Wednesday, December 22, 2010

Sour Grapes--er, Milk

When hearing a story about ethanol subsidies diverting corn from cattle feed and raising its price, angering dairy farmers, I confess my reaction was uncharitable. In fact, my reaction was something like "Oh, are the poor dairy farmers being forced to pay an artificially elevated price for something important to them? Poor babies. I know they would never support anything like that."

Of course, the ethanol subsidies are a terrible idea, too; it's just interesting to see such hypocrisy without any sense of self-awareness or irony.

Sunday, December 19, 2010

Fun with Google Ngrams

I saw a link on Marginal Revolution to the Google Ngram Viewer. It tells you how often a phrase occurred in the books contained in Google Books. My first thought was that Deirdre McCloskey should play around with it a bit, since her most recent work deals with the importance of language and other factors in allowing the industrial revolution and economic growth. For example, consider this ngram of bourgeoisie. Or maybe don't; it only shows how many times the word occurs. McCloskey would be interested in how the word is used--is it an epithet or used to praise?

So then I started wondering who's been mentioned more in recent years, and I decided to type in those two figures who towered over economics in the 20th century, Milton Friedman and John Maynard Keynes. Here's what you get. I recommend clicking the link; the graphs below are tiny by comparison.

I think it nicely reflects their roles over the last century, up until the last few years, when Keynes has made a resurgence. The graph doesn't seem to reflect that, at least, not in 2007 and 2008. Hyman Minsky is barely visible by comparison to both of them, so I won't even include that graph here.

I wondered how some other famous economists would compare. My expectation was that Adam Smith would be big, but I didn't realize how big:

Wow. He's surpassed by Marx in the 60s until the 90s (which fits with the times, I suppose, but is nonetheless frustrating), but otherwise Adam Smith seems to tower over the other big names. I was sad to see David Ricardo with so few mentions. For the sake of Austrians out there I threw Ludwig von Mises in, too. Sorry, Austrians; even Paul Krugman is getting more mentions than Mises nowadays (note that the frequency with which an economist is mentioned does not suggest that they are wiser or more correct).

Who are the other big names I should be putting in here? It would probably be best to drop Adam Smith and Karl Marx from any comparisons you do with any modern economists; they are mentioned so often that they make modern economists hard to see on the graph.

Friday, November 19, 2010

Airline Safety is Simple

My god, I haven't updated since September. Life is kicking my ass lately.

The big story in the news lately is the TSA's increasingly invasive search procedures. My friend Art Carden has called for abolishing the TSA. This article points out that the TSA doesn't seem to actually catch any terrorists, and it's not clear why the mere existence of the TSA would deter terrorists more than the private contractors that provided security before the creation of the TSA. 

Here's what I really don't understand: Why does it make sense to have a government agency providing security? As Art points out, airlines have an incentive to provide security, if only because they don't want to lose planes and pilots to terrorists. If you think that's not enough incentive, then make airlines legally liable for damage caused by their planes and for the deaths of passengers on their planes. Then step back and let the airlines provide security. They will search for and find the right balance between annoyance and safety--that is, they will provide safety up to the point where the marginal cost to passengers, in terms of annoying safety procedures, is equal to the marginal benefit to society (in risk of death and financial loss). 

Contrast this with the TSA: What incentive do they have to worry about passenger convenience? They only face weak pressure filtered through the political process. Suppose something slips through, and someone gets hurt; the agency is not going to lose money as a result. It will face political pressure to do a better job, but it would likely get more funding as a result. The TSA faces perverse incentives. 

This reminds me of Mixon's Law (named after Wilson Mixon): Government agencies can always justify funding increases. There are two reasons to increase funding for a government agency. 
1) The agency is doing really well, and should be rewarded with more funding. That way it can do more great stuff.
2) The agency is doing a terrible job, and should be given more money so that it can do a better job. 

Thursday, September 16, 2010

Good Questions From My Students

I've been teaching two introductory classes, and my students have asked me some really good questions, which is part of what makes teaching worthwhile. For example:

Why are there price supports for milk, but not for, say, steak? I don't know; the just-so story I suggested was that milk is sold primarily directly to consumers, who are a very dispersed interest group (so they find it difficult to organize to oppose the regulation). Steak is an important input for many restaurants, so perhaps they form an effective counter-lobby against ranchers. Bryan Caplan's answer to why such a clearly inefficient regulation would exist would be (in part) "voters are rationally irrational and support the policy", but I don't think that's true here. I don't think most voters are even aware milk price supports exist. It has to be some sort of classic lobbying battle.

Is there regional variation in minimum wage laws that correlates with homelessness rates? One student said that she had lived in Hawaii, where the minimum wage exceeded the federal wage and homelessness was rampant. I guessed that if one were to run the data, one would not find a relationship (although I don't think there'd be a causality problem--how would high rates of homelessness cause a higher minimum wage?), but it sure would be interesting to check. 

Why do some cities have rent control, but not others? Why New York and Santa Monica, but not Atlanta? I don't really have any good answer here. Anyone have any ideas I could run by the students?

Friday, September 03, 2010

David Friedman On Macro

I am teaching an introductory Macro class this semester, and it always makes me feel like a snake-oil salesman. David Friedman has a great new blog entry on Macro. I have two additional thoughts on the subject.

1) I have another objection to Macro: we cannot see the counterfactuals; there are no good natural experiments to test hypotheses. When some states do one thing, and others do a different thing, we end up with lots of different observations that can be used to test a hypothesis. We can see how two similar states that do two different things differ from each other, and this tells us something about the effects of policy. With the U.S., however, there are no other data points--different countries are too dissimilar to make direct comparisons. As a result we cannot know what would have happened if macro policy had been different. What would have happened without TARP, or the stimulus bill? We don't know. There's no way to know. Combine this with the poor predictive power of macro theory in its current state and you get something that is of dubious scientific value. Aside from "Inflation is always and everywhere a monetary phenomenon," there's not a lot of Macro that I would be willing to stand behind firmly.

2) Friedman suggests that insufficient attention has been paid to regime uncertainty--the reluctance of individuals and firms to make costly economic decisions when policy is uncertain. Bob Higgs has been writing about this topic for some time. I blogged about it once. Here's Jerry Jordan, former Fed bank president, making the same point. Here's Don Boudreaux reading James Madison on the subject. Here's Russ Roberts (after an interview with Higgs) on the subject, and again here. Here's Scott Sumnerdismissing the idea. Finally, here's Tyler Cowen on regime uncertainty (he calls it "policy uncertainty"), and not atypically, he takes a muddy position. My point here is that I'm not sure if insufficient attention has been paid to this topic. Lots of economists are aware of it. How much attention should the topic receive? I don't know. Given that it's so very difficult to test macro hypotheses, would paying attention to the topic of regime uncertainty make any difference at all?

Sunday, August 15, 2010

Subsidies for Electric Cars Are Also a Bad Idea

In June Art Carden and I argued that subsidies for nuclear power were a bad idea, not because there's anything wrong with nuclear power, but because we cannot know the best way to generate cleaner energy--it takes a market with prices to figure that out.

