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Hopefully within the next day or two we will be able to get Modeled Behavior.com to redirect to our Forbes Blog.  Yet, it looks as if there is no way to get our RSS feed to continue to work. Here is a link to our new RSS feed a Forbes.

http://blogs.forbes.com/modeledbehavior/feed/

We also will not be able to transfer any of our old content and so this website will continue to exist as an archive.

Let me summarize a debate that is going on:

1. Matt Zwolinski repeats the popular argument that people like Warren Buffett who want higher taxes should donate money to the government like they do to charity.  But people largely don’t do this, as a mere $3.2 million was donated to the government compared to $300 billion to charities. This tells you people don’t really want higher taxes.

2. Will Wilkinson replies that this is incorrect because it can be rational for someone to not comply with a rule that: “(1) you support, but (2) will only have its desired effect if general compliance with the rule is high, and (3) you suspect general compliance will not be high.” He compares someone who thinks we should not eat meat but their not eating meat won’t result in any less animals being killed, since his not eating alone will have zero effect on market demand.

3. Bryan Caplan responds that the real question we should be asking is:  “Why is government’s share of the voluntary donations market so damn small?”  He argues that the prisoners’ dilemma can explain why a particular charity (or the government as a charity) has a low amount of donations, but it can’t explain why it has low donations relative to other charities, which also suffer from a prisoners’ dilemma.

This is going to be another one of those posts where I argue everyone kind of has a point. Overall, I think Will is correct that people legitimately do want higher taxes. But I think Matt and Bryan have a point that the lack of donations is indicative of something.

One point I want to make is that I think Bryan is incorrect that the prisoners’ dilemma can’t explain why the charitable donations to government are so small. Consider Bryan’s hypothetical that raises money for haircuts for hippies. Imagine that absent coercion people would voluntarily give $1,000 to hippy haircuts by themselves, but if they know that everyone else would also, they would be willing to give $3,000, making it the largest charity in the country. Now suppose the government taxes everyone $2,800 and gives it to the organization. In this circumstance it can be completely rational for everyone go give zero marginal dollars to hippy haircuts, despite the fact that without the government taxing them they would have donated $1,000. Likewise one could argue that people in this country would be willing to donate hundreds of billions each year to the U.S. government if they weren’t already paying taxes, and that we are still below the efficient level of contribution.

However, I also want to quibble with Will’s example of not eating meat. It makes sense for someone to believe they’re not going to have any effect on the consumption of meat since the tiny, tiny amount of lower demand may be a fraction of a rounding error that doesn’t even show up in the yearly spreadsheets upon which they base next year’s production numbers. Likewise the extra couple thousand dollars the typical U.S. household could donate to the government would amount to pennies per government program. But meat consumption is going to be relatively normally distributed, while income is going to be more log normally distributed. Consider everyone’s favorite example in this issue, Warren Buffett. I believe he makes in the neighborhood of $60 million a year, and total U.S. household income is around $7 trillion, meaning he accounts for 0.000857% of U.S. income. A rounding error? Maybe. But consider if Buffett consumed a proportional share of meat, as in Will’s example. U.S. households consume around 30 million cows a year, which means Buffett would personally be consuming around 250 heads of cattle. Would it be legitimate for a man consuming 250 cows a year to say that it wouldn’t matter if he became a vegetarian?

But this brings me to a section point related to Will’s meat eating metaphor. Part of the reason people who think eating meat is wrong shouldn’t eat meat is to be an example to others. Charitable acts are often purposefully visible signals meant to encourage others to do the same. Isn’t this why people do charity walks? Sure, a lot of this signaling is motivated by the desire to signal higher status, but this desire to signal can incentivize good behavior.

Like Bryan, I don’t find it hard to imagine us ending up at a different equilibrium where many people do donate to the government:

Could the U.S. government attract a lot more donations with better marketing?  What if the President spent less time raising money for his campaign and more time raising money for the Treasury?  What if Congress publicly acknowledge the ten biggest donors in an annual ceremony?  I can easily believe that donations to the U.S. government would rise a hundred-fold.  But even then, Uncle Sam’s share of national charity would be a mere .1%.

Rather than politicians appealing to people to donate to the government, I could imagine high profile people like Warren Buffett urging people to donate more and generating some movement on this. But I don’t think the lack of this sort of movement proves anything about how much people value government spending, I just think it’s a potential that hasn’t been realized yet.

Ross Douthat writes

. . . much of today’s liberalism expects me to respect its moral fervor even as it denies the revelation that once justified that fervor in the first place. It insists that it is a purely secular and scientific enterprise even as it grounds its politics in metaphysical claims. (You will not find the principle of absolute human equality in evolutionary theory, or universal human rights anywhere in physics.) It complains that Christian teachings on homosexuality do violence to gay people’s equal dignity—but if the world is just matter in motion, whence comes this dignity? What justifies and sustains it? Why should I grant it such intense, almost supernatural respect?

This seems largely correct to me. A coherent secular morality is a tricky problem in and of itself. One that makes absolute claims even more so, and one that makes absolute claims absolutely seems well beyond our grasp. And, I say this as a secularist who is very much concerned with ethics or what, to make the point, I have often been forced to call the-ethics-game.

For example, the claim that slavery is fundamentally wrong in all cases is not controversial among secularists but it is far from clear how one justifies this except by asserting it. And, then of course what is one to say to people who deny it?

Intending no disrespect to the underlying issue, the argument seems to devolve into “na-na na-na boo-boo.” Which is to say, simply refusing to accept the denial as valid.

There are various claims which amount to saying the human faculty of reason endows us with certain inalienables. Not only does this strike me as blatant post hoc speciesism, but it seems to suggest that there is some mental threshold below which a person could fall in which not only enslaving them would be fine but also violating any of the other rights which are asserted to stem from self-ownership. In short treating the person as an animal.

Attempts to reconcile this problem back people into corners such as asserting that the well-being of an adult pig is as important as the well-being of a newborn baby.

At least some of the confusion over this comes from the assumption that lacking the same ethical grounding as Christians, secularists either will not behave morally or cannot make moral demands.

The first I think just misunderstands how people behave and gives too much credit to critical reasoning and justification. For the most part secularists behave morally for the same reason just about everyone else does, because they would feel bad if they did not.

The second I am increasingly tempted to say conflates cultural politics with the ethics-game. If you ask on what grounds do I accuse rapists of having done wrong, then the authentic answer is that a world with rape displeases me and this is a tool I can use to get society to impose sanctions against it.

That in my mind is quite different than the ethics-game. The ethics-game is an attempt to answer the question, what moral stance “should” I adopt. It is in the ethics-game that we pay careful attention to metaphysical coherence, consistency and an attempt to tease out what we really believe.

What Douthat appears to be saying is that the ethics-game is hard for secularists, and that is correct.

Over in the comments at Steve Waldman’s, Morgan Warstler has an interesting proposal for a replacement for the minimum wage and unemployment insurance:

Using a clone of Paypal and Ebay platforms, the US govt. should establish a Guaranteed Wage of $240 per week. Anyone who wants to work registers, receives a Debit Card,and each Friday has their GI deposited.

All recipients have their labor weeks auctioned online. Bidding begins at $40 per week ($1 per hour). Bid increases by .50 cents per hour ($20 increments).

Recipients keep 50% of the top bid, if they take it. If they opt for a lesser bid outside certain boundaries there are penalties (fraud measure).

Recipients cannot be made to work outside a radius of a couple miles.

Bidders must deposit money into system before they bid. They must accurately describe the job. Feedback will be given both ways. If you are familiar with Ebay, you understand what this accomplishes.

There are no taxes paid, there are basic workplace protection requirments. Umbrella insurance is sold on site for folks bringing labor into their home.

Expect 30M to register so approx $345B is our cost assuming 30M are auctioned at $1 (The govt. is picking up $5.50 and bidders are in for $1)

At an avg. bid of $4 per hour, avg. worker is making $8, and the govt. is spending $250B a year.

There is no more UI. There is no more minimum wage. That’s why there are 30M in program.

It is an intriguing proposal, and I see something like this as more likely if the fears of robot labor market dominance come true and many workers end up zero marginal product. But here are some problems I see with this program:

1. If weekly online ebay-like employment markets like this are efficient, then why don’t they exist yet? Is the extra $5.50 in marginal product really all that is stopping them? Here is one similar market for what are mostly errands. Perhaps we are already on a path towards the obsolescence of this complaint. Although maybe labor market regulations make this impossible to do on a significant scale.

2. Are workers required to put themselves up for auction or can they just receive the minimum guaranteed income and say “no thanks” to auctioning their labor? If it is the latter, then I think we will see many workers choose the $5.50 and do nothing. If you can receive $5.5 an hour from the government for doing nothing, or $6 for working 40 hours a week, then you’re exchanging 40 hours for an extra $20 a week. Not a very good deal.

On the other end of the low-paid spectrum, workers who are worth $10 an hour will receive $10.50 ($5.50 + 50% x $10), which means they can get $220 a week for doing nothing or $420 for working 40 hours. Some will probably choose to work, and some will choose not to. But I think many would find $220 plus some extra pay from black market labor (likely at more than a marginal $5.50 an hour) to be a pretty good deal. Those that don’t will be receiving a very small subsidy of $0.50 an hour.

Thus workers with labor worth $10 or more will have only a small subsidy from this, and those with labor worth less will find it pretty tempting to not work. Under either scenario I don’t see much work flowing through this market.

