquist for his strict stance against any tax increases.

In NRO, I write,

When large banks have resources, politicians will be tempted to treat them as piñatas, taking whacks at them in order to extract money to distribute to constituents (see the recent "foreclosure settlement," or the pressure being placed on Freddie Mac and Fannie Mae to write down principal on loans). When large banks get in trouble, politicians will be tempted to bail them out.

Thus, my reaction to the JP Morgan loss was to see the case for breaking up big banks as reinforced. Some day, perhaps I will write a Dr. Seuss version.

See also Mike Konczal (pointer from Mark Thoma.)

Question from the final exam for my graduate Public Choice class:

The Kim family has ruled North Korea for three generations.  Doesn't the stationary bandit model imply that the country should be prospering?  If so, what's wrong with the stationary bandit model?  If not, why not?

No one gave quite the answer I was looking for.  Care to share yours?

NOTE: This post is NOT financial advice. Rather, it's my relating of some interesting stories that my tax accountant told me.

Every March I have my annual meeting with my tax accountant. The meeting lasts 30 minutes. In the first 15, we go over my numbers and in the last 15 he tells me stories about various investments he has been in, some of which made him a lot of money and some of which lost him a lot. I've noticed that one thing almost all his losers have in common is the absence of due diligence on his part. I always find the last 15 minutes exhilarating. Here's a guy who has an Associate degree from the local community college, is a few years younger than me, and has a net worth in the 8 figures. Talking to him is far more exciting to me than talking to the average academic economist.

So each year I tell him that I would like to take him out for a nice meal and pick his brain. Each year I don't. This morning I did: the only time he could make was breakfast.

He told me stories about various people he's known over the years and has noticed a pattern in those who build a nice fortune and those who don't. He did so this morning and said that there are three key elements that all the successful ones had in common. "I know one," I said, "diversification."

"No," he said, "that helps, but that's not it." The three he named are:
(1) Don't have a lot of overhead. Don't commit to a large rent. Don't have a large mortgage or, if you do, pay it down quickly.
(2) Be "footloose." That is, be able to adjust quickly when things go bad. So, for example, he told the story of a friend who was doing well but then had his rent on a municipal property jacked up by a local government that saw that he was doing well. His friend didn't renew the lease but went elsewhere quickly.
(3) Take advantage of--and maximize if at all possible--all of the tax-advantaged ways of saving that you have access to: max your 401(k), max your Roth, etc. He told of a man who worked for a large company and who, over his working life, maxed his 401(k) and now has $1.4 million in that account alone.

His stories and thinking reminded me of the spirit and, to some extent, the letter of Dwight R. Lee's and Richard B. McKenzie's excellent book, Getting Rich in America: 8 Simple Rules for Building a Fortune and a Satisfying Life. As I said in my review of the book in the Wall Street Journal, their book "is the how-to handbook for becoming the millionaire next door."

I'm willing to bet--call it a hunch--that most people, if asked to name someone who they think is a humanitarian, would not put a tax accountant who makes a lot of money high on their list. But I've gotten to know this one over about 25 years and, with his careful thinking about how to make and keep wealth, thinking that he seems willing to share with those who will listen, my accountant is a true humanitarian.

UPDATE
Here is a note from my tax accountant referred to above, after he saw this post:
"One correction. I never did get my AA. I dropped out to pursue my golf. Never made it as a pro. Enjoyed our breakfast."

He writes,

This couple bought their Reno home in June 1988 for $127,000. Their home is currently valued at $100,000. They currently have a mortgage worth $168,000. At first blush, this seems strange. Assuming a normal down payment and paying off the mortgage for 14 years, shouldn't the current mortgage be much lower? Indeed, should it not be lower than $100,000 (in which case, they would not be underwater)?

Are the Kellers "responsible" homeowners? I am not sure that anyone is in a position to pass judgement on how they chose to manage their wealth. I am happy to label them "responsible" homeowners. I'm just not sure why society should necessarily be obligated, in this case, to enact a wealth transfer in their direction (away, for example, from yours truly, who foolishly chose to rent a small town home 2000-2009, instead of living the American dream).