Daniel Gross argues in this piece in Slate that people who oppose subsidies for electric cars misunderstand "the process of innovation, economic history, and the current macroeconomic situation". For someone who is writing with such confidence, I would say Gross is the one displaying staggering misunderstanding. Yes, costs of building electric cars will probably come down with economies of scale, and yes, that process has repeated many times through history. None of that suggests that subsidies are a good idea, and Gross doesn't even begin to justify subsidies. How can the government know that electric cars are the best solution? What about small turbocharged clean diesels, or hydrogen, or some other technology? How can the government know which is the best one into which to sink billions of dollars? It can't. With a subsidy, however, it is making that very expensive bet.

If we want cleaner cars, a gasoline tax is the way to go. Car producers will experiment with a variety of techniques in an attempt to find the cheapest way to reduce gasoline usage. We'll also get responses from consumers, who move closer to work, carpool, and find other ways to reduce fuel usage (thereby reducing pollution). Government subsidies for new car technologies make as much sense as subsidies for, say, new MP3 players or new vacuum cleaners--that is to say, they make no sense at all. Markets are great at technological innovation; rather than ramming one form of innovation down our throats, why not give everyone the incentive to innovate in a variety of ways until we find the best solutions?

Nashville Bike Share--Will It Be Berry Bikes All Over Again?

Personal stuff has kept me from blogging recently; I've just been too busy. I hope to slowly get back into things over the next few weeks.

Nashville has started a bicycle program called Nashville Bike Share to encourage people to ride bicycles rather than drive. My first thought upon hearing this was "This will be the Berry Bikes disaster all over again". In 1998 Berry College's student government placed bicycles around campus; anyone who wanted to use one could hop on and ride it to class for zero price. As detailed by Frank Stephenson and Daniel Alban in this Freeman article, it didn't turn out very well. Riders treated the bicycles poorly, and within weeks they were unusable. Why? They were common property; because everyone owned them, no one owned them, and because no one owned them, no one had an incentive to take care of them. No individual bore a significant portion of the costs of damage to a bicycle. This is the classic Tragedy of the Commons. The program was eventually abandoned.

I don't think the Nashville Bike Share will end up faring quite so poorly. Riders must check out the bicycles and return them to the checkout one hour before the checkout location closes, and hefty late fees are assessed if riders fail to do so. I don't see anything on the site about fees for damage to the bicycles, but with the riders being individually identifiable, simple legal remedies should work. It will ultimately come down to how diligent the bike share workers are in chasing down bicycle abusers. This is a huge improvement on the Berry Bikes.

Does this mean the program is a good idea? It's hard to say. On the one hand, if there is sufficient demand for bicycles for rent, then it should be profitable for someone to provide those bicycles. The fact that no one is doing so suggests that this is not a wise use of government funds (I'm guessing it's a government program--it doesn't actually say so on the site, so I'm not sure, and in any case, it could also be a poor use of private charitable funds). On the other hand, if there are unpriced negative externalities from non-bicycle transportation (air pollution and congestion from cars, for example) then more bicycle use could be efficient. If that is the case, however, then it makes more sense to raise the gasoline tax, since that allows individuals to find the lowest-cost ways of reducing externalities. 

Wednesday, June 16, 2010

The Economics of Information Security

I have uploaded a paper that I've just finished that surveys the literature on the economics of information. It discusses malware, botnets, and other attacks, and the defenses against them.

Frankly, I think it's pretty dry stuff. I initially thought it was going to be about encryption and online retail security, but it seems there's not a lot of economics there, and that particular problem is mostly solved.

Monday, June 14, 2010

Have Pity on Afghanistan

As if their fate wasn't bad enough when they lacked any resources of value (with the exception of opium which, of course, they're not supposed to grow), now they've got one: Lithium. Given their high levels of government corruption, I would expect the natural resource curse to strike.

Monday, June 07, 2010

A New Machinery of Freedom!

David Friedman is considering a third edition of his classic The Machinery of Freedom, and he's soliciting input regarding what to include and what to exclude. If you're familiar with the book and have an opinion, now's the time to express it!

This was the book that convinced me that I was a libertarian (and, for that matter, explained to me what a libertarian was). It's also the book that explained what kind of libertarian I was not. I think every libertarian should read the sections at the end on why most simple libertarian arguments about force don't make sense.

Friday, June 04, 2010

Some Reasons Why I'm Not a Big Fan of Ayn Rand

A lot of libertarians were influenced by novelist Ayn Rand. It's important to keep in mind that she wrote her novels in a different time, when it was radical to suggest that profit and self-interest might not be bad. While I think it's possible to get some useful things out of her novels--a sense of outrage at the destructive capability of government intervention, for example--there's not a lot more to be learned from them. I read it in high school, and was briefly excited. It opened my mind to different ways of thinking about the world. I soured on the philosophy itself pretty quickly, however.

Charles Murray has a  new review of two recent books about Rand, and it has some great criticism. When I look at the lives of the people who created and tried to live by the Objectivist philosophy, I don't really see anything that makes me want to jump on board. They seem miserable, hypocritical, self-deceptive, and prone to witch-hunts and purity tests that seem more like religion than rational philosophy.

There are plenty of knocks against the philosophy itself. David Friedman points out that her derivation of "ought" from "is" doesn't follow. Bryan Caplan suggests that her philosophy is at adds with evolutionary psychology (the same occurred to me after reading Nathaniel Brandon's biography a few years ago; they seemed to think human nature could be overcome by pure rational thought, or perhaps that human nature was pure rational thought--but evolution selects for reproductive success, not rationality. The results were affairs that ended badly.). Roy Childs pointed out years ago that the logical conclusion of her philosophy is Anarcho-Capitalism, not minarchy. A quick Google search will show you other critiques of Objectivism, although some of them are weak.

(SPOILERS for Atlas Shrugged below)
It has also always bothered me that Galt's Gulch is hidden by some kind of holographic screen, which is a pretty serious public good, yet we're also told that there's no taxation. So who pays for the screen? Surely it's not charity; that would be, in Rand's view, evil. The rest of the economics is pretty laughable, too--even with a  motor that pulls static electricity from the air, they could not have a complex, wealthy modern society without heavy trade with the outside world, for natural resources at the very least. They'd be lucky to achieve subsistence. It reminds me of Art Carden's critique of the end of Wall-e: If they decide to try farming, 90% of the population will die within a year.

Thursday, June 03, 2010

Miscellaneous Links

Here are some things that are worth reading.

How can people miss the obvious parallels between alcohol prohibition and drug prohibition, and if they don't, how can they think drug prohibition is still a good idea?

This article on record teenage unemployment prompts Don Boudreaux to write one of his many letters to the editor pointing out that there was a recent record hike in the minimum wage, which the article's author doesn't even mention. Mark Perry provides a nifty graph and commentary. Here's the They Might Be Giants song, Minimum Wage.