If the point is that everyone will be required to put themselves on auction and surely everyone will be bought at a minimum cost of $40, then I think this logic is incorrect. A review system will be in place, and any worker who does not wish to be hired again will find ways to make sure that doesn’t happen very quickly.

3. Do workers and laborers have the incentives to provide accurate rankings? If an employer finds a good worker and they elect to give them an accurate rating then they will have to pay more for them the next week. If they rank them poorly, perhaps accusing them of being negligent or criminal, then they should get them cheaper.  The reverse is true for a worker who finds a good employer.

4. How much does employee choice matter in this framework? The setup of employers purchasing employees at an auction ignores worker preferences over what work they do. Morgan says if job seekers “opt for a lesser bid outside certain boundaries there are penalties”, and it’s unclear to me how you do this without meaningfully ignoring job seeker preferences. This also provides a potential explanation for question #1: the predominant labor market arrangement for cheap labor is for employers to post a wage, job seekers to apply, and employers to choose among them. Aren’t there reasons we’ve evolved to this equilibrium?

Overall Morgan says with this program we can get rid of unemployment insurance and the minimum wage, but I see this more as lifetime unemployment insurance combined with a government funded minimum wage. Still, with the threat of hordes of ZMP workers looming in the future, things like this are worth thinking about and we need more ideas like Morgan’s.

H/T Pascal Gobry

image

Apple announced this morning a major dividend program that is set to transfer profits to shareholders at a significant rate. From the looks of it starting at roughly $10 Billion per year. Though that is small relative to expected Apple profits, even I would admit that this is a huge initial commitment.

Obviously, I have been accusing Apple executives of hoarding cash in an attempt to protect their own interests and the long run survivability of the company rather than maximizing the return on equity of shareholders.

To add insult to injury, share price was down in the immediate wake of the announcement, which though anticipated by a few analysts cannot be regarded as anything other than a discrete jump in market expectations.

There is just no way at this point I can see a narrative in which my story was correct and Apple and the market responds in this manner together.

I will have an update as information becomes available but right now this looks like nothing less than Epic Defeat for my thesis.

So, despite my repeated attempts to drill a deep pessimism into my readers lots of my commenters still take my attitude about the future as Cassandra-ism.

Indeed, it’s the exact opposite. If I had to yoke with someone more famous I would pick Camus, though – and perhaps you laugh – I find much of his words a quasi-optimistic copout.

Suicide is fully rationally and consistent with our (the black-black existentialist) stated views on absurdity. One can embrace simply by saying: I am viscerally afraid to die. I viscerally long for the morrow. None of this makes any sense.

Yet, when I open my eyes the question “So, what now” is imposed on me by simply being a conscious being. And, so we love the moments not because there is any sense to it or because we have escaped or transcended absurdity in anyway, but simply because we are therefore, why not.

Still, if not rebellion per se we can seek insight. Again, for no other reason than that we are and we wish. And, yes formal ethics is a game we choose or choose not to play. I prefer the terminology, table we wish to sit at or not, because I do not like the English language connotation of “game.”

As I said to Bryan Caplan in our debate, there simply is no response to “I don’t want to play this game”  That is, to say if you don’t wish to sit at this table then that’s the end of the conversation. We can and Bryan and I did, go for drinks.

In any case, to the events of the day.

Understanding that things won’t work out in the end helps you take a more level headed approach to things that are happening now.

For example, both Megan and Kelly were taken aback at my attitude on long run fiscal issues. There are a lot of levels of disagreement, different with each, but key is that I push this line of reasoning:

  1. That we cannot as individuals or as a state afford everything we would like is simply scarcity and is the furniture of our world.
  2. If we are lucky we will have the choice to kick-the-can-down the-road.
  3. Kicking-the-can-down-the-road is of its nature preferable because bad things now are worse than bad things later.
  4. There is some price to can kicking but before I endorse increasing the suffering of actual existent people I would need at least an argument as to why that price is high.
  5. “Being responsible” is not an argument. Its an attempt to display high status
  6. In actual fact the claims of long term calamity are overblown. Calamity usually comes swift by its nature and for reasons I can go into later.

My case in point on this is Greece. Greece’s “insolvency” was handled extremely poorly. Its an example of folks choosing policy that makes almost everyone poorer and the poor relatively.

Nonetheless, lets see what happened when sudden austerity comes clamping down.

At least 45 buildings were burned, including one of the capital’s oldest cinemas, while dozens of stores and cafes were smashed and looted.

The stench of tear gas still hung in the air on Monday morning, choking passers-by. More than 120 people were hurt in the rioting which also broke out in other Greek cities. Authorities said 68 police needed medical care after being injured by gasoline bombs, rocks and other objects hurled at them, while at least 70 protesters were also hospitalized.

Police arrested at least 67 people, while in several cases they had to escort fire crews to burning buildings after protesters prevented access.

This is not exactly civilization ending stuff.

The precautionary principle has yet to show its merit.

Ordinary Optimal Control still wins the day.

As a note, I know some people will find this all confusing because you can’t tell whose side I am on. My point is beyond all that.

My point is that the entire paradigm is wrong. There is no “we just have to” either for reigning in spending or maintaining the welfare state. Nor have there been any consequences so discontinuous as to be approximated by “we just have to.”

What do you think you want to do?

That’s the public finance question.

A few people have asked about my debate with Bryan Caplan on the issue of how deserving the poor are. I’ll try to give a sense of the case I wanted, though perhaps failed, to make.

My thesis may be best understood this way:

There is no reason to view emotional or mental deficiencies as different in kind from physical ones. To put it in the harshest of terms, if you think someone who is born blind is deserving of sympathy and support then you should think someone who is born lazy and stupid is deserving of sympathy and support.

Further once you concede that the lazy and stupid are deserving of sympathy then its difficult to construct a set of poor people who are not, since these are among the least sympathetic qualities that could cause someone to be poor.

Thus the vast majority of the poor are deserving of sympathy or support.

 

As to those attributes. To a wider audience this might be a question, but I had assumed that the audience I was going to speak to at GMU would swallow without objection the notion that IQ is more or less fixed before the age of 12. We can talk about the relative influence of genes, prenatal care, nutrition, early childhood education, lead, etc. However, I didn’t think they would dispute that your IQ is determined before what most people would think of as your moral agency. If so, can it reasonably be your fault that you are stupid?

As it happened I was also debating Bryan Caplan, who I thought and still think, would admit that one’s actual level of conscientiousness is probably genetically determined. And, further that this personality attribute underlies most of what the normal world would call “laziness.”

And so again, if one is sympathetic towards those born blind does it not follow that one should be sympathetic towards those born lazy?

 

Now, that having been said I recognize that there will be a huge visceral aversion to this line of reasoning. And, so I want to do what I can to calm that aversion.

My point was that the reason we feel so differently about disabilities like blindness as opposed to disabilities like laziness, is that its really difficult to fake being blind. Thus there is much less concern that the blind person is taking advantage of you by lying about their blindness.

Its much more difficult to confirm laziness. So much so that people are hesitant to think of it as not a innate property of the person at all. However, our psychological research strongly suggests that this is not true.

What is true is that someone could claim to be lazy when what they really are is indifferent to your suffering. They could say, “ Holding down a job is especially difficult for me” when in reality they feel “I am simply much more concerned with my own happiness than I am with yours and prefer a state of the world in which you suffer so I don’t have to”

Since from the outside we can’t tell which of those two things is true we reject all claims about laziness as unjustified.

However, we can recognize that this is a product of our limited knowledge and not the world itself. If we could tell who had genuinely low conscientiousness versus who simply claimed to have it in order to pass suffering on to others then we would want to distinguish between the two.

This means that our problem is practical and not moral.

It is not that the lazy are underserving but simply that we lack the technology to distinguish them from those faking laziness.

The irony of this, however, is that if we adopted an economic system that was extremely intolerant of laziness, then everyone who still exhibited laziness would be genuinely lazy.

The authentic thing to say to them then would be: I am very sorry that you were born this way. I wish things were different. Unfortunately we lack the technological sophistication to create a better world.

It would be inauthentic to say: You chose not to work and so you deserve what you get.

Indeed, as economists we can instantly detect the inauthenticity of the last statement by conducting the following thought experiment. Suppose that we took someone who is currently in poverty and told them that on threat of death they will obtain and hold a middle class job as well as save and invest according to middle class norms.

And, suppose the person complies. Would it then make sense to say: congratulations you deserve all the net happiness that comes from these actions? After all, our working assumption as economists is that the net happiness from these actions is negative.

That is, the cost of obeying these social norms exceeds the benefit of obeying them and that is precisely why the person didn’t do it of their own accord.

What does it mean to say that the desert of making hard choices is misery?

I think the natural response here would be to say, very well but how do you know they are miserable. Perhaps they feel the same I as I do but were even happier on the street.

Perhaps, and this goes to the deep question interpersonal comparisons of happiness and suffering. Yet, if we want to stop here and say “we can go no further” then don’t we have to give up on all of our notions of suffering and sympathy?

In the face of the seeming agony of  achild slowly dying of cancer and the parents grieving the creeping loss are we prepared to say: Well I really don’t know if the lived experience of these people is better or worse than my experience of a pin prick and so sympathy is unwarranted here.