Pointer from Mark Thoma. David does not seem to have gotten the memo that says that mortgage borrowers are always victims.

Lots of great feedback in response to last week's question, "Why don't applicants volunteer their test scores?"  I'm increasingly impressed by the wide range of first-hand education/job experiences; clearly the world is full of puzzles few economists have ever conceived, much less addressed. 

Several respondents doubted the usefulness of applicants' test scores.  But this contradicts a large literature finding that IQ-type tests are among the very best predictors of job performance for a very wide range of occupations.

A few highlights from the comments:

Colin k:

1. When I graduated in 1998, a lot of high-test hiring companies like finance and consulting did ask for SAT scores.

[...]

4. HR departments hammer home that you're not supposed to make decisions based on information you're not supposed to know.

5. I have seen something similar happen, where applicants who were disabled would volunteer information about their condition that suggested they would not need any more sick time or "accommodations" than a non-disabled person... Anecdotally it tended to benefit the discloser.

Timothy Taylor summarizes some recent and not-so-recent research showing the surprising extent of occupational licensing.

My own guess is that the politics of passing state-level occupational licensing laws is driven by three factors: 1) lobbying by those who already work in the occupation to limit competition; 2) passing laws in response to wildly unrepresentative anecdotes of terrible or dangerous service; and 3) the tendency when setting standards to feel like more is better. But in a U.S. economy which is hurting for job creation, especially jobs for low-income workers, states should be seriously rethinking many of their occupational licensing rules. Many would be better-replaced with lower standards, certification rather than licenses, or even no licenses at all.

One approach I would like to see is one in which being in licensed in one state means that you are licensed in every state. State-specific licensing requirements strike me as violating the spirit, if not the letter, of the Constitution's provisions protecting interstate commerce.

Timothy Taylor, managing editor of the Journal of Economic Perspectives, has an excellent article in the Spring 2012 issue on his job of editing economists. I'll hit highlights along with comments on how his experience with editing dovetails with mine.

His Background

I had spent a couple of years in Stanford's Ph.D. program, before dropping out with a master's degree, and I had been working for a couple of years at the San Jose Mercury News as an editorial writer and columnist.

When I read that, I realized that I had met him in September 1985, shortly after he had dropped out. We met at a PERC conference in Big Sky, Montana for economists and journalists. I was covering it for Fortune. I asked him why he had dropped out of the Ph.D. program and I still remember his answer: "When you get to the second quarter of a two-quarter IO [Industrial Organization] sequence and you haven't even heard the word 'firm,' that's a problem."

Superfluous Fluff

Some economists like to believe (although this belief has blessedly faded in recent decades) that economics is an edifice built on the rocks of mathematical theory and statistical empiricism, and everything else is superfluous fluff. McCloskey (1983) thoroughly strafed that conceit, pointing out in "The Rhetoric of Economics" that the research and analysis of economists is built on uncertain and subjective judgments, and often uses, among its rhetorical tools, analogy and metaphor, appeals to authority and to commonsense intuition, and the use of "toy models" counterbalanced with the choice of supposedly illustrative real-world episodes.

On Introductions and Conclusions

Introductions of papers are worth four times as much effort as they usually receive. The opening paragraph of each main section of a paper is worth three times as much effort as it usually receives. Conclusions are worth twice as much effort as they usually receive.

Get and Hold the Reader's Attention

Barney Kilgore, who was editor of the Wall Street Journal during its time its circulation expanded dramatically in the 1950s and 1960s, used to post a motto in his offifice that would terrify any editor (as quoted in Crovitz 2009): "The easiest thing in the world for a reader to do is to stop reading." An editor can help here, by serving as a proxy for future readers.

As editor of the Econlib Feature Article every month, and as editor of a few hundred articles for The Fortune Encyclopedia of Economics and The Concise Encyclopedia of Economics, I always have and had the Kilgore thought in mind. (Although I had never heard it: I just learned it writing for Fortune.)