After events like the bungled attack on the "freedom flotilla", I first think about the wonders of free trade, but then I turn to something else: Why are we sending any money to Israel? I don't mean to imply that they don't deserve aid because they're evil, or that I'm taking any particular stance on Middle East politics. Rather, I wonder why we send almost $3 billion in aid each year to a country with a per capita GDP of over $31,000. We're sending aid to a very wealthy country. Do they really need our help? Assuming that aid actually does anything (which isn't so clear, in terms of economic development, anyway), wouldn't those $3 billion do more good in a country that is poor? I can't help but think it would do more good in Haiti, even if half of it were squandered.

Wednesday, June 02, 2010

Ford to Kill Off Mercury (Probably)--But Why Did They Wait So Long?

It looks like Ford is going to announce the demise of the Mercury Brand, which seems to me to be an obviously good idea. Mercury has offered slightly-modified versions of Ford cars for years, with the main difference being slightly higher equipment levels. The result was lots of unnecessary costs for producing slightly different sheet metal, emblems, and other cosmetic differences, with no clear benefit. GM did the same thing when it eliminated the Oldsmobile brand 2004, and the Pontiac, Hummer, and Saturn brands in 2009. Personally I think they should kill off Buick as well (in the U.S., anyway--it's still a big deal in China). All these brands lacked clear identities. Some of them had a clear identity at one time (Pontiac was a performance brand, Saturn produced small cars that were more reliable than the average GM car), but "badge engineering" diluted these brands. Ford also sold off the  Land Rover, Aston Martin, Volvo, and Jaguar components of its Premier Automotive Group.

I think successful car companies like Toyota and Honda have shown that two or, at most, three brands is optimal. For example, Toyota has Scion for the youth segment, Toyota for the mainstream, and Lexus as its luxury brand. Honda gets by with just Honda and Acura. Ford is now down to Ford and Lincoln (with some technological cooperation from Mazda). GM has Chevrolet, Buick, GMC, and Cadillac.

Here's my question: Why did these companies wait so long to clean up their messy brand identities? These problems have been around for years. Did it have something to do with labor agreements and the revisions to them necessitated by the recession? Or was it simply reluctance to kill off old traditions? Why didn't the stockholders force the companies to take these steps earlier? Maybe it was a good idea before, but it's not now--but why? What changed to make badge engineering become a bad idea in the last few years?

UPDATE #1: Nathan Prey suggests it has something to do with dealership legalities (by which I assume he means contracts). Katie Francisco suggests that the thing that allows Ford to kill off dealerships now (as opposed to earlier) is a decline in Mercury sales. I think that's borne out by this graph. I pointed out that this suggests Buick should be killed off, too, but Nathan says that big sales in China will keep that from happening here. I still think it would be fine to kill off Buick here and let them continue in China, if only to avoid the costs of the tweaks to distinguish them from their Chevrolet versions (or the shipping costs, if they're shipped here), but maybe those costs are really low, or maybe the Chinese market success depends on them being sold here for marketing reasons.

UPDATE #2: Autoblog asks the same question, and comes to pretty much the same answer.

Tuesday, June 01, 2010

What's Under Your Gas Station

The Kroger nearby put in a gas station. My wife took a picture of the enormous tank before they buried it. I thought it was pretty cool, so here it is.

Think about all the specialized labor and capital that goes into building this gas station.The workers know how to dig and build and hook everything up. There are tools for digging and moving things around, and there must be cool equipment used for building that big tank, and trucks and trailers for delivering it. The total operation must take hundreds of people, maybe thousands, most of them unaware of each others' existence, with no one coordinating the whole thing. Sure, there's probably a guy who oversees construction, but he doesn't oversee the production of the tank or the truck that delivered it. It's an incredible decentralized machine. Amazing, huh?

Tuesday, May 25, 2010

This American Life on Haiti and Development Economics

If you're interested in development economics and/or Haiti, you absolutely have to listen to this This American Life podcast. It has almost everything: insecure property rights, infrastructure problems, education, health, incompetent NGOs, justifiably skeptical Haitians, and the hazards of central planning. The focus is on attempts to improve the mango industry, one of Haiti's few exports. What's missing is discussion of how markets can solve some of these problems, but it's lurking in the background.

You might also enjoy this Bob Murphy story about his experience in Haiti.

Monday, May 24, 2010

Do They Hate Everyone Who Breaks Dumb Laws, Or Just Some?

It bothers me how many people get upset about illegal immigration simply on the grounds that the illegal immigrants are here illegally. They are upset that the immigrants didn't go through the (ridiculously convoluted, nearly impossible to penetrate) legal process to gain entry, permission to work, and citizenship. Laws that keep out peaceful people who just want to be productive are dumb. Shouldn't we be mad at the lawmakers, and not the people who break the dumb laws?

I wonder if the same people think the operators of speakeasies during alcohol prohibition were also moral monsters. Were they evil for allowing people in to drink? I think most people now agree that alcohol prohibition was a dumb policy. What about jaywalkers? What about someone who loses his temper and cuts off one of those "Do not remove under the penalty of law" labels on mattresses? Do illegal immigrant-haters hate those people, too?

Here are two seldom-heard reasons to want a lot more immigrants:
  • They tend to be young, and they pay payroll taxes, which means that they would postpone our problems with social security for many years. 
  • They all need to live somewhere. We have a lot of excess housing. It's not "re-inflating the bubble" if increases in housing prices are the result of more people buying houses to live in!
Check out Art Carden's posts on Division of Labour regarding immigration herehere, and here.

UPDATE: Hat tip to Art Carden yet again for this great Jeff Miron piece on illegal immigration. 

ANOTHER UPDATE: A friend who wants to remain anonymous says:
Another example of law-breaking relevant to the immigration debate is this: in the South before the war, you were BREAKING THE LAW by teaching slaves to read and write.  Might this look familiar:
Now, I'm not a racist and I'm all for people learning how to read and write, but they need to do it LEGALLY and not BREAK THE LAW of our sovereign country.

Friday, May 21, 2010

New Article in the Freeman on Nuclear Energy Loan Guarantees

Art Carden and I have a new piece in The Freeman on nuclear energy subsidies. Do we get to call ourselves prescient for our comments on removing limits on tort liability for the energy industry?

Tuesday, May 18, 2010

Guns in Nashville Bars: Opt-out Versus Opt-in

Here in Nashville the legislature has tried to pass bills making it legal for individuals to carry handguns into a bar. On first hearing this sounds like a terrible idea; well-armed drunks are a recipe for trouble. I personally don't like guns; I'm sure if I owned one, I would end up shooting myself in the foot. I'm simply not comfortable around them.

In this case, however, I think the bill's supporters have actually managed to craft a reasonable bill. Gun carriers cannot drink in the bar, and bar owners can opt out, banning weapons from their bars as they see fit. If it really is such a terrible idea, then all the bars end up banning guns and the problem is solved. The bill ends up doing nothing.

Perhaps, one might argue, the law would still be inefficient because bars will have to spend money on signage announcing that guns are not allowed; prohibiting guns in bars would accomplish the same goal without any wasteful expenditure by bar owners.