My sense is that we do want to admit the meaningfulness of the suffering of others and that we have at least a somewhat workable mechanism at determining what that is. We should then apply this mechanism to those suffering from laziness.

My approach would go as follows. If you see someone who is a beach bum and looks to not have material care in the world you may be able to imagine saying “I wish that I could be as free of material concerns as that fellow.”

We would not deem him to be suffering and so his poverty is not something about which we would have sympathy.

On the other hand, if you observe an individual repeatedly trying to obtain and hold jobs and repeatedly being fired for not showing up on time or screwing off in minor ways, then we imagine saying “I am glad I am not this fellow. He can’t seem to get it together for the life of him.”

We would then deem him to be suffering and so his poverty is something about which we would have sympathy.

Taken all together this says: Even the least sympathetic reasons for being poor stem ultimately from inborn conditions. A person with those conditions faces a high tradeoff between material comfort and emotional distress. I can recognize what it would mean to say the nature of this tradeoff is preferable to my condition or unpreferable to my condition. If it is unpreferable then I can say, this person was born worse off than me and so is deserving of my sympathy.

And, since we find reason to be sympathetic to some of the least sympathetic reasons, for being poor, consistency should lead us to be sympathetic towards almost all reasons for being poor. And, hence we should declare that few if any persons deserve to be poor.

A Few Notes

Why does this matter: Well on one level I simply appeal to the aesthetic. We try to understand our world and our intuitions about it in a consistent way because doing so is beautiful.

In practice I would say it puts an increased focus on the ability of our technology to support the deserving poor without encouraging fakery.

In a very practical sense it might suggests that programs which depend on 1-1 relationships should be given high levels of moral praise as poverty elimination systems. So, that might mean local charities and organizations with the discretion to support individuals or not based on a long history of working with them should been seen as doing a special good.

Isn’t poverty much more complicated than you laid out: For sure. My point is that there are lots of gray areas regarding sympathy and poverty, but rather than getting bogged down in that lets look at the strongest reasons to be unsympathetic and see if they withstand scrutiny.

Is this just more Pity-Charity Liberalism: Yes. And, I think it’s an ethically more meaningful enterprise than getting up in arms about failures of the meritocracy. I don’t know any moral reason why the talented deserve to prosper and the untalented to fail and so the leveling-of-the-playing-field is of purely instrumental importance. It matters if it makes a more productive society or increases personal fulfillment, but it is not a moral cause unto itself.

I will debate Bryan Caplan on this topic this coming Wednesday.

Bryan’s says

My strategy, as usual, is to use an uncontroversial moral premise to show that the status quo is absurd.  The premise: You are poor by your own fault if there are reasonable steps you could take – or could have taken – to avoid poverty.

Tyler correctly predicts that no one – not least myself – knows for sure which Karl Smith will show up.

Yet other perspectives must be brought to bear.  There is determinism, at differing levels, ranging from “it’s tough to come from a broken home” to “lead poisoning is bad for you” to “what if the universe is a frozen four-dimensional Einsteinian/Parmenidean block of space-time?”  (Ethics does look different when you are traveling at the speed of light.)

There is the view that desert simply is not very relevant for a lot of our choices.  We still may wish to aid the undeserving.

Though it will be tough I will resist the urge to preemptively concede to Bryan on the grounds that desert is a fiction and morality a farce. The only question of any importance is which more unlovely to us: the manners and habits of the poor or the sight, sound and knowledge of their suffering.

Morality – like causality – is a tale told by an idiot. Or, more precisely the left prefrontal cortex. This mass of neurons is tasked with weaving purpose and meaning out of world which has no such things.

When combined with speech this application of narratives to reality allows human beings to operate as a giant hivemind, responding to events they have no direct access to and coordinating behavior in ways that greatly increases the survival rate of their offspring.

All of that having been said, it is lovely to work through the implications of what we believe.

So my basic case is that Bryan’s distinction between utility functions and budget constraints doesn’t correspond to anything that would be relevant to most folk’s well examined sense of morality.

In some cases this is because the distinction is so easily redefined simply by altering the choice set.

Bryan has famously said that the alcoholic is deserves the consequences of his alcoholism because he could have chosen differently. If you put a gun to his head and said don’t drink, the alcoholic could stop.

Fine.

But, the alcoholic cannot choose the consumption bundle that I chose all the time. That is to not drink and not experience delirium tremors. Putting a gun to his head can’t make him choose that outcome.

I’ll of course go into more detail in the debate but unless you are saying the alcoholic deserves delirium tremors it makes little sense to say that he deserves the poverty that results from his alcoholism. After all poverty is his attempt to better his situation.

I used alcohol because Bryan did but we can keep tracing down the chain to more fundamental properties of people and see that in many cases poverty is an attempt to escape a fate worse than poverty.

Unless you believe that they deserve this worse fate then why do they deserve poverty?

Karl has been blogging about Apple’s large cash holdings for some time now. His point is that management is taking advantage of shareholders by holding too much cash instead of paying dividends. My initial reaction when he first blogged this was “no way”. Then after the second or third post on it I had been converted to a “maybe”. Karl isn’t alone in arguing that cash holdings are too high, and Apple isn’t alone in guilt; there is a good bit of literature arguing corporations hold too much cash and trying to explain why. While the agency problem may not explain excess cash holdings overall, I do think it is at least one possible explanation, and that it may apply for some firms, especially Apple.

One uncontroversial fact is that cash holdings have been going up over time for firms. There are several explanations for why, and Karl’s agency problem is just one. For instance, one theory is that taxes provide firms with incentives to hold cash, and another is that there are frictions in access to capital markets so firms should hold more cash when shocks become more likely.  A 2006 NBER working paper from Bates, Kahle, and Stulz provides a good overview and some interesting empirical insights. Here is how they summarize the literature on Karl’s agency problem theory of cash holdings:

As argued by Jensen (1986), entrenched managers would rather hold on to cash when the firm has poor investment opportunities than increase payouts to shareholders. Dittmar, Mahrt-Smith, and Servaes (2003) find cross-country evidence suggesting that firms hold more cash in countries with greater agency problems. Dittmar and  Mahrt-Smith (2006) and Pinkowitz, Stulz, and Williamson (2006) show that cash is worth less when agency problems between insiders and outside shareholders are greater. Dittmar  and Mahrt-Smith (2006) and Harford, Mansi, and Maxwell (2006) provide evidence  suggesting that entrenched management actually spends excess cash quickly.

The paper provides some empirical tests of the agency problem explanation and do not find the evidence in support of it:

Agency theory predicts that cash holdings will increase for firms with high free cash flow. Our evidence on the changes in cash holdings for subsamples of firms is largely inconsistent with the agency explanation. In particular, we find that cash holdings increase more in firms that are financially constrained, as proxied by negative net income, than for other firms. Further, larger, more established firms are more likely to have agency problems of free cash flow that could lead to an increase in cash  holdings. However, the increase in cash holdings is much more significant for smaller and recently listed  firms.

I don’t know the literature well enough to say whether or not these results are consistent with most of the research in this area, but they should at least make us somewhat skeptical of the agency explanation. However, while agency problems might not explain the increase in cash holdings overall, Karl could still very well be correct in the case of Apple.

An important and related issue here is that as firms have held more cash they have also decreased net debt, which has implications for the question of whether the corporate income tax is causing firms to have too much leverage. Mihir Desai, for example, has argued:

While excessive leverage is sometimes associated with the tax code because of a presumed debt bias for corporations, concerns over the role of tax policy in fostering the financial crisis appear unfounded…. For the non-financial corporate sector where the presumed debt bias is thought to exist, the startling fact is how unlevered that sector was prior to the crisis.  In particular, the rise of cash balances and the decline of net debt is the  dominant corporate finance trend of the last decade.

He provides the following graph showing that leverage for non-financial corporations is not high by historical standards:

Reading the literature on leverage and the corporate income tax I have moved recently from thinking this is obviously a big problem to thinking that perhaps this isn’t as big of a problem as we commonly think, or perhaps it is not a problem at all. Points to Karl and Tyler Cowen who have both been arguing this.

For his part, Desai argues that there are three main explanations for the excess cash holdings issue:

 1. Weak product market demand

2. Regulatory and macroeconomic uncertainty

3. A coordination problem leading managers to be frozen into not spending

Desai proposes a tax that could fix the coordination problem if in fact that is the cause. Karl’s explanation of an agency problem implies some possible solutions relating to changing shareholder rights, and a tax might help here too. But the relationship between excess cash and low corporate leverage raises the question of whether it is in fact a problem at all. Desai argues:

“…the remarkable underleverage of the  non-financial sector prior to the financial crisis was a saving grace in ensuring that the financial crisis was not nearly as severe as it could have been.”

The overleveraging of banks is a persistent problem that regulators seem unwilling or unable to fix, and this creates serious macroeconomic risks. Perhaps we should just be glad for the corporate sector’s opposing bias against leverage and not worry about taxing it away. Excess cash may be a problem at the firm level, but it could be a boon at the macro level.

This also raises the question of whether we should be reconsidering the wall between commerce and finance. If non-financial firms have a bias against leverage, than allowing them to take banking business from financial firms is one way to eat away at leverage in the financial system. Letting Walmart get into retail banking would be one obvious way to do this.

On the other hand, perhaps allowing non-financial firms into the banking business will just remove their bias against leverage and infect that currently safer sector with the leverage problem. It’s an issue worth discussing more.