Intensive Editing

For many JEP authors, my extremely hands-on editing comes as a surprise. After all, most of those who are listed as editors of journals or conference volumes don't actually "edit" in the commonplace meaning of the term.

In the guidelines I sent out to authors for the Encyclopedia, I wrote, "Expect to be more heavily edited than you have ever been in your life."

Our God-given Right to Write Badly

Taylor has a great quote from Donald McCloskey in 1985 that expresses what I think most economists think about writing and what I'm sure was my attitude circa 1979:

Most people who write a lot, as do economists, have an amateurish attitude toward writing. Economists do not mind criticism of their facts or their formalisms, because they have been trained in these to take criticism, and to dish it out. Style in writing is another matter entirely. They regard criticism of their drafts the way a man unfamiliar with ideas regards criticism of his ideas: as an assault. . . . The economic writer, therefore, cherishes his habits of style as matters God-given, or at the least highly personal. One cannot change one's body-type or basic character, and it is offensive for some creep to criticize them . . .

The two people who did the most to help me out of this were my wife, a professional editor, and the late Dan Seligman, my editor at Fortune in the 1980s.

How the Economists Took Feedback

When you deal with academics, you aren't necessarily working with a group of great team players. However, my experience in editing economists over the last quarter century has been overwhelmingly positive, and certainly has not borne out fears of an inevitable clash between authors and editors. With remarkably few exceptions, JEP authors have been receptive, respectful, and even on occasion grateful for our comments and my detailed editing. They often say that it was a pleasure to receive constructive feedback--which I interpret as a not-so-veiled comment on the editorial feedback they are accustomed to receiving.

Similarly, most of my experiences with authors for the two Encyclopedias were positive. I remember that the late Alfred Kahn, in response to my edit of his "Airline Deregulation" article for the Fortune Encyclopedia of Economics, said that I had flattened his style. He was right: it needed flattening. But he took it professionally. There were two horror stories. But those two authors' articles didn't get published. One positive example particularly stands out, given his stature in the profession: the late George Stigler. I knew all of his work on monopoly and I sent him a detailed outline of what I wanted upfront: use this segment from this article, that segment from Memoirs of an Unregulated Economist, etc. He followed it like a school boy and the result is one of my favorite articles in the Encyclopedia.

The Importance of Clear Writing

One vision of "knowledge" is that it all appears in the specialized literature, and dissemination of that knowledge--whether through JEP, policy reports, articles in the popular press, teaching, or textbooks--cannot add to knowledge. However, I believe that knowledge is multidimensional: for example, as ideas and applications are applied and considered and explained in various contexts, new strengths and weaknesses are ever-emerging. One of the nicest compliments our JEP editorial process ever received was from a prominent author who sent us a first draft that, by JEP standards, was overly technical. We pushed him to scale back the algebra and to explain in words. With his revision, he sent along a note saying as he had worked to explain the material in a way appropriate for JEP, he had also come to a better understanding of his original technical demonstration.
Knowledge doesn't end with the QED at the end of a proof or with the publication of a regression table. An editing process that produces an accessible discussion of results is part of knowledge, too.

This way of thinking has motivated me in everything I've ever written, whether for academic journals or for more-popular publications. I remember a colleague at the University of Rochester 35 years ago referring to popular writing as "hack writing." If you think that way, then your popular writing is likely to be hack writing. But to do it well, you need to show as much respect for the final product as you do for more-technical writing.

Charles Kenny writes,

The good news is that decolonization began a process of leveling the playing field, with rapidly climbing and converging indicators of health and education worldwide. Thanks to the Flynn effect, IQs are doubtless on a path of convergence as well, and the poisonous idiocy of genetic explanations for wealth and poverty will soon lose what little empirical support they might appear to have today.

Read the whole thing. To me, it seems possible to believe that IQ affects economic development without denying that economic development affects IQ. It also seems possible to believe that IQ affects economic development without claiming that IQ is racially determined. I would hope that one could undertake research on the role of IQ in economic development without being presumed to have racist intent.