There is a simple solution to this: Make the bill opt-in instead of opt-out. Make the default legal rule "guns are banned in bars", but allow a bar to post signage saying "guns are allowed here". Bar owners could even add stipulations, such as "gun carriers can't drink" or "guns must be checked at the door" or "only guns below .38 caliber allowed" (or whatever). The result would be that only bar owners that actually wanted guns in their bars would have to deal with them. Bar patrons who don't want to worry about guns at bars can simply avoid those that have chosen to opt in. I wonder, would any of the bill's current opponents accept this version? They can't think that bar owners would willingly place themselves at risk (physically and financially) and their patrons at risk (mostly physically, I guess) if guns in bars really are a bad idea. If they still don't support the bill, are they really worried about safety or do they simply not like the idea of people carrying guns?

That last question isn't rhetorical; I genuinely want to know. What are the remaining objections to my alternative version of the law?

XXX Isn't Really About YYY: Some Suggested Compromises That Won't Fly

Robin Hanson famously argues that signaling drives much of behavior. Medicine isn't about health; it's about signaling to other people that we care, or that we're trying to be helpful--the real outcome isn't important (as suggested by evidence that health care expenditures don't contribute much to health).

Much (most?) policy discussion is driven by this signaling.  So, for example, the BP oil platform accident drives one side to suggest banning offshore drilling, and the other side to remain steadfast or even increase its support for drilling. Surely neither side can really mean this--stopping all offshore drilling would be too costly, and no one can really think that oils spills are a reason to be more willing to support drilling. These positions are just posturing to keep the other from getting some advantage.

If they were really interested in the public welfare, they would support some kind of compromise. This is a pretty easy one: Get rid of the limits on liability for oil spills, which causes injurers to take into account the full scope of the damage they could cause. This causes them to take greater precautions against accidents. It doesn't cause them to reduce the probability of an accident to zero; that's impossible, and the closer we get to zero probability of an accident, the more costly it becomes. Given that there's little the injured can do to influence the damage from an oil spill (aside, I suppose, from living on or near the coast), simply making the injurer liable for the full scope of damage caused should give the injurer the incentive to take the efficient level of precaution.

This might upset some conservatives, as it means that some oil platforms might shut down or fail to start up in the first place, due to increased safety or liability costs. It might upset some liberals because it only reduces the amount of drilling and the probability of accidents, rather than eliminating them. But if both sides were really interested in increasing safety and allowing drilling, it seems to me a reasonable compromise. Of course, the limit on liability will not be removed. The two sides are interested in signaling to their constituencies, not in making society better off. Drilling regulation isn't about safety; it's about showing you care about the environment or people driving cars. The same goes for mine safety: tort and civil law won't simply be allowed to sort out who should bear the liability for accidents, because it's not really about safety or business.

Another example is Cap and Trade. Liberals want to limit CO2 emissions with regulation, conservatives do not, due to opposition to the taxation implied by Cap and Trade or carbon taxes. Here's another simple compromise: Replace payroll taxes with CO2 taxes (or CO2 allowance auctions for Cap and Trade). Tax burdens shift but do not go up overall--in fact, a tax that creates a deadweight loss is replaced by a tax that eliminates a deadweight loss. Yet neither side will even propose such a bill, because they're interested in heat, not light (some people outside of government, including Al Gore, have proposed such an arrangement). CO2 regulation isn't about reducing CO2; it's about showing you care about the environment or taxpayers.

Such compromises are not always possible, but the fact that they sometimes are available but unexplored should create some doubts in the minds of anyone with faith in the efficiency of democracy.

ADDENDUM: Robin Hanson talks sensibly about regulation and infrequent accidents. Hat tip to Bryan Caplan at Econlog.

Wednesday, May 12, 2010

People DO Respond to Gasoline Price Changes

This is a terrible graph, layout-wise (if they're arguing that higher gasoline prices reduce miles driven, why is the dependent variable on the horizontal axis?), but it is interesting. The sections where the graph bends backwards are gas price spikes that lead to reductions in miles driven per capita. When gas prices go up, people do respond by driving less, and the bigger the price increase, the bigger the drop in miles driven.

The most interesting part of the graph is the section from 2008 to 2009, where the price falls while miles per capita continue to fall. I don't know what's causing this. If I had to guess, I would guess that, unlike the 1970s, we have a greater ability to adapt to gas price changes--by telecommuting, maybe--so once people started identifying such opportunities, they just kept on going. Also, the drop in housing prices may have allowed some people to move closer to work. Finally, the 2008-2009 price, while lower than 2007-2008, is still high by historical standards, so people may still be trying hard to find ways to reduce their high gasoline bills.

One more thing: If we want people to drive less, and use less gasoline, gas prices are the tool to use. Higher gasoline taxes will drive the price up and reduce gasoline usage. Whether or not that is a good idea is a separate question, but if the goal is to force people to use less gasoline, higher gasoline taxes are the most efficient tool to accomplish this.

Tuesday, May 04, 2010

Let's Play "Pat Robertson Channels God's Anger"

We all remember how Pat Robertson let us in on why God smote New Orleans and Haiti. This raises the question, why does God hate Nashville? Or more accurately, what is the reason Pat Robertson would (will?) give for why God hates Nashville?

On Facebook, Eric Lease suggested "It's that demon country music!".

Also on Facebook, Art Carden suggested "They finally released Johnny Cash's American VI, so Nashville has apparently outlived its usefulness.

My own suggestions: Tennessee failed to make it illegal for gays to adopt last year (Nashville being the seat of the state government). 

What do you think? What horrible sin has Nashville committed to deserve divine wrath? 

More Pictures of Nashville from Metrocenter and Salemtown

I went for a bike ride around Metrocenter with the crummy 2 megapixel camera in my cell phone and took some pictures and really low-quality videos. The area has experienced some flooding. It doesn't look like the buildings are in terrible shape. Last night my wife and I were part of a huge crowd that showed up to throw sandbags on a low spot in the levee that shields Metrocenter from the Cumberland River.

Some of the pictures below are panorama stitched together from several pictures. Combine the terrible quality of the camera with stitching and the result is a pretty bad image, but you can at least get an impression of the water levels. Be sure to click on the pictures to enlarge them.

Here's Morgan Park. That big body of water is supposed to be a big open grass area, with a baseball diamond in one corner. The auto stitching is particularly bad here. I had some images to the left, too, but the change in perspective made them unstitchable.

More pictures after the jump.

Sunday, May 02, 2010

Pictures From the New Nashville Aquarium

You might have heard that we got some record rainfall here in Nashville. In fact, it's been disastrous, with many homes destroyed and businesses damaged. Our house here is fine, although the dogs have been getting cabin fever from being cooped up all day.

We went for a walk to take some pictures this afternoon (all of the pictures below were taken by my wife). The Salemtown/Germantown neighborhood seems to have fared pretty well. Here's a view of Morgan Park from the river side, looking back to the west toward the community center (visible on the right). The park itself is flooded.

More pictures after the jump.

Friday, April 30, 2010

My Problem with Part of the Proposed Financial Reform

I'm not sure if it's in the current version of the reform bill or not, but one proposal for financial reform was a sort of FDA for financial instruments. It would review new instruments and determine whether they were valuable innovations or excessively complex and unnecessary--possibly even fraudulent--tricks that will lead to further financial disaster. So, for example, if a company offers some fancy new kind of derivative, the review board would have to approve it before issuance.