Brian Palmer attempts a takedown of twin studies that shows the opposite of what he suggests

Pause for a moment to examine that astonishing claim—that Americans’ stubborn insistence on disagreeing over hot-button national issues is the result neither of two parties adjusting their views to appeal to a shifting political center nor of the fact that the issues on which we have learned to agree simply fall out of the political debate. (How many slavery proponents do you know? I hear there used to be a few of them in the U.S. Senate.) Nope. It has to be the series of base pairs in our cellular nuclei.

….

Twin studies rest on two fundamental assumptions: 1) Monozygotic twins are genetically identical, and 2) the world treats monozygotic and dizygotic twins equivalently (the so-called "equal environments assumption"). The first is demonstrably and absolutely untrue, while the second has never been proven.

So not to get too much into the first paragraph but the suggestion here is not that “abolitionism is in your genes” so much as abolitionism isn’t about abolitionism per se. Abolitionism is about – say – the ability to empathize with “the other” and that is in your genes.

Indeed, if you believed that the issues were really about the issues then a deeper puzzle would be why people disagree at all. People who cared only about the issue itself should tend to converge on compromise views if for no other reason then that the very fact that some other rational person holds conflicting views should cause you doubt the veracity of your own convictions.

No, people are likely biased towards things that “feel right” and what feels right is probably heavily influenced by genes.

Now on to the twin studies. Palmer points out correctly that identical twins are not, in fact, genetically identical. However, this implies that twins studies underestimate the influence of genes.

That is the way twin studies work is that one assumes that any difference between identical twins must be due to something other than genes because they have the same genes. However, if they don’t actually have the same genes then this causes you to attribute things which are really genetic in source to non-genetic causes.

Especially, the more we think the brain of identical twins are different, the “No Two Alike” puzzle melts away. That puzzle is how it is possible that conjoined twins can be so different. They have the same genes because they are monozygotic and they have the same largely the same experiences because they are literally joined at the hip (or head or chest.)

How then do we explain the sometimes large disagreements between conjoined twins. Can being “on the left” really be that much of a life changer?

Now what about the similarities between mono and dizygotic twins. Maybe being treated as an identical twin makes you different. That’s could be true but is beside the point of genetic research. What you really want to say is being treated as a twin makes you more similar.

Perhaps. This sounds plausible. But, it sounds equally plausible that identical twins might want to distinguish themselves. That constantly being confused with one another would cause them to invent differences. We really don’t know.

Importantly, however, concern about this issue is undercut by another one of Brian’s points

There have been numerous studies showing that dizygotic twins who look similar have more personality traits in common than those who are easily distinguishable.

Yet, doesn’t this say that these personality traits are genetic in origin? Its simply that the genetic influence is mediated by the fact that people respond to you based on the way you look.

We know that taller men make more money. Maybe that’s the result of the higher marginal product stemming from height. More likely its because tall men are treated differently. However, that shows that height and hence genetics is a determinant of life outcomes.

I think the twin research is still compelling evidence that gives us a deep insight not just into the effect of genes but on “how genetic” a given trait may be.

And as a last note, I would say that I sense that some of the push back against genetic determinism is push back against determinism more broadly. However, unless you want to reject the block universe then rejecting twin research and genetic determinism doesn’t get you out of the determinist box.

A tabula rasa world is just as deterministic if you think that life experiences make the man.

Felix Salmon reports that despite the fact that it’s extremely easy to get around the New York Times paywall, many people are nevertheless paying for the online subscription:

But here’s the thing about freeloaders: if they value what they’re getting, a lot of them will end up paying anyway. What happened when the Indianapolis Museum of Art moved to a free-admission policy? Its paid membership increased by 3%. When the Minneapolis Institute of Arts did the same thing, paid membership increased by 33%.

Sales people and business-side executes tend to believe as a matter of faith that if people can get something for free, they won’t pay for it. But all they need to do is look at their own behavior to see how that isn’t true: when they go to a restaurant in a distant town that they’ll never visit again, they still leave a 20% tip…

At first glance one is tempted to celebrate what appears to be irrationality. Economists are fond of advocating rational behavior, but with the New York Times paywall we have behavior which is seems individually irrational, yet helps preserve a commons. With tipping, if you presume that it is the most effective system of encouraging efficient service, then again you have individually irrational behavior that preserves the commons (the commons here is the system itself). Of course behaviors like this aren’t actually irrational, because people value fairness, and the are willing to pay more in order to feel fair. Here our sense of fairness leads to welfare improving outcomes: people feel better because they are behaving in accordance with fairness, and a commons is preserved.

On the other hand, fairness and welfare can also be at odds. For instance, many people may find it unfair when businesses to not share quasi-rents with their employers, and may encourage, both through market and non-market means ranging from protests, to private demand for goods from “fair” goods, to demanding outright regulation or labor cartelization. However, those quasi-rents may be the incentives that businesses need in order to start up the business in the first place, so that the demand that businesses share them  (again, this can be market or non-market) may lead to less business creation in the long-run. Here, people’s sense of fairness produces inefficient outcomes: workers capturing quasi-rents may be made better off, but the business owners lose that transfer and future business owners and workers are hurt by less business creation. In short, wealth is destroyed.

With respect to intellectual property, fairness can cut both ways. It is possible for most people to circumvent music copyrights with very little effort. Yet, for many a sense of fairness prevents them from “stealing” music. Sometimes this is efficient and sometimes it isn’t. There are many small bands for whom small drops in album sales could lead them to produce less albums and perhaps leave the industry all together. When people pay for their music rather than illegally download it out of a sense of fairness, the outcome is efficient.  There are others who produce less output because the wealth that copyrights afford them means they don’t need to create as much. For example, I’ve argued you could possibly include Stephen Malkmus in this category. Thus buying his music out of a sense of fairness, rather than illegally downloading it, can lead to less efficient outcomes. Fairness can be good or bad in this context.

On the margin, the public’s demand for fairness in copyright laws is probably inefficient. Of course how much the current laws are a function of voter demand versus regulatory capture is a matter for debate. But even if left to popular vote without industry interference, I believe we’d end up with an inefficiently strict regime.

In the same industry, to give one more example, market demand for what is perceived to be fair ticket selling policies certainly leads to inefficient outcomes: scalpers are left with the surplus instead of the artists, thus no extra output is incentivized. The market outcome is of course bolstered by legal restrictions on resales, resulting in part from fairness.

Maybe this is a trivial point that only economists need to be reminded of, but I think it merits keeping in mind. Sometimes fairness leads us to more efficient outcomes, like preserving the commons, and sometimes it leads us to inefficient outcomes, like copyright laws. Be skeptical of fairness, but do not toss it aside completely.

Here is a data point you may want to keep in the back of your mind when discussing financial literacy:

In a recent consumer study, 21 percent of individuals surveyed – including 38 percent of those with income below $25,000 – reported that winning the lottery was “the most practical strategy for accumulating several hundred thousand dollars” of wealth for their own retirement. In addition, 16 percent thought that winning the lottery was the best retirement strategy for all Americans, not just themselves (Consumer Federation of America and The Financial Planning Association, 2006).

Some may be tempted to interpret this as the Death of the American Dream, and evidence that people are hopeless about their economic futures. But winning the lottery as the best retirement strategy for all Americans? I chalk this up to the phenomenon that no matter how stupid a belief is, if you know one person that ascribes to it then a survey will show that 1/4 to 1/3 of the population probably does as well. This includes the existence of witches and werewolves, and the fact that Saddam Hussein planned 9/11. That, and I blame the fact that people don’t understand the concept of a fair bet and thus, of course, an unfair bet. Talking about insurance with the average person can be shocking and illustrative. This is why auto insurance companies run commercials promising to be forgiving of accidents and generous with benefits and this is somehow persuasive to customers. “Where does that money come from?” I want to ask them…. “where does that money come from?”.

First I want to let S&P speak for themselves at some length, since their report lays out pretty clearly what it is they are worried about:

The political brinksmanship of recent months highlights what we see as America’s governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed. The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy. Despite this year’s wide-ranging debate, in our view, the differences between political parties have proven to be extraordinarily difficult to bridge, and, as we see it, the resulting agreement fell well short of the comprehensive fiscal consolidation program that some proponents had envisaged until quite recently. Republicans and Democrats have only been able to agree to relatively modest savings on discretionary spending while delegating to the Select Committee decisions on more comprehensive measures. It appears that for now, new revenues have dropped down on the menu of policy options. In addition, the plan envisions only minor policy changes on Medicare and little change in other entitlements, the containment of which we and most other independent observers regard as key to long-term fiscal sustainability.

Our opinion is that elected officials remain wary of tackling the structural issues required to effectively address the rising U.S. public debt burden in a manner consistent with a ‘AAA’ rating and with ‘AAA’ rated sovereign peers (see Sovereign Government Rating Methodology and Assumptions, June 30, 2011, especially Paragraphs 36-41). In our view, the difficulty in framing a consensus on fiscal policy weakens the government’s ability to manage public finances and diverts attention from the debate over how to achieve more balanced and dynamic economic growth in an era of fiscal stringency and private-sector deleveraging. A new political consensus might (or might not) emerge after the 2012 elections, but we believe that by then, the government debt burden will likely be higher, the needed medium-term fiscal adjustment potentially greater, and the inflection point on the U.S. population’s demographics and other age-related spending drivers closer at hand.