Does breast-feeding really give your kids a leg up in life?  It's an important question, and there's a lot of research on it.  But most of the research is, at best, moderately convincing. 

The key weakness: If parents falsely believe that breast-feeding is good for kids, then the (genetically and environmentally) "best" parents will be more likely to breast feed.  When their kids turn out well, breast milk will undeservedly get the credit. 

Sure, you can control for parents' genetic and environmental quality.  When you do, the effect of breast-feeding on e.g. IQ shrinks but doesn't disappear. But you always have to worry that the lingering correlation reflects unmeasured differences in parental quality.

I've figured out a more convincing way to measure the effect of breast-feeding, using what economists call a difference-in-differences approach.  The starting premise: Breast-fed twins get less breast milk because they have to share it.  They probably get more than 50% of a normal dose, because milk production responds to nursing.  But when nursing time doubles, milk production less than doubles.  As a result, moms who want to breast-feed their twins are more likely to supplement with formula. 

Given this fact, it's tempting to compare the outcomes of twins and non-twins, then chalk up the difference to breast milk.  But that's no good.  Different doses of breast milk are just one of many differences between twins and non-twins.  (For starters, twins have lower birth weights).  I propose a more sophisticated approach:

1. Measure the differences in outcomes between breast-fed twins and breast-fed non-twins.

2. Measure the differences in outcomes between bottle-fed twins and bottle-fed non-twins.

3. See if (1)>(2), and if so, by how much.  The key intuition: If breast milk matters, the outcome gap between breast-fed (twins and non-twins) should exceed the gap between bottle-fed (twins and non-twins).

Of course, this only measures the marginal effect of breast milk, not the total effect.  Perhaps a small dose of breast milk is all a baby needs to realize all the benefits.  But to the best of my knowledge, any study along these lines would be a big advance over previous research. 

P.S. Any researcher who wants to steal my idea is welcome to do so.

In March, I had a post about William Nordhaus's article in the New York Review of Books, an article in which he responded to claims by 16 scientists who are global warming skeptics. That post gave rise to a lot of good comments.

Today Bob Murphy published an excellent critique of Nordhaus's piece. The whole thing is worth reading. I'll hit some highlights.

1. The last 10 years. Murphy catches Nordhaus in a rhetorical sleight-of-hand. Nordhaus had written:

The first claim [of the 16 scientists] is that the planet is not warming. More precisely, "Perhaps the most inconvenient fact is the lack of global warming for well over 10 years now."

Notice the rhetorical sleight-of-hand: Nordhaus attributes the claim that "the planet is not warming" to his critics, and then at least has the courtesy to follow-up with their actual statement that "the most inconvenient fact is the lack of global warming for well over 10 years now."

Those are different statements. Yes, it's easy to knock down opponents when Nordhaus is allowed to change their position. The 16 signatories to the WSJ piece never claimed that "the planet is not warming," relative to preindustrial times. No, what the 16 signatories to the WSJ piece claimed--and which is true, at least depending on which data set one uses--is that there has been no global warming in well over the last ten years. Indeed, look at Nordhaus' own graph: It shows that the current temperature deviation (of about 0.8 degrees Celsius) is the same value as it was back in the late 1990s. And yet Nordhaus somehow thinks this chart should embarrass his opponents.

By the way, a good editor of Nordhaus's piece would have caught this. Had I edited it, I would have insisted that Nordhaus admit that they're correct. My edit would have looked something like the following: "They're right about the last 10 years. The previous 100 years, though, are a different story. During that time, global temperatures rose by an average of about 0.8 degrees C." I'm guessing, though, that the 16 scientists weren't disputing this.

2. Whether actual global warming has been less than what the models predicted.

Notice what Nordhaus has done: When faced with a skeptic challenge that the climate models predict more warming than has actually occurred, Nordhaus retreated to defending the view that the prevailing suite of climate models explains past temperature movements better when they attribute a sizable impact to human activities, than if these computer models are run with natural influences ("forcings") alone.