I have two problems with this (they're closely related to each other, but I think they're different enough to call them separate arguments). The first is well-summarized here with an example:

For example, before 1996, certain initial public offerings of stocks were subject to merit review in certain states, where the state decided if a security is a "bad" investment and thus not appropriate to be offered to its citizens. In fact, this is exactly what happened to Apple Computer when it first went public in 1980. Massachusetts prohibited the offering of Apple shares because they were "too risky," and Apple did not even bother to offer its shares in Illinois due to strict state laws on new issues. What if federal bureaucrats had had the power to impose their judgment on a "risky" financial product (such as an IPO) on a nationwide scale, or every state followed Massachusetts' lead?
That's taken directly from Marginal Revolution, which quoted it from Paul Atkins.  This is a great example of my first problem with this kind of reform: Financial instruments are really just contracts, and every one is new and different. New financial instruments are created all the time, with new and different terms. Every new financial instrument is a new contract. Can a review board really review and approve all of them in anything resembling a timely fashion? The only way I can imagine that they could do so would be to restrict financial instruments to a set of standardized forms. Issuers are allowed to change a few things--the interest rate, the time period, etc.--without needing approval. Changing anything else would require approval.

Yet this would almost certainly leave some value-increasing exchanges foregone. There must be some value in allowing new and different financial instruments that don't follow strict forms; they can't all be schemes and frauds. Arnold Kling would probably argue that we can do without the complexity and do fine with simple forms, but I'm no more comfortable with that than I am with governments deciding if an innovator like Apple should be able to issue stock.

My second problem with this kind of reform has to do with the FDA. Economists (particularly Robert Higgs) have long suspected that the FDA tends to be too reluctant to approve new drugs. The reasons for this are straightforward: The incentive to approve new drugs is low, and the incentive to deny them is high. If a drug is approved, and someone gets sick as a result, the public and Congress are going to blame the FDA. If a drug is approved, and it works wonders without getting anyone sick, then no one is going to sing the praises of the FDA. Furthermore, the people who could have been saved by a drug that is not approved are usually not a vocal interest group (a notable exception being HIV/AIDS victims), and their suffering is not visible to most of the public. As a result, the FDA tends to require drugs be tested for a long time before approval.

I would expect the same problem to occur with financial instruments. The regulatory approval body would have an incentive to reject most instruments, or at least subject them to lengthy reviews that delay their implementation (leaving many potential users of these instruments without them for some time).

To add my usual caveat, I'm not an expert in finance or macro, and my opinion on this subject is not as valuable as the opinion of such an expert would be.

Wednesday, April 28, 2010

Why Do Soccer Players Fake Injuries So Frequently?

I've often seen this question asked, and I don't think it's just an imaginary pattern. Here's my armchair economics-based analysis.

Real injuries in soccer are usually intensely painful, but brief (particularly shin and other lower-leg injuries--even with pads, they can still hurt). An injured player may briefly be in agony, but it ends quickly and the player can get back up.

This means that it can be difficult for a referee to tell a real injury from a fake one. If the referee is fooled, the penalty to the "offending" team is the same whether an injury is real or faked, so it pays to fake injuries. Furthermore, there's no disincentive to fake an injury--the referee is not going to penalize a team for trying to make the other team look guilty. Even if the referee wanted to do so, he'd have to use replays to reliably find the truth, and soccer fans cannot tolerate the delays that would be associated with replays. Maybe they could fine players after a game upon reviewing a recording of the game, but I suspect the fines would have to be really big to change player behavior.

So to sum up: In soccer, faking injuries is pretty much all benefit, no cost. Again, this is merely an armchair just-so story. I'd be interested in hearing other just-so stories, too!

Friday, April 23, 2010

Why Are Some Commercials Insulting to the Advertiser and Its Customers?

For example, there's the GEICO gecko's clueless boss (and his dumb ringtone), or the two idiots that sit in their car at Sonic--two examples of effective commercials. Then there are those annoying Progressive commercials with the completely unfunny woman at the counter; again, they make their customers and employees look dumb, but the effect is annoying. I guess my question is, why are companies so willing to look stupid and insult their customers? I don't mind; in fact, I think self-deprecation is endearing, but it still seems counterintuitive.

ADDENDUM: Upon further reflection, the relationship is more interesting than that. Commercials are more likely to be insulting to employees and customers if they are for companies that have direct interfaces with consumers--restaurants, car insurers, etc. Advertisements that speak in vague, positive generalities about companies come from companies that don't have much direct interaction with the customer (such as commercials from ADM or GE). Again, this seems counterintuitive. Shouldn't companies that are closer to their customers be less willing to depict customers as idiots, and less willing to portray themselves as awkward and stupid? Perhaps companies with a close relationship with consumers have goodwill that allows them to be silly, while companies without such relationships cannot afford to insult anyone.

This is all anecdotal; perhaps I'm just imagining things. 

Peel Back the Layers of the Marketplace Onion and it Still Stinks

I really don't like American Public Media's public radio show Marketplace. It's rife with bad economics. I once heard a show in which a reporter explained that the Federal Reserve has two tools for influencing the economy: interest rates and money supply. That's like saying there are two ways to drive a nail into a board: you can use a hammer, or you can use a stick with a metal head on it.

Last night while driving I heard the host of the show explain that there is a law against futures trading for onions in the U.S. I was excited because I had actually learned something new from this show that so frequently annoys me. I was delighted when the host pointed out that prices in the onion spot market are more volatile than in other agricultural markets. It turns out that both statements are correct, too.

Then, of course, I was let down, as the host said (and I'm paraphrasing) "It just shows that you never know what to expect from a market". This is an indication of incredible ignorance of economics. Increased volatility is exactly what economics predicts should happen if futures markets are eliminated. Why? Because futures markets allow people to bet on future prices. If I look at weather data and conclude that onions are going to be in short supply in three months, I can sell a promise to deliver onions then (at what will be a high price) and buy a promise from someone else to give me onions (at today's low price). The result is an increase in the demand for onions now, and an increase in the supply onions later. What happens to the price? It goes up now, and down in three months. Prices are smoother over time because speculating in futures markets allows planning for the future. It's intertemporal arbitrage. (This does not mean that speculative bubbles cannot occur; it just means that we should generally expect prices to be smoother over time.)

This is not a surprising result. Econ 101 students should understand this intuitively. It's disappointing that the creators of a much-listened-to radio show do not seem to understand this.

Tuesday, April 20, 2010

Economic Freedom and Government Requests for Data

Google has made available the number of requests for information and requests for removal of information that various governments made from July 1, 2009 to December 2009. I was curious what kinds of countries made various kinds of requests, so I plotted their Index of Economic Freedom score against their number of requests.