I don’t see a whole lot unreasonable in there. If you read S&P’s document Sovereign Government Rating Methodology and Assumptions, you can get a better look at the criteria they’re using. They use five main ratings factors:

  • Political score: Institutional effectiveness and political risk
  • Economic score: Economic structure and growth prospects
  • External Score: External liquidity and investment position
  • Fiscal score: Fiscal flexibility and fiscal performance, combined with debt burden
  • Monetary score: Monetary flexibility
Despite some indignant protestations, it’s hard to argue that the bottom 4 criteria are all that matters in assessing sovereign risk and that institutional effectiveness and political risk should be ignored when assessing sovereign risk. The S&P document goes on:
The political score assesses how a government’s institutions and policymaking affect a sovereign’s credit fundamentals by delivering sustainable public finances, promoting balanced economic growth, and responding to economic or political shocks… The primary factor for determining the political  score is the effectiveness, stability, and predictability of the sovereign’s policymaking and political institutions.

Again, it’s hard to argue that the recent debt ceiling debate did not represent a decrease in the effectiveness, stability, and predictability of our policymaking. Aren’t those complaining most about S&P the same ones who were making these same criticisms of the Tea Party recently?

I want to disagree with Kevin Drum in particular who argues that we were never going to default on our debt. He says:

…even if a deal hadn’t been cut by August 2nd, we wouldn’t have defaulted on our debt. A bunch of government services would have been temporarily put on hold, but bondholders would have been completely unaffected. This is a really important point. It’s true that a temporary government shutdown would have been bad, but this has happened before. It’s ugly and stupid and unnecessary, but it’s politics. America’s debt, however, was never at any risk.

That’s Kevin’s perception. When it comes to markets and financial panics perception is everything and beliefs can be self-fulfilling. If market players agreed with Kevin, then he’d probably be right. I doubt that this is the case however. I side with Lawrence White:

 “…if the federal government delays payment to anyone, then certainly in a common-sense sense, the government has defaulted on its obligations….I believe that the financial markets would not be copacetic [if bondholders were repaid but other creditors weren’t]….They would realize that the government was stiffing one set of claimants who are creditors, and the markets would worry that they might be next”

and Neil Buchanan:

“Foreign holders of Treasuries will understand that it is politically untenable to pay foreigners but not Americans…Can you imagine the firestorm if Americans were told that we cannot afford to pay Social Security recipients, because we have to pay foreign banks and governments first? …No matter how strong the argument that doing so is necessary to protect our credit rating, the bottom line is that the government would be favoring foreigners over Americans. Any foreign investor would know that this is not politically sustainable. They would have every reason to dump our bonds, or at least to require much higher rates of return.”

S&P, and I believe Fitch, also said they would have considered any payment prioritization in-and-of itself a “selective default”. I have a hard time believing that these are not risky outcomes.

So I want to make this post as gentle as possible but it touches issues that are for some reason quite emotional with me. I feel the call of the shrill.

The more I here people talk about the issues surrounding first the financial crises, inflation and now the debt ceiling the more it makes sense to me why Wall Street pays such enormously high salaries.

For example, there is this meme going around in reference to the debt ceiling were folks are asking rhetorically: If you keep hitting your credit card limit should you always raise you limit?

Is this a serious question? Of course you should always raise your limit. If the Red Sox win the World Series you should raise your limit. If you dog takes a poop in the park you should raise your limit. If it rains on Tuesday in July you should raise your limit.

Why?

Because you should always raise your limit. The whole point of the limit is to protect the creditor against you. If he willing to forgo that, take it.

Trying to play games with your credit score aside, it is always but always better to have more liquidity than less.

It is always but always better to be playing with or have the potential to play with someone else’s money. It is always but always better to have more credit and to be more heavily leveraged.

The only question is the price you have to pay. The carry and the exposure.  However, the carry on a limit raise is zero, there is no exposure and the asset is pure liquid. You always take free liquidity.

Imagining a friend of mine saying, “Hey I was just offered a bunch of liquidity at zero carry, should I take it?”  is like having a single male friend ask me, “Hey Monica Bellucci just asked me to spend the weekend in Aspen with her, should I take it?”

Well, are you a crazy person? Do you make it habit of throwing away option value and weekends with iconicly beautiful women?

Maybe some people do.

Maybe some people do.

Pivoting off Karl’s recent posts, I want to throw my two cents in on the minimum wage. Actually, I’ll make that one cent, because I’ve already written about my take on the empirical evidence plenty before and there’s no sense in rehashing that. What I do want to draw attention to is a smart post by Robert Waldmann from 2009 that illustrates why now in particular is a bad time for the minimum wage:

Empirical estimates of the effect of the minimum wage on employment suggest that the effect is very small. One famous study by Card and Krueger showed a positive effect of an increase in the minimum wage. The logic used by Card and Krueger to understand how this could happen suggests that things are different now.

Their logic is basically that firms can choose to pay a low wage and have a high quit rate and take a long time to fill vacancies or pay a high wage and have fewer quits and fill vacancies more quickly. If they are forced to pay the higher wage, their desired level of employment will be lower, but that level is the sum of employment plus vacant jobs. A binding minimum wage can reduce the number of vacant jobs by more than it reduces the sum of employment plus vacant jobs. Thus more employment.

I think this is not relevant to the current situation. There are very few vacant jobs. Quit rates are low. According to their logic, the effect of the minimum wage on employment depends on the unemployment rate. The evidence of a small effect is almost all from periods of unemployment far below 10%. I don’t think it is relevant to the current situation.

As you can see in this graph quits are still quite low, and so Robert’s logic still holds.

It’s always worth noting that when basic laws of supply and demand don’t seem to hold it’s not because of some universal and eternal forcefield simply protecting a market from these laws, but for reasons typically explained by some usually more complicated economic theory. Either that or it’s a mystery, and maybe the exception to the rule is simply due to some irreducible complexity economists will never grasp. But if this is the case it should make you worry even more: since you don’t know where the exception is coming from, you have no idea what will cause it to give way.

When the laws of supply and demand seem violated, it’s probably for a reason, and that reason may not hold in all circumstances. “When and under what circumstances will the result you believe continue to hold?” is an important question to ask yourself. Take the minimum wage. I don’t know any economist who believes that the minimum wage won’t definitely cause unemployment at some level. Maybe it’s a $10 minimum wage, maybe it’s $8, and just maybe it varies a lot by location, industry, and job. That some studies in the past have failed to show a significant unemployment effect of the minimum wage should not lead you to toss aside the concepts of supply and demand and conclude that they are meaningless or disproven in this context.

Pain and its alleviation is major focus of thoughts. To quotes caught my attention.

First from Richard Dawkins

Isn’t it plausible that a clever species such as our own might need less pain, precisely because we are capable of intelligently working out what is good for us, and what damaging events we should avoid? Isn’t it plausible that an unintelligent species might need a massive wallop of pain, to drive home a lesson that we can learn with less powerful inducement?

I suggested the exact opposite to my wife the other night. That pain – as we experience it – may in some sense be the price for willfulness. An organism without conscience motive will eat when it is hungry, sleep when it is tired, and back away when it is stung.

Humans perhaps not so much. Thus stronger inducements are needed to keep us on the genetic straight and narrow. That what’s good for the genes is not always good for us is an important puzzle. As I sometimes say: We are the Matrix; built to service our genes but now having gained consciousness struggling to outwit them.

The second from Jeff at Cheap Talk

There is an alternative to pain as an incentive mechanism:  dispensing with incentives altogether and just programming the organism with instructions to follow. And if the organism doesn’t already have “feelings” as a part of its infrastructure then the instructions are the only alternative.  The big question for theories of pain and pleasure as an incentive mechanism is why mother nature as Principal bothers with incentives at all.

Perhaps Jeff is getting at the deeper question of why it is that we have to be. That is, why we aren’t zombies. However, I take it he asking why the physical mechanism of feelings – apart from their actually being felt – is important.

It seems to me that this is more or less the implementation of an instruction set in an uncertain environment. You want some messy emergent way of integrating competing signals from the environment. This messy integration is what we call feelings.

HT TC

In Tyler Cowen’s The Great Stagnation, he points to three main types of low-hanging fruit that helped drive America’s earlier economic growth but are now drying up:

In a figurative sense, the American economy has enjoyed lots of low-hanging fruit since at least the seventeenth century, whether it be free land, lots of immigrant labor, or powerful new technologies. Yet during the last forty years, that low-hanging fruit started disappearing, and we started pretending it was still there.

Yet while real limiting factors may have caused free land and powerful new technologies to start disappearing over the past 40 years, the only thing that has made “lots of immigrant labor” go away is our political choice to let in less immigrants. I think Tyler is wrong to largely neglect more and better immigration as a way to reverse our Great Stagnation. One could argue that changing opinions about immigration is very difficult, but so too is his crusade to raise the status of scientists, one of his main recommendations for stagnation reversal. Read this quote from his book, for instance, and you decide whether it could just as easily apply to immigration:

That’s going to be hard to achieve, but it’s not a question of lacking the resources. We simply need to will it, and change our collective attitudes, for it to happen. It’s a potential free lunch sitting right in front of us.

I’ve sort of made this point somewhat before, but I think it bears repeating, especially given our current political debates.  If Tyler is right, and lots of immigrant labor was one of the most important drivers of our early growth, and a crucial low-hanging fruit, then our subsequent Great Stagnation should be regarded, at least in part, as a choice.