These are entirely different claims. The WSJ scientists were not claiming that anthropogenic changes to the atmospheric composition have not given rise to an increase in the global average temperature, but that the increase has been less (considerably so) than that produced by the standard collection of climate models. It should come as little surprise that the climate models do not well capture the actual climate, because the climate is fiendishly complex, incompletely understood, and hence difficult to model. Consequently, it is reckless to go forth with trillion-dollar taxation schemes on the basis of our limited understanding. Until models are able to more accurately replicate the climate behavior of the observable past, it is foolish to think that they will produce reliable climate projections of an uncertain future.

3. Economic damage from global warming.

Nordhaus had written:

The question here is whether emissions of CO2 and other greenhouse gases will cause net damages, now and in the future. This question has been studied extensively. The most recent thorough survey by the leading scholar in this field, Richard Tol, finds a wide range of damages, particularly if warming is greater than 2 degrees Centigrade. Major areas of concern are sea-level rise, more intense hurricanes, losses of species and ecosystems, acidification of the oceans, as well as threats to the natural and cultural heritage of the planet.

But Murphy goes back to Tol's work and, on that basis, writes the following:

As Tol's diagram quite clearly indicates, the consensus of economic studies finds that global warming would be on net beneficial to human welfare, at least through 2C degrees of warming (and this is relative to the current baseline, not to preindustrial times). This is not at all what the innocent reader would have taken away from Nordhaus' description of Tol's findings.

4. The benefits or harm of taxes on carbon.

On this, Murphy quotes an earlier piece he wrote on Nordhaus's DICE model:
The 2007 DICE model contains simulations not just of the baseline (no controls) and the optimal carbon tax scenarios, but of many other policies as well. These calculations show that the dangers of an overly ambitious or inefficiently structured policy can swamp the potential benefits of a perfectly calibrated and efficiently targeted one (that is, the optimal carbon tax scenario). As table 4 indicates, Nordhaus's optimal plan yields net benefits of approximately $3 trillion (consisting of $5 trillion in reduced climatic damages and $2 trillion of abatement costs). Yet some of the other popular proposals have abatement costs that exceed their benefits. The worst is Gore's 2007 proposal to reduce CO2 emissions 90 percent by 2050; DICE 2007 estimated that Gore's plan would make the world more than $21 trillion poorer than it would be if there were no controls on carbon.

Murphy concludes:

Although leading climate economist William Nordhaus tries to cast himself as the messenger of objective science, his attempt to rebut the "global warming skeptics" is itself filled with misleading arguments. The actual situation is that the physical climate models have indeed predicted more warming than has actually occurred, while the economics literature casts serious doubts on the case for immediate government mitigation efforts.

UPDATE: I just noticed that David Friedman wrote a post highlighting Murphy's article. David also pointed out something I had missed. He wrote:

One point Murphy did not make but that is worth noting is that the benefits of climate control, on Nordhaus's own figures, are not very large. The optimal policy--for obvious reasons not likely to occur--is calculated to produce a net benefit of about three trillion dollars. That sounds like a lot of money--until one recognizes that it is spread over the entire world and about ninety years. That makes the annual benefit of the ideal policy about 33 billion dollar a year--roughly one percent of the current U.S. federal budget or one tenth of a percent of current world income.

Which suggests that, with a less ideal and more realistic policy, net costs are likely to be larger than net benefits.

Actually, $33 billion a year is one twentieth of a percent of current world income.

Yang, a Manchester student from China, emailed me some interesting observations about education signaling in China.  Reprinted with his permission.

---

Professor Caplan, 

---

In a later email, Yang adds:

---

A bit more of my observation: on the employers side, I am more familiar with the hiring behaviour of 'Shiye Danwei', a form of non-public institutions which are controlled by the state (For example almost every newspaper and tv station in China is organised in this way) and the good old state-enterprises. Excluding many who get in these institutions through back door, the qualification requirements are usually high. Good university degree is a must. And a master's degree is increasingly becoming a must, too. I am guessing a mixture: signalling, heads of these units competing for prestige, and general culture reverence for learning? 