There are so few observations that's it's hard to say much. I had to throw out most of the removal request data because so many of them were classified as "less than 10" rather than specific number. It looks like there is a weak negative relationship, as one might expect--countries with lower rankings on the index of economic freedom made more requests. I suppose one could consider all sorts of variations on this, such as requests per capita. Maybe an industrious undergraduate could take a look at this. China is missing from this data, which leaves the U.S. with the most requests for data, and Brazil with the most requests for removal. Apparently Brazil's government requests lots of information from Orkut, which is a social networking site. Perhaps it's part of anti-drug investigations or some other criminal investigations. 

Friday, April 16, 2010

What If

I'm not a global warming denier; I accept the consensus view of climatologists that anthropogenic global warming is real. I am even willing to accept that it's worth doing something about.

It is my understanding, however, that the earth has been in a lengthy period of remarkably stable climate for some time, and that sometime "soon" (I'm not sure what that means in climatological terms--it could mean a thousand years from now as far as I know) we're due for some a cooling cycle. I can't find any nice summaries of the science on this, so let's just ignore my ignorance and suppose that we found out that global cooling was about to happen in the near future. Suppose also that this cooling would have serious implications for humans and for species around the world.

What would environmentalists want to do in this case? Would they be in favor of letting the world cool down, possibly leading to human suffering, and the extinction of many species? Would they be in favor of trying to warm the world somehow (not necessarily by increasing CO2 emissions--they might not like ocean acidification or some other side effect)? I don't know what their answer would be. Maybe different environmentalists would answer differently. I think the answer says something important about the opinions of the person answering, though.

I think economists would be in favor of doing whatever cost-benefit analysis supports, even if that means trying to manipulate global temperatures to avoid the costs of accommodating rapid climate change.

Wednesday, April 14, 2010

Art Carden and Others on The Myth of the Rational Voter

There's video up of Mike Munger, Art Carden, Randall Holcombe, Geoff Brennan, and Bryan Caplan discussing The Myth of the Rational Voter at the 2008 Public Choice Society.

Part 1

Part 2

Part 3

Part 4

Part 5

Art Carden makes a lot of points from our forthcoming piece in Economic Affairs, The Truthiness Hurts. You can read a pre-print version of it here. I was disappointed to see that Art didn't mention that my wife came up with the name for "Stick-It-To-the-Man Bias", but then, his time was very limited. In fact, the editor seems to have cut out some of his remarks (which is a shame, as I thought he was more interesting than the other speakers).

Sunday, April 11, 2010

A Research Project for an Industrious Undergrad: Discrimination in the Checkout Line

There's an interesting literature that attempts to measure racial discrimination. For example, I once read a paper that tried to determine whether basketball referees are harsher on players who are not of the same race (as I recall, they were).

Here's something that an industrious undergrad might be able to pull off (although he or she might need a partner). Go to a local supermarket and sit near the checkout lines. Record the gender and race of each employee in the checkout line and each customer that goes through the line (you probably ought to ask a manager for approval first). Also  record the number of people that go through each line in, say, an hour. Repeat this at some other grocery stores.

This data should allow one to determine:

  • Whether customers are more likely to go to an employee of the same race or gender than pure chance would predict.
  • How much customers are willing to pay, in time, to go through a checkout line operated by someone of the same race or gender (assuming a same-race or same-gender preference exists). That is, you can find out how much they are willing to pay to indulge their racism or sexism. 
There may be some confounding factors--self-checkout or express checkout, and the relative attractiveness of the employee, but I think it should be a fairly straightforward project. 

Wednesday, March 17, 2010

Markets in Everything: A Coffin for Your Dead Xbox 360

If your Xbox 360 gives you the Red Ring of Death, at least give it a decent burial.

Okay, so this isn't actually for sale (yet).

An Inefficient Ruling: Severed Fingers are now the Manufacturer's Fault

A man in Boston won $1.5 million in a lawsuit against the manufacturer of a table saw for failure to include technology that would detect the presence of fingers or other human flesh, which resulted in severe injury to his fingers.

The main problem with this ruling is that it assigns the burden of avoiding injury to the wrong party. The party that can avoid injury at the lowest cost is the person using the saw--he or she can simply be careful. It costs nothing more than going a little slower and paying more attention. By contrast, the inclusion of this technology would almost certainly be expensive, raising the price of a table saw significantly, and still would not eliminate the risk of injury (it would apparently result in small gouges rather than severed fingers).

Another problem is that it creates a disincentive for companies to develop these kinds of technologies. Flesh-sensing technology apparently does exist, and could be used on saws, but if failure to include it on all saws creates a large legal liability, then it might no longer be in anyone's interest to put it on any saws. Consider another example: The airbag was invented long before it was ever used in a car. Suppose that, one year after the airbag's invention, one could sue automobile manufacturers for failure to include them after being injured in an accident. This would give manufacturers two perverse incentives: to include airbags before they are fully tested (possibly causing more accidents), or to avoid developing airbags in the first place.

Depending on how the table saw case turns out in the end (I would not be surprised if the damages were reduced on appeal, or if the entire verdict were overturned), there are several possible outcomes that could occur:
1) Manufacturers stop selling inexpensive saws, and sell only high-end saws with flesh-sensing technology.
2) Manufacturers sell low-end and high-end saws with the flesh-sensing technology, resulting in more expensive saws for everyone.
3) Manufacturers continue to sell low-end saws without the flesh-sensing tech, but charge more for them to reflect the higher liability they represent to manufacturers.

Anyway you look at it, the consumers of low-end saws suffer from this decision (except, I suppose, for those who are unwilling to take care to avoid injury, and who would prefer to pay more to get a low-end saw with flesh-sensing technology--surely a very small portion of those who would buy table saws).

Tuesday, March 16, 2010

Why a Long-Term Business Model is Difficult for Some Games

Consider multiplayer video games like Call of Duty or the Battlefield series, and pen-and-paper role-playing games such as Dungeons and Dragons. They both face a similar problem: After the initial publication of the basic game, which (if the game is successful, as these have been) sells a huge number of copies, there is little additional revenue.

Suppose all 400,000 people who want a copy of Battlefield: Bad Company 2 buy one. EA Games loves all the revenue this brings in, but now faces nothing but costs, possibly for years, as EA Games has to pay to maintain game servers (through which players connect, or on which players actually play the game together).

When Wizards of the Coast releases the fundamental Dungeons and Dragons rulebooks--the Players Handbook, the Dungeon Master's Guide, and the Monster Manual--the basic rules are now available to all players. The players and the game master/dungeon master/referee (or whatever you want to call him or her) can use their imagination to create adventures and characters to develop the rest of the game. Again, once the basic rules are released, the publisher brings in a lot of revenue, but after that it slows to a trickle.

In both cases, publishers try to find ways to sell more stuff to the players. Developers of video games release Downloadable Content (DLCs) or expansion packs. These are additional maps or new game modes that make gameplay more interesting and diverse. The danger of these for multiplayer games, however, is that they can splinter the player base. Only players who buy the game can play together; any individual player worries that if he or she buys the expansion pack or DLC, few other people will buy it, rendering the new content useless. Few people operating servers enable the additional content, because they do not want to limit the number of people that can play on the server. This coordination problem becomes a self-fulfilling prophecy: few people buy the expansion pack because of fear that few people will buy the expansion pack. Therefore multiplayer game publishers face a risk if they rely on DLCs and expansion packs to bring additional revenue. It is difficult for them to make additional profits from this content, so players may be stuck with stagnant gameplay.