The Future of Humanity Institute recently reported the results of a survey conducted at their 2011 Winter Intelligence conference. The survey asked participants, who came from fields like philosophy, computer science and engineering, and AI and robotics, several questions about the future of machine intelligence, and one of the results is somewhat worrying. Participants were asked the following question:

How positive or negative are the ultimate consequences of the creation of a  human‐level (and beyond human-level) machine intelligence likely be?

They were asked to assign probabilities to: extremely good, good, neutral, bad, and extremely bad. Here is a box-and-whisker plot of the results.

The most likely outcome is extremely bad. Eyeing it up it looks like a good outcome of any degree (extremely good + good) is less likely than a bad outcome of any degree (extremely bad + bad).  Given that these experts think that the result is most likely very bad, why do we hear such little discussion about how to stop intelligent machines from being invented? In response to a question about what kind of organization was most likely to develop machine intelligence, the most probable was the military. This means we have something of a lever with which to try and slow them down. Should DARPA be shut down?

Participants were also asked when human-level machine intelligence would likely be developed. The cumulative distribution below shows their responses:

The median estimate of when there is a 50% chance is 2050. That suggests we have around 40 years to enjoy before the extremely bad outcome of human-level robot intelligence arrives. The report presents a list of milestones which participants said will let us know that human-level intelligence is within 5-years. I suppose this will be a useful guide for when we should start panicking. A sample of these include:

  • Winning an Oxford union‐style debate
  • Worlds best chess playing AI was written by an AI
  • Emulation/development of mouse level machine intelligence
  • Full dog emulation…
  • Whole brain emulation, semantic web
  • Turing test or whole brain emulation of a primate
  • Toddler AGI
  • An AI that is a human level AI researcher
  • Gradual identification of objects: from an undifferentiated set of unknown size- parking spaces, dining chairs, students in a class‐ recognition of particular objects amongst them with no re‐conceptualization
  • Large scale (1024) bit quantum computing (assuming cost effective for researchers), exaflop per dollar  conventional computers, toddler level intelligence
  • Already passed, otherwise such discussion among ourselves would not have been funded, lat alone be tangible, observable and accordable on this scale: as soon as such a thought is considered a ‘reasonable’ thought to have

There you have it. These are things to look out for, which may foretell a robot disaster is on the horizon. Of course if that last respondent is right, it’s probably too late already.

This is the second part of a series of posts responding to Matt Steinglass at the Economist, who put forward some common progressive arguments in favor of more unionization recently. To understand the big picture problem with the argument for more unions, it’s useful to look at the reasons why unions have died out in the first place. One common explanation is that the most highly unionized industries, like manufacturing, have shrunk, and that unionization was simply taken along for the ride. This is not the case however. As Barry Hirsch details, while overall manufacturing employment fell from 20.1 million from 1973 to 15.6 million in 2006, nonunion manufacturing employment rose by 1.5 million. A similar patter persisted in the other main union industries of construction, and transportation/communication/utilities: union employment fell while nonunion employment rose. The graphs below, from Hirsch, tell the story pretty clearly:

If declining industries is not the cause then what? Hirsh identifies 3 main explanations for the decline of unionism: competitive, structural, and institutional. Ultimately, he provides a convincing argument that the fall of unionism is due to a more competitive and dynamic economy. Part of the problem, he argues, is that collective bargaining slows firms down:

“Were changes in the economic environment very gradual and competitive pressures weak, a  formal and highly deliberate union governance structure might pose few problems. The costs of deliberate or sluggish union governance, however, increase with the speed of change and the degree of competition. New information is constantly coming to a firm and its workers and it is prohibitively costly. to have explicit contract terms for every possible contingency. Revising formal contractual terms is costly. Although many collective bargaining agreements have broad management rights clauses, formalized contractual governance limits flexibility and managerial discretion in union companies. “

A related problem is that by cartelizing labor, unions raise wages above the competitive level. The more competitive a firm’s market, the less they will be able to raise price in response to higher wages, and the more costly unionization is in terms of lost employment. For both reasons it is difficult more difficult for unionization to exist in a competitive and dynamic economy.

A common counterargument to this, which Matt makes, is to point to the high employment and unionization of the 50s and 60s as evidence that they can co-exist. But the economy was much less dynamic and competitive than it was today. As detailed by Brink Lindsay in Nostalgianomics, labor market competition in that time period was limited by discrimination against minorities and women, and strict immigration restrictions. Goods market competition was limited by government policy like tariffs and price controls, and a much lower level of global competition than you have today. Despite this, strong economic growth was possible due to lots of long-hanging productivity fruit and innovation.

Today low unemployment can’t co-exist with high unionization of the kind we have in the U.S. because the world, and especially the U.S., is more competitive and dynamic.  I think an implicit argument made by some, although not necessarily Matt, is that we should be willing to give up the dynamic and competitive economy in exchange for more unionization. But aside from being good for all the reasons detailed in Nostalgianomics (free trade, less discrimination, and more immigration are good things), a competitive and dynamic economy is extremely important. As Tyler Cowen argues in The Great Stagnation, we’re out of low-hanging fruit like we used to have, and so we can’t afford to give up the economic growth we do have by attempting to decrease labor market and goods market competition enough that unions can thrive again.

In an attempt to tamp down rising prices, the Obama administration is setting a 10% maximum increase for health insurance rates, above which insurers would have justify the increases based on higher costs. Starting in 2012 they will set different rates for individual states. I don’t know if there is any literature on this in health insurance, but there is evidence that when regulators set price points it can serve as a focal point, or “Schelling point” for economist Thomas Schelling, for collusion. Here is how Knittel and Stango describe the theory:

In practical terms, the problem of tacit collusion often reduces to one of successful coordination.Firms can resolve the coordination problem in many ways; one such way is through the use of a focal point. The theory of focal points dates at least to Thomas Schelling (1960), who noted that in simple games with many equilibria, agents can quite often recognize a focal point and use it to coordinate. In one of his more well-known examples, Schelling discusses the problem of two people simultaneously choosing a common location (in which to meet) in New York City. Given that the game possesses an infinite number of equilibrium location-pairs, we might expect the odds of successful coordination to be quite low. Nonetheless, in practice most people who play the game choose a well-known spot—such as Times Square or the Statue of Liberty—and can successfully coordinate. In situations where firms set prices, it is often suggested that the “clustering” of prices occurs at certain natural focal points (e.g., $9.99).

Like I said, I have no idea whether this would or has occurred in health insurance markets. But regulators should certainly consider it a potential cost to setting prices.

Robin Hanson argued some time ago that politics isn’t about policy. This was his theory for why we have so many excessive regulations that “make everyone act like high status folks act, regardless of how appropriate that is for their situation”. Here are some of his examples:

“Consider one-size-fits-all building codes, food and drug regulations, safety rules, professional licensing, and medical insurance regulations. Such rules tend to make sure that a typical rich person wouldn’t accidentally buy a product or service of a much lower quality than they would desire.”

His favored theory for why these types of laws are pervasive is that politics isn’t about policy, in that:

“We (unconsciously) don’t care much about the consequences of such policies – we instead support policies to make ourselves look good. If our support for regulations pushing high status actions is taken as a signal of our personal status, then we can want to support such regulation regardless of what results when such regulations are implemented.”

How would we know if Robin was wrong? I think that no matter what your policy priors are, there are some obvious things policy should incorporate if in fact we did care about policy outcomes. The lack of these policy features suggests to me that Robin is correct.

For one thing policies should be designed so that we can tell if they worked. One way to do this would be to incorporate randomization into their design. State and county differences in laws are already used as instruments for economic studies, but endogeneity of policy is always a concern. The experimentalist school of economics is growing more and more prominant, and government’s could hire staffs of these economists to design very subtle and smart ways to insert randomization into policies and tease out causality.

A state that wants to raise the minimum wage, for instance, could raise it in randomely selected counties. Or consider what could be learned about payday lending if some state or group of states hired Dean Karlan and Jonathan Zinman to design a study oriented policy. It certainly would have been a good use of money to randomize some of the first round stimulus package. If it worked as proponents claim then it would make it easier to get a second round of it, and if it didn’t as critics claim then it would be much less likely we would waste money on future stimulus.

Of course this would not work with all policies. Sometimes the effects are significantly long-run, indirect,  or they impact hard to measure outcomes, such that it would be difficult or impossible to empirically determine whether they’ve worked. Here we must be guided by theory. But surely there are many laws where this is not the case.

Another thing you would observe if politics were about policy is sunset provisions in laws where the efficacy is examined some predetermined number of years out and they are automatically repealed unless they are shown to have had a demonstratable effect. This would go hand in hand with policies designed so that effectiveness can be measured.

Policies that are designed so that we know if they worked as intended, and are be automatically repealed if they don’t: why is such a common sense idea so foreign, and what does that tell you about politics and policy?