In a comment at the Bleeding Heart Libertarians (BHL) site, "figleaf" wrote:

Consider further that the privately owned Facebook restricts user liberty more than any fully-owned public university website. Therefore it's not as simple as private-sector = more liberty, public sector = less. Consider further that Facebook is openly contemptuous of "citizen" privacy or the implicit right to the property of your personal information than the U.S. Census Bureau.

I think he meant to put the word "more" before "openly."

Later in his comment, he wrote:

Point being, I don't really care who's infringing liberties -- infringement by government vs. private interests is still infringement

Andrew Cohen, the BHL blogger whose post figleaf was commenting on, responded, in turn, to figleaf. Cohen surprised me. He wrote:

figleaf: this comment makes me think you're a BHL! My only limit about this is that I wouldn't say its about maximizing liberty at root, but maximizing well-being. My well-being requires liberty. I imagine yours does as well. I imagine most people reading this blog are the same. But I also think some people are better off with less liberty than I would otherwise think ideal--and I would not want to make them worse off by "forcing them to be free." In any case, I completely agree that it does not matter "who's infringing liberties." We should be concerned, I think, about any accumulations of power--whether in the hands of government officials or private parties--because we should oppose any attempts to use such power to infringe on others.

What I get from this is that neither Cohen nor figleaf sees the crucial difference between the two kinds of power.

figleaf is right that FB is contemptuous of privacy. I'm not sure that the U.S. Census Bureau is less contemptuous. Its handing over Census data to the Secret Service so the federal government could round up Japanese Americans and imprison them was pretty contemptuous of privacy, to put it mildly.

But let's grant, for the sake of this discussion, that FB is quite contemptuous of privacy and that the Census Bureau is less so. Here's the difference. Every single person who signs up with Facebook does so voluntarily. If FB had committed to guarding your privacy, then it would be breeching a contract by doing so. But I've never seen FB make that commitment.

The U.S. Census Bureau, by contrast, uses the threat of force to get its information. That's a pretty big difference. It's not one that I would expect, say, the New York Times, to point out. But it is a distinction that I would have expected from someone who calls himself a bleeding heart libertarian.

Timothy Taylor's post is based on an article by Melissa S. Kearney and Phillip B. Levine in the journal Taylor helps to edit.

The cause-and-effect evidence here suggests that for many women who give birth as teenagers, their life outcomes like level of education achieved, income, employment, and chance of marriage are already so constrained that they are not made worse off by having a child as a teenager. Encouragement about contraception or abstinence can help reduce teen pregnancy on the margin. But what many teen girls from low socioeconomic status backgrounds need is a reduced prospect of marginalization, and a greater chance for personal and economic advancement.

Read the whole thing.

Scott Beaulier and I argue that behavioral economics explains a lot about poverty; indeed, the poor deviate from neoclassical assumptions to an unusually large degree.  Consider, for example, the fact that the poor are far more likely to be single, even though being single is an expensive luxury. 

Law professor Amy Wax has a nice piece on poverty and the family that coheres well with a behavioral economics of poverty.  Wax's main building block is the distinction between local and global choice, but it's easy to interpret her story through a behavioral lens.  Here are some highlights from her "Diverging Family Structure and 'Rational' Behavior: The Decline in Marriage As a Disorder of Choice."

Her strategy:

[M]y model rejects the notion that group disparities can be explained by positing a unitary "rational" response to the peculiar circumstances confronting distinct sociodemographic groups. Instead of linking choices directly to external conditions (either economic of social), this model turns inward to examine modes of thought and action that inform the decisionmaking process... The proposed explanation does not turn on external conditions, but looks to what is going on in people's heads. How people think about costs and benefits - specifically as they relate to sexual and related conduct bearing on the quality of interpersonal relationships - is what matters most.