Publishers of pen-and-paper role playing games also want additional revenue after the initial sales of rulebooks. This is usually done by selling "modules", or pre-written adventures (for those dungeon masters who don't have the time or imagination to create their own), as well as books detailing "campaign settings", the worlds in which the games take place (e.g., The Forgotten Realms, Dragon Lance, Eberron, Greyhawk, etc.). Again, these are only useful to gamers that cannot create their own settings. Publishers can also release additional rulebooks, which create new options for players (The Fighter's Handbook, The Bard's Handbook). Again, these are not necessary for players and dungeon masters with imagination, and they may not even fit the campaign setting being used.

In both cases, the result is lumpy income for the publishers: They get a big pile of revenue upon initial release, and then a small stream after that. Would it be possible to smooth this revenue over time? There are some possibilities, some of which are in use.

For multiplayer video games, the publisher can require that game servers be rented. This helps cover the ongoing costs of the game (developing patches and running any necessary central game servers), and allows the developer to more closely monitor and maintain the online game system. Another possibility is that the publisher could charge more for the initial game, but promise that the developer will release free DLC over time. Whether or not this works depends on the reputation of the developer. A developer like Valve Software could do this, as they have a long history of providing new free content long after a game's release. Publisher EA Games and the developer DICE, however, probably could not do this. They have a reputation for releasing buggy games which are slowly patched over time--sometimes there is free content, but often there is not (and sometimes gamers would prefer that the initial game be fully fixed instead). If this works, it does not smooth income over time, but it does avoid the coordination problem that comes with DLC and expansion packs for sale, allowing the developer to capture the revenue from their sale in the price of the initial game.

A final possibility for multiplayer games would be leasing, instead of sale. The publisher charges players a (probably low--maybe $5/month) monthly subscription fee for access to the game. The game gets upgrades over time. This makes the game much like a Massively Multiplayer Online Role-Playing Game, like World of Warcraft, except that this is a round-based action game, rather than a persistent-world role-playing game.

I think there are fewer solutions for pen-and-paper role-playing games. A leasing model would be difficult; leasing books is simply not practical. Leasing electronic versions of the rules is too susceptible to piracy. Charging a higher up-front fee and then providing free content isn't practical, either--the fee would have to be quite high to cover the costs of developing and then mailing out additional rulebooks, many of which would likely be of little interest to particular players and campaigns. Wizards of the Coast has instead revised the rules every few years, releasing D&D 3.0, 3.5, and 4.0. A danger with this, however, is that some players simply decide that the old rules were good enough, and therefore avoid the new books.

To summarize: Some multiplayer online games share lumpy revenue problems that are similar to those of pen-and-paper role-playing games. There are tools available to game developers to smooth this revenue over time, but pen-and-paper games do not have analogous tools available.

Monday, February 15, 2010

A Question About Regime Uncertainty

An argument that is often advanced by free-market types (such as myself) is that regime uncertainty is responsible for sustained recession and slow recovery. The theory is that the unpredictability of policy causes businesses to be reluctant to invest and hire. The owner of a business doesn't want to commit to a costly course of action if government spending, taxation, and regulation could quickly render those decisions incorrect. Instead, the business owner prefers to sit and wait, and as a result, recovery takes longer.

Bob Higgs argued that this was the case during the Great Depression, and some argue that this is happening today--that the Federal Reserve is changing its role too unpredictably, that Obama's proposals for cap-and-trade and health care reform are costly and uncertain, and that Congress, too, can easily change policies in unpredictable ways.

My question is, how would one test to see if this hypothesis were correct today? How would one find evidence to support this view and reject, say, the Krugman view, which is that the stimulus just hasn't been big enough? There's always uncertainty about future policy. How do we know it matters more now than it did in the past?

Thursday, February 04, 2010

Bad Economics: Revenue vs. Profit

I was reading The City Paper, one of Nashville's free news magazines, and came across this article on music sales. The following caught my attention:

Now for some basic math, using a revenue formula (for record labels) of 70 cents per digital track and an average of $9.25 per album. The results: 2009 digital track revenue grew about $62.3 million while album sales revenue fell about $503 million. That’s a net revenue loss of more than $440 million.

So clearly digital track sales are not fully replacing lost album sales revenue. In fact, during 2009, digital track increases offset less than 15 percent of the revenue lost from shrinking album purchases.

There are two things that bother me about these paragraphs. The first is the comparison of digital tracks versus album sales, which includes both physical (CD) and digital albums. It's not clear to me why one wouldn't just treat albums as bundles of tracks, rather than different things. In any case, while sellers might not be happy with decreasing album sales, buyers are presumably happier because they don't have to buy as many unwanted songs as they did when albums could not be broken up.

The more serious objection is that the real issue is not revenue but profit. What if digital tracks (and albums) are significantly cheaper than physical albums to produce and distribute? It might not be the case--bandwidth, storage, and management of these files are not free--but then again, it might. If the profit margin on a digital track is high enough, and if the profit margin on physical media is low enough, total profit might still be rising despite the drop in album sales revenue. Yet the word "profit" does not even appear in the article. We simply cannot tell whether the decrease in album sales and increase in digital track sales is, on net, good or bad for sellers, based on the information in this article.

Wednesday, February 03, 2010

Identifying Crazy, Stupid, or Just Plain Wrong Beliefs

Bruce Bartlett links to and presents results of a poll of Republicans. If the results are to be believed, a significant portion hold beliefs that I think could be fairly described as stupid or crazy. For example, on the fact side, fifty-eight percent either believe Barack Obama was not born in the United States, or are not sure. Fifty-seven percent either are not sure whether Obama wants the terrorists to win, or think that he does want them to win. One third think Barack Obama hates white people. On the opinion side, seventy-three percent believe openly gay men and women should not be allowed to teach in public schools, and a third believe that contraceptives should be illegal and that the birth control pill is an abortion method.

I don't think that belief in conspiracy theories runs quite as deeply through Democrats, although they surely do have some mistaken beliefs of their own. I would like to see a poll of Democrats with Yes/No/Not Sure questions such as:
  • Do you think Republicans hate poor people?
  • Do you think Republicans want to harm poor people?
  • Do you think it is wrong for a business to make a profit?
  • Are prices of goods and services set by agreements between businesses? (This question needs work--there ought to be a way to get at the question of whether prices are determined centrally by colluding firms or by decentralized market processes).
  • Does an increase in the minimum wage raise cause some workers to loser their jobs?
  • Can we clean up the environment at no cost to consumers by forcing stricter emissions standards on car producers?
  • Do you believe Freedom of Speech should protect racist speech, too?

What other questions could one ask? For that matter, what questions could one ask of libertarians? There would probably have to be questions about the Federal Reserve and fiat money, a source of much libertarian paranoia that I have never quite understood. I would like to see a question about the Non-Initiation of Force Principle, which is important to many libertarians but which has, I think, been demonstrated to be full of holes.