(Thanks to the always insightful Sister Y for inspiring this post)

Some time ago I challenged those who don’t believe that paternalistic regulation is characterized by a slippery slope  to provide some examples of regulation that would prove them wrong. The problem I saw was that paternalism fans always deny the slippery slope exists by claiming that new regulations are just reasonable policies. But of course this is how the slippery slope works, as today’s new policies will be used to justify future policies and to make them look reasonable. After all, every new step is only a small distance from where we are currently standing, but what are we walking towards? Nobody took the challenge, but pivoting off of San Francisco’s Happy Meal ban I did makee some predictions about future likely paternaism:

Making fast food less attractive may protect parents when they happen to be near a McDonalds with their kids, but it doesn’t protect them from having McDonalds reach out to children in the first place and getting it into their heads that their food and toys are awesome. If you’re going to stop this problem, it must be at the root. One way to do this is to ban advertising of fast food targeted at children. This would probably start with children specific magazines and TV shows, but move to a general ban.

Now regulators are helping to make my predictions come true, as they attempt to place limits on advertising by food companies to children. Here is how Ad Age describes the guidelines:

…the rules would start in 2016 and only allow foods that contain no trans fat and not more than one gram of saturated fat and 13 grams of added sugar per “eating occasion” to be marketed to children. Also, the foods could not contain more than 210 milligrams of sodium per serving. The sodium restrictions would tighten by 2021. In a concession to industry, the rules do not include “naturally occurring” nutrients. Additionally, the foods must provide a “meaningful contribution to a healthful diet,” including from at least one major healthy food group such as fruit, vegetables, whole grain, fish, eggs and beans.

The guidelines are said to be “voluntary”, but as Ad Age points out this is a little murky:

Although not binding, whatever emerges in the final report to Congress will likely be adhered to in some fashion because the rules are put forth by a quartet of agencies that have strong sway over marketers, including the FTC, Food and Drug Administration, Centers for Disease Control and Prevention and Department of Agriculture. “Despite calling these proposals ‘voluntary,’ the government clearly is trying to place major pressure on the food, beverage and restaurant industries on what can and cannot be advertised,” the ANA said in a statement.

I would be interested in reading more about the “strong sway over marketers” that these agencies have, and exactly how the nominally voluntary guidelines would be non-voluntary in practice.  This will probably come to light, as Ad Age says that this announcement is only an “opening salvo in what will be a lengthy debate between government and industry on how to solve the growing childhood obesity crisis”.

If paternalists truly were concerned about reducing childhood obesity and not simply trying to make themselves feel good, then they should be willing to include in these regulations a sunset provision that repeals them if they don’t have a demonstratable impact on childhood obesity rates in 5 years. My guess is that paternalists wouldn’t go for this, because deep down they know this isn’t going to make much if any difference in children’s health and are really interested in banning something they find distasteful.

The slippery slope from here is pretty obvious: strictly non-voluntary guidelines that require any food packaging or advertising of must be approved by a regulatory agency and subject to standards similar to those above. But we know that advertising isn’t the only way that companies influence purchasing decisions. Why shouldn’t the color of packaging be regulated? I’m sure behaviorlists can tell us which colors children like most, and I’m sure regulators would be happy to insist on gray boxes for unhealthy foods. Children are also probably more drawn to items low on grocery shelves or in the checkout aisle, so why shouldn’t regulators determine where in a store products can be placed?

I’ll repeat my challenge to paternalists: if this isn’t evidence of the slippery slope of paternalism, then what would be?

The problem with romantic jobs is that many people will always argue, on any margin, that the right thing to do is “support” them. This is on full display in a recent article in the Washington Post discussing the plight of families with public sector workers in Ohio.

Judy and Jim Embree, an operating room nurse and paramedic and firefighter, were attending a rally at the state Capitol when they discovered that everything they thought to be good and right about their lives was, to an alarming number of people, completely wrong.

The people who showed up that day in support of a plan, since adopted, to cut the power and benefits of public-sector unions said that people like them were the problem. That their “high wages” and “exorbitant pensions” were crippling cities and counties across Ohio. Some, even, said their jobs were unnecessary.

It had never occurred to the Embrees that firefighters and nurses could be unnecessary. They thought of themselves as linchpins of the community — and one of the biggest rewards of their jobs was knowing that the rest of the world thought so, too.

One can obviously feel sympathy for these people. But it’s an extremely problematic notion that an occupation that people generally admire should always have more, and that to question whether wages are too high or whether there has been too much hiring is an unimaginable assualt. The shame of this is that the current negative attitude towards public sector workers by some, however unfair, is in part created by a system that has generated obviously inefficient and unsustainable policies, which is in turn enabled by such romanticism in the first place.

On this issue and many other I continue to believe that if you’re angry about radical reforms today, you should be angry at those that fought moderate reform. The unions, legislators, and administators who for so long failed to produce or outright opposed meaningful education and public sector reform have brought us to the point where people are willing to vote for radical reform. With respect to edcuation I particularly blame those from the “all wee need is more money and smaller classrooms” school of education policy.

Part of this has to do with the fact that the Great Recession has magnified these issues, and Republicans have successfully stoked these fires. But they aren’t creating the demand for radical reform, they’re simply catering to it. The lesson, for both left and right, is that there is a danger to preserving the unsustainable by fighting off moderate reforms. Bringing this back to my initial point, I think this problem is most likely in areas where romantic and idealistic beliefs make it easy for vested interests to fight off moderate reforms.

Bryan Caplan offers this challenge liberaltarians:

From what philosophic point of view is “maximizing growth + lots of redistribution + the immigration restrictions lots of domestic redistribution naturally encourage” better than “maximizing growth + no redistribution + free immigration”?  Whether you’re concern for the poor is Rawlsian, utilitarian, or even dogmatically egalitarian, “no redistribution + free immigration” is the way to go.

I consider myself a liberaltarian, so I’ll take up Bryan’s challenge.

I think the key disagreement here is that I don’t think redistribution policies are actually a binding constraint on immigration. Specifically, I disagree with Bryan’s presumption that domestic distribution actually encourages that much of a restriction on immigration, or at least that the immigration restrictions we have would go away or significantly loosen if we suddenly abandoned all redistribution policies.

This is because people would oppose immigration pretty much regardless of how much or how little immigrants benefitted from welfare and redistribution policies. How do I know this? Well, because Bryan Caplan told me so. In his excellent book The Myth Of The Voter Bryan identified the anti-foreign bias, which is a “tendency to underestimate the economic benefits of interaction with foreigners”. No amount of minimal government is going to do away with this bias, and I don’t think it will help reduce it much on the margin either.

You know why else I think more immigration is consistent with welfare policies? Because Bryan Caplan told me so. In the slides to the presentation he gave on immigration for the Future of Freedom foundation, Bryan specifically counters the Milton Friedman’s claim that “You cannot simultaneously have free immigration and a welfare state.” Here is his rebuttal to Friedman:

  • Was he right?  Key fact about the U.S. welfare state: Most of the money goes to the old, not the poor.  New immigrants tend to be young.
  • Julian Simon and others calculate that the average immigrant is a net tax-payer.
  • – Absurd?  Remember – much gov’t spending is non-rival.  Immigrants help spread the cost of national defense, debt service, etc.
  • – Further result: Illegal immigrants are a great deal for taxpayers.  People who pay taxes on fake SS#s are pure profit for the Treasury.
  • – Others aren’t as optimistic as Simon, but almost no serious researcher finds a big negative fiscal effect of immigration.
  • Even if the complaint were true, there’s clearly a much cheaper and more humane alternative: Freely admit immigrants, but make them ineligible for benefits.

So Bryan is right and immigrants are net tax payers and they help spread the costs of national defense around, then more immigrants should make our welfare state that much easier to maintain.

If an anti-foreign bias prevents people from seeing that current immigrants provide us with net economic benefits even with our welfare policies, then it would seem foolish to abolish those welfare policies on the hopes that it will somehow convince people to suddenly abandon the anti-foreign bias that prevents them from seeing that they don’t matter in the first place.

So Bryan’s challenge to liberaltarians is not so tough, especially when you have Bryan on your side backing up your arguments.

Free traders like to point out that technology likely destroys far more American jobs than globalization, and yet globalization skeptics do not complain when this happens. Furthermore, we like to add, why should individuals whose jobs are offshored be entitled to a better safety net than individuals whose jobs are made redundant by technology? Aside from being absolutely true, free traders like myself engage in these arguments because they bolster the case for free trade by pointing out the logical inconsistency between people’s intuitively positive feelings about technological progress and their intuitively negative feelings about free trade.

But what happens in the future if artificial intelligence means that human-like robots start replacing jobs? When the machine that replaces you has a voice and a name, like Watson, it will feel different than when the machine is a big metal contraption that attaches widget A to widget B. I suspect that the more human-like the technology that replaces human work, the more people will begin to finally heed the arguments of free traders and reconcile their feelings towards technology driven versus globalization driven job destruction. Unfortunately, this won’t be in the direction we want. Instead, people will begin to see technological progress as a “they” who is “taking our jobs”.

Because it is true I don’t think free traders should stop drawing attention to the connection between technology and free trade, but I do worry that one day it will come back to bite us as it makes the popular adoption of techno-phobic* beliefs that much easier.

*We will need a new word that reflects a bias towards favoring humans, sort of like nationalism or nativism except favoring humans instead of favoring one’s nation or it’s natives.

Ryan Avent at the Economist explains much more clearly than I the wrongness of the claim that low population growth will make us better off:

The point concerning government spending is simply bizarre. Projected growth in federal spending is largely due to rising spending on entitlements, especially Medicare and Medicaid. Slower population growth isn’t going to limit this spending growth; it will just increase the dependency ratio and the expected per capita burden of taxation….