The "crummy boyfriend" problem:

[T]he single mothers the authors interview complain most consistently about their male partners' infidelity, which often leads to the birth of children outside the relationship. But infidelity is only one factor impeding the formation of lasting unions. The women also describe a range of other shortcomings, including poor impulse control, violence, financial
profligacy, drug use, and poor work effort. These women's observations strongly suggest that their failure to marry, despite a professed desire to do so, is a function of their men's anti-social behavior - what Edin and Kefalas dub the "crummy boyfriend" problem.

...It can be argued that what makes boyfriends crummy is a tendency to think locally. The decision to engage in many of the complained-of behaviors would appear to involve a tradeoff between satisfying immediate desires and securing long-term benefits. The choices may minimize costs in the short run, but often wreak destruction in the long run.

Behavioral econ and contraceptive use:

One key behavior that affects reproductive patterns is the effective use of contraception. Although the failure to use birth control may not directly undermine relationship stability, conscientious contraception is critical to reducing out of wedlock childbearing. The evidence suggests that differential patterns of contraceptive use, with resulting variations in rates of extramarital pregnancy, are an important component of observed race and class differentials in extramarital childbearing... Because effective contraception requires anticipating the long-term costs of unprotected sex, groups that think globally can be expected to use control fertility more effectively and conscientiously, and those that think locally less so.

What went wrong:

[T]hese developments are best understood as the product of moral deregulation. The rise of individualism in the wake of sexual liberation weakened the moral and institutional conventions that dominated before the 1960s. The sexual mores embodied in these conventions were designed to guide most people to stable choices. By establishing "simple rules for simple people"... these strictures functioned not so much by encouraging global thinking as such, but by obviating the need to think, or to think very much, about family formation and sexual choice. Rather, all that was necessary was to follow the script, and the script was simple.

This makes sense as far as it goes, but I say that a lot of the "moral deregulation" wouldn't have happened if the welfare state wasn't around to foot the bill for irresponsible behavior.  Remember my critique of Charles Murray?

Imagine the welfare state were completely abolished.  Does Murray really think that this wouldn't make it considerably harder for lazy men to sponge off the women in their lives?  Convince a lot of men to swallow their pride and take a low-wage job?  Change the way that women look at a macho but habitually unemployed man?  And that's only the short-run impact.  In the medium-run, what's socially typical changes what's socially acceptable.  Murray has been wisely saying so for decades.  Why on earth should he fatalistically assume that this interaction only moves in one direction?

I say this works equally well for Wax.  If the welfare state were completely abolished, unprotected unmarried sex would immediately be a lot scarier.  And in the medium-run, what's socially typical changes what's socially acceptable.  When more of their peers delay child-bearing until marriage, even kids who ignore incentives will revise their behavior out of sheer conformity.

Will the whole process take decades?  Then we'd better get started today.

There are too many interesting things to write about at length this morning and so I'll just say a little about three.

EU Dispersion: Check out this graphic of hypothetical monetary unions to see how incredibly diverse are the members of the actual Euro union compared to other hypothetical unions. Of course, the devil is in the details and I don't know the specific "over 100 characteristics" the studiers used. In 2001, I bet an Austrian central banker that least one country would have left by 2006. Of course, I lost. What I learned from this and other failed bets is something that Milton Friedman learned relatively late in life also: he was almost always right about an outcome but almost always wrong, in one direction, about how quickly that outcome would happen.
HT to David Levey.

Austerity Policy: Bob Barro has a good piece in the Wall Street Journal this morning. Great excerpt:

Two interesting European cases are Germany and Sweden, each of which moved toward rough budget balance between 2009 and 2011 while sustaining comparatively strong growth--the average growth rate per year of real GDP for 2010 and 2011 was 3.6% for Germany and 4.9% for Sweden. If austerity is so terrible, how come these two countries have done so well?

I would have liked him to drop the word "austerity," though, and instead dig into the details: there's a lot of difference between austerity due to tax increases and austerity due to cuts in government spending. Tyler Cowen has made this case cogently.