Wednesday, January 20, 2010

You Can Save Money On Your Car Insurance!

There are a lot of commercials for car insurance on television. Many of them claim that people who switch to their insurance company save a certain percent, or a certain amount of dollars, compared to their old car insurance. Yet it can't be possible that every car insurance company has cheaper rates. Can the average person who switches saves 15% or more, or $150, or whatever?

Yes. The reason that it's possible is that the people who wouldn't save money by switching don't switch. As a result, the average person who switches saves money. This is similar to a point Steven Landsburg makes in The Armchair Economist. He argues that grocery stores can truthfully claim that shoppers buying there can save money, because they are each touting the sale prices of their cheapest goods--and these goods are different from store to store.

A remaining question is why there might be enough price dispersion to allow such different policy prices for different consumers; I don't know the answer to that. Perhaps different sellers specialize in different kinds of customers, resulting in specific knowledge and human capital that allows them to charge lower prices to those customers. That is, Safe Auto and GEICO probably attract different customers.

Tuesday, January 19, 2010

O'Brien, Leno, and Coase

In 1960 Ronald Coase's paper "The Problem of Social Cost" was published. In it Coase laid out what has come to be known as the Coase Theorem. There are at least two versions of the theorem, and they can be stated many ways. The version I'll discuss here goes something like this: "In the absence of prohibitively high transactions costs, the same efficient allocation of rights will occur regardless of the initial allocation of rights."

"Efficient" means "the difference between benefits and costs is maximized". "Transactions costs" are the costs of transacting--the costs of bargaining to reach agreements. They could be language barriers, regulatory differences, excessive arrogance or mistaken beliefs of the parties to the agreement, or even coordination failure due to a large number of participants on one or both sides of the negotiation. "Rights" could mean any right to anything--the right to graze one's sheep in a particular area, the right to be free from pollution, the right to pollute, or even the right to host a television show at a particular time.

The recent mess over at NBC over late night television is, I think, a simple example. NBC and Conan O'Brien signed an agreement years ago, in which NBC promised that Conan O'Brien would host the Tonight Show. It is not clear whether the contract guaranteed O'Brien the 11:35 time slot, but let us assume for the sake of argument that it did (even if it doesn't, The Tonight Show is closely associated with that time slot, so that O'Brien might be able to argue that it isn't the same show if it airs at a different time).

Eventually O'Brien took over The Tonight Show from Jay Leno, who got a new show at 10:00. Leno's new show performed poorly. O'Brien's Tonight Show also did not perform as well as NBC had hoped (in particular, NBC's affiliates were especially upset).

Now NBC has a problem. They have promised O'Brien The Tonight Show and (perhaps) its time slot. Leno also wants his old show back, as his new show is about to be canceled. What efficient new bargain can they strike?

It is pretty straightforward, and it is the result that the network and O'Brien are rumored to have struck. NBC buys O'Brien's right to The Tonight show, and lets Leno return to the show. Everyone is better off: The viewers and the NBC affiliates get the show they want (bizarrely--I can't imagine preferring Leno to O'Brien). NBC should expect an increase in profits as a result. Leno gets his old show back, and O'Brien gets a large amount of money, and the opportunity to go to a network that will appreciate him. (If you must have some numbers, suppose the network values having Leno back on The Tonight Show at $60 million, and suppose O'Brien values staying on the show at $20 million. There is a range of offers that would make both parties better off.)

Similarly, if NBC had never promised the show to O'Brien, this same outcome would have occurred--Leno would have the show, and O'Brien would not. The parties end up at the same efficient outcome, regardless of the starting allocation of rights.

What about transactions costs? There could be transactions costs that prevent a bargain from occurring. O'Brien might be offended and stubborn, or he might overestimate how much NBC would be willing to pay for the rights to host The Tonight Show. If he asks too much, NBC declines to pay. Similarly, NBC might underestimate how much O'Brien loves the show, and might try to offer too little. Still, both these problems should be addressable with repeated negotiation. The more serious impediments to bargaining don't seem to exist here.

A side note: I am leaving out wealth effects; I think this is reasonable in this case, given the wealth of the parties involved.

Another side note: I suppose this is also an example of efficient breach.

UPDATE: John Lentz points out that it appears transactions costs were low enough for an efficient bargain to be struck.

Thursday, January 14, 2010

The Opportunity Costs of Foregone Economic Growth

Economic growth is great; it brings people out of poverty, so they can have cleaner water, sufficient food, better medicine, and safer cars, as well as less important things, like bigger houses, cool gadgets, and hundreds of channels of television.

The earthquake disaster and its aftermath in Haiti has reminded me of another benefit of growth: it creates resources that can be used to prevent and deal with crises. A wealthier country would have safer, stronger buildings, fewer of which would have collapsed. A wealthier country would have more and better hospitals that could deal with the wounded. A wealthier country would have an airport that could handle the influx of foreign aide without running out of fuel to get the planes back out again. A wealthy country has accumulated physical and human capital that allows it to deal with emergencies, and to better receive help from other countries during emergencies. Haiti's poverty makes disasters more disastrous, makes internal efforts at recovery impotent, and makes foreign aid less effective.

Wealthy countries aren't immune to disasters, of course--thousands died in the U.S. in Hurricane Katrina, and nearly 15,000 died in France in 2003 during a heat wave. These pale compared to the death toll in Haiti, however. Even if an earthquake occurred in, say, San Francisco, I would expect the death toll to be a much smaller fraction of the population than has occurred in Port au Prince.

It's hard to come up with a silver lining for this, but I'll stretch and try. Tyler Cowen suggests that Haiti as we know it is gone. This is a chance to replace its government and other institutions with new institutions that work better, allowing economic growth and a brighter future. It's hard to be optimistic, however. The old government (or what is left of it) surely won't give up power, and it will try to steer any changes in ways that benefit it at the expense of others. Other countries may try to steer the direction of change to their own advantage. Gangs and criminal organizations may try to carve out their own pieces of the country.

Maybe these problems can be overcome, but it's not clear to me what process would lead to better institutions. One possibility is for a country with relatively health institutions to just take over, copying and pasting its legal system and eventually its traditions. Here the problem is how to figure out which country does this. I wouldn't want, say, Venezuela to take over. I'm not even sure I would want the U.S. to try to run things.

Another possibility is for the U.N. or some other international entity to try to redesign their legal and political systems. I can't see this top-down approach working out well. This sort of central planning problem is just too difficult to solve. No, if beneficial change is going to take place, it will have to be from the bottom-up, and gradual. I'm not sure if the political entities involved will allow this.

(Please note that I'm not repeating the stupid claim sometimes made about the success of Japan after World War II. That is, some said that Japan grew so quickly after the war because they were able to replace their old factories and equipment with new ones. This is ridiculous; absent the war and its destruction of capital, they could have had the old factories and the new ones, or they could have torn down the old stuff if necessary. Destruction of capital is not a path to growth. Rather, I am arguing that destroying old and harmful institutions can be beneficial.)