And, of course, as I've said many times, the post-war drop in federal spending as a percent of GNP by about 35 percentage points, with the unemployment rate never going above 4 percent, is Exhibit A against the Keynesian model.

MIT economist Esther Duflo, in her first Tanner lecture at Harvard, said the following:

The emphasis on self-reliance can go too far. When you create the conditions where the basic constraints are more or less automatic, you give freedom, not take it away.

I don't know what Professor Duflo meant by "freedom." I'll wait until I can see the transcript to see if she ever defined it. She illustrated with the case of water. Here's an excerpt from the news report:

What her research in India and other developing countries has shown is that too much choice about everyday needs, such as whether to boil water or trust the government to immunize children continually, imperils the poor. If your basic health relies on your remembering to boil the water, you are not more free, she said.

"In Boston, I would have to go on a camping trip to drink unchlorinated water," she said. "In both senses, the rich are subject to a more paternalistic policy than the poor. Does that make them less free?" she asked.

Um, yes, it does. If the government mandates chlorination, you are not free to drink unchlorinated water out of your tap. That one seems simple. The only way I can understand why she asks that question as if it's rhetorical is if she equates freedom and wellbeing. But, again, I'll have to wait and read the whole lecture.

In his book The Upside-Down Constitution, Michael Greve suggests that in theory there are two types of federalism. With competitive federalism, state governments compete with one another for citizens. With cartel federalism, state governments collude to raise spending and taxes and expand regulatory authority. I have cited Greve here, where Medicaid is an example of this sort of collusion. We also did a talk with Greve.

Examples of competitive federalism include Canada, Switzerland, and the 19th-century United States. Examples of cartel federalism include Argentina and, increasingly, the United States today. With cartel federalism, the central government lowers the cost to the states of spending and regulating. When the central government distributes tax revenues to the states, it encourages spending. When the central government restricts state regulatory competition (for example, by allowing state X to restrict the ability of health insurance companies, doctors, or lawyers from state Y to offer their services in state X), it encourages over-regulation.

Greve's book examines the Constitution as a bulwark against cartel federalism. However, as he points out, it seems that other factors, notably sectional discord, seem to provide a better bulwark. Thus, Canada and Switzerland, with their internal linguistic differences, resist cartelization. In the U.S., the intersectional discord between the North and South may have accomplished something similar.

What to expect from Europe, then? The press is reading the latest European election returns as a rejection of "austerity," because that is the way the elites promoting cartel federalism wish to read it. However, another way to read the returns is as an assertion of nationalism and a sign of resistance to cartel federalism.

My sense is that the people of Europe do not want cartel federalism. The elites want it in the worst way. My prediction is that the elites will win and the masses will lose, because the elites are more determined and they understand political power more clearly.

Ditto for the United States.

In a comment on my post yesterday, BLM4L had another way of calculating the implied elasticity of demand for cigarettes. His looked right; mine looked right too. But they didn't give the same result. The problem, it turns out, is that he and I were both wrong. I did the analysis in too much of a hurry because I wanted to get it done quickly and deal with all my emotions about my daughter leaving for Thailand yesterday after a short visit.

We should have both forgotten about the earlier year baseline and simply worked with the data on (1) the estimated tax revenues gross of backfill and (2) the backfill. Those two numbers, combined with the price before the tax increase, are all we need.

So here goes.

The gross revenues from the tax are estimated to be $810 million. That means that the analyst must be assuming 810 million packs sold in the first full year after the tax is implemented. So that part of what I did was right.

But then we can use the "backfill" number to estimate what the analyst estimated to be the reduction in the number of packs bought because of the tax. The loss in tax revenues that the state government collects with the old 87-cent tax is $75 million. That means that he's estimating $75 million divided by 87 cents, or 86 million fewer cigarettes sold because of the $1 tax increase. This is a reduction of 86 million divided by 896 million (810 million + 86 million) or 9.6%.

So a 20% price increase leads to a 10% cut in quantity. Bottom line: elasticity of demand = -0.5.