…Indeed, all of the above is precisely what has been observed in Japan, where population growth slowed, halted, and eventually reversed. Per capita incomes have risen only very slowly, government debt is enormous, households are heavy savers, and deflation is endemic.

Also in the comments Andy Harless tries to provide an explanation for what Johnson may be thinking:

(1) fewer immigrants mean less competition for jobs in the short run (assuming immigrants don’t create enough domestic demand to support their employment), and (2) fewer children mean less drain on governments. Of course fewer children do also mean less demand and therefore fewer jobs, but this is obviously endogenous: children are just a manifestation of the multiplier effect, an expense that people choose based on their income. OTOH immigration is also endogenous, so all the first argument is really saying is that it’s a good thing people aren’t dumb enough to keep coming to the US when there are no jobs.

I think this is quite possibly what Johnson is thinking, and I like Andy I think there are some big problems with it. I won’t rehash the arguments here, but there are a lot of other reasons why more immigration would make us better off.

Commenter Adam and Matt Yglesias (via twitter) also point out that an economy based mainly on some scarce natural resource or agriculture could have diminishing returns to labor even in the long-run as capital adjusts, which would explain higher real wages as population grows. However as Matt, Adam, and I agree, this a very bad model of the U.S. economy.

Karl addresses the monetary impacts in the comments:

More worker would imply an increasing demand for money. If you are thinking of the money stock as fixed this will tend to be deflationary and worsen our condition.

However, we have a rate target so increasing money demand should be met by increasing lending. More population should supply more credit unconstrained borrowers who can profitably take out loans at the prevailing interest rate.

Overall I am less puzzled by what Johnson could be thinking, but don’t see a plausible case for why he could be right.

A new paper by Nathan Berg and Gerd Gigerenzer asks this question:

For a research program that counts improved empirical realism among its primary goals, it is surprising that behavioral economics appears indistinguishable from neoclassical economics in its reliance on “as-if” arguments. “As-if” arguments are frequently put forward in behavioral economics to justify “psychological” models that add new parameters to fit decision outcome data rather than specifying more realistic or empirically supported psychological processes that genuinely explain these data. Another striking similarity is that both behavioral and neoclassical research programs refer to a common set of axiomatic norms without subjecting them to empirical investigation. Notably missing is investigation of whether people who deviate from axiomatic rationality face economically significant losses. Despite producing prolific documentation of deviations from neoclassical norms, behavioral economics has produced almost no evidence that deviations are correlated with lower earnings, lower happiness, impaired health, inaccurate beliefs, or shorter lives.

My guess is that this critique will bring the behavioralists and neoclassical economists together in joint attack. The authors propose a new approach they call ecological economics, and summarize what the field should do improve like this:

“To make behavioral economics, or psychology and economics, a more rigorously empirical science will require less effort spent extending as-if utility theory to account for biases and deviations, and substantially more careful observation of successful decision makers in their respective domains.”

Here is David Brooks’ advice about how the President can bargain with both parties to make progress towards fixing some of our long-term problems:

Most important, the president will probably have to take advantage of the following paradox: bigger is easier. If he just tinkers around the edges with modest proposals, then everybody will be on familiar ground. But if he can expand the current debate, then, suddenly, everybody is on new ground.

The general approach should be to offer the left something it really craves. Then offer the right something it really craves. Then, once you get them watering at the mouth, tell them they’re going to have to bend on the things they don’t care about in order to get the things they do.

Now I don’t agree with the things Brooks’ calls for giving the Democrats, but I can think of one thing Obama should give the Republicans and the Democrats should happily give up: get rid of the minimum wage. Wait, wait, don’t roll your eyes and close this window! Stay with me!

Economists from both sides of this debate agree that the minimum wage is less important than most people think and politicians act. Futhermore, there is widespread agreement it is a highly imperfect way to make poor people better off.  The Earned Income Tax Credit is better targeted at low-income families instead of middle class teenagers, and it doesn’t have the downsides of potentially causing disemployment. So Democrats should be glad to trade this policy in for a smarter, more effective, and more efficient one, and in doing so cash in on Republican’s emotional attachment to this issue.

Yes, it would be a huge symbolic loss for Democrats. But like Brooks said, getting reform done is going to require giving and taking, so a good strategy for both sides to maximize actual real benefits is to give when the policy is symbolic, and take when the policy is most efficient and beneficial.

Robert Samuelson wrote a recent piece arguing that part of our current economic woes are due to a new widespread risk aversion, which prompted Matt Yglesias to write that the risk aversion is not new. He argues that the large investment in housing in the post dot-com bubble world was a in fact a result of people becoming risk averse and seeking the relatively safe investment vehicle of housing. There may be some truth to this, but I think an equally compelling story is that people were seeking returns rather than avoiding risk.

After 2004 or so it’s hard to picture someone putting their money into housing in Florida, California, Nevada, or Arizona out of an increased aversion to risk rather than seeking increased returns. Of course, a more complete description is to say that both perceived risks and returns motivated homeowners, but what changed the most was the expected returns went up a lot while expected risk did not, so I think this is best characterized as chasing returns rather than avoiding risk.

On the other hand, there were surely many potential homebuyers who were planning on buying housing in the later in the future but bought during the bubble to avoid the risk of being priced out of the market. For these homebuyers, Matt would be correct to call them motivated by risk aversion, but even here they are motivated by changes in risk/return to housing rather than a change in the risk/return of equities.

As has been pointed out many times on this blog and elsewhere, you’re born short on housing and so fully modeling the rent/buy decision and the subsequent level of housing consumption are both tricky. Nevertheless, I would say the best simple explanation for what changed in homebuyer behavior over the past decade was perceived increase in the expected returns to housing investment, rather than an increase in risk aversion.

I hope the long-run takeaway from the housing bubble is that individuals learn that you can’t simultaneously seek outsized returns and avoid risk at the same time, which if both Matt and I are partially correct is exactly what was happening. I have a friend who is a financial advisor who says that when he’s seeking new clients, some will be hesitant about whether they need his services because, as they brag, they got 15%+ returns on their portfolio last year. This is one thing to hear from someone who is young, but he tells me it often comes from people at or past retirement age.

If you are someone who is getting ready to retire, and you see 17% returns on your portfolio you should be terrified, not proud, because the investments which you will shortly be living off of are clearly exposed to large amount of risk. There is no magic that brings large returns without risks. Where you see one, there will almost certainly be the other. So if you don’t like huge risks, be wary when you see huge returns.

I cannot think of an explanation for this trend:

The number of Americans hospitalized for dog bites almost doubled over a 15-year-period, increasing to 9,500 in 2008 from 5,100 in 1993, a new government study reports.

The increase vastly exceeded population growth, and pet ownership increased only slightly during the same period, said the report’s author, Anne Elixhauser, a senior research scientist with the Agency for Healthcare Research and Quality.

Is this a healthcare utilization trend? Is the rise of “how to” dog training TV shows to blame (I’m looking at you Cesar Milan!)? Is it a trend in the kind of dogs that people are owning, i.e. a shift to more aggressive breeds? What is going on here?

There are two important questions in the economy today that may be related: 1) is negative equity causing a decrease in geographic mobility? and 2) why is the Beveridge Curve breaking down? Wait! Don’t stop reading yet, I can explain it in non-econo-jargon, I promise.

House prices have obviously fallen a lot since the peak of the bubble, and this has left many homeowners “underwater”, so to speak, meaning they owe more on their mortgages than their house is worth. This is potentially causing a big decrease in people’s willingness to move, which includes moving for a job. This, in turn, is potentially causing higher unemployment by preventing people from moving away from places where their labor isn’t demanded to places where it is. The question is, how big of a deal is this?

The second question relates to the Beveridge Curve, which shows the relationship between the unemployment rate and the number of job vacancies. The idea is that when unemployment is high, job vacancies should be low, and vice versa. If people are having a hard time finding work, then employers shouldn’t be having a hard time finding workers, since there are plenty of unemployed people looking for work. However, as the graph below shows this relationship has broken down somewhat over the recent recession. This is suggestive of some sort of friction in the labor markets that is preventing employers from finding hires among the vast numbers of unemployed.

A recent study investigates whether house price induced immobility is causing the breakdown in the Beveridge Curve. This is an intuitive and plausible mechanism.  House prices fall, homeowners are underwater and can’t move to jobs, so there are unemployed people in one area and job vacancies in another, and negative equity prevents them from moving to those jobs. Supporting their hypothesis, the authors cite a 2010 study by Ferreira, Gyourko and Tracy which found that having negative equity reduced the probability that a homeowner would move by 35%.

The study uses a structural VAR (which is a big regression with multiple dependent variables) to estimate the dynamic relationship between 3 housing market variables and 2 labor market variables. They find that their model predicts 30% of the increase in unemployment observed during the great recession, and in generates a flat or slightly upward sloping Beveridge Curve as observed in reality. The authors are then able to run a counterfactual where they removing shocks to housing preferences, meaning that they see what would have happened to unemployment without the housing bubble.  They find that the unemployment rates are in line with the Beveridge Curve, and thus conclude that underwater homeowners can explain the breakdown of the Beveridge Curve. The graphs below show the counterfactual unemployment rates in two scenarios: a high leverage economy, and a low leverage economy.

The authors do caution that their model is a simple one, but the results suggest that housing markets are holding back labor markets. What is also important to note however, is that the model only explains 30% of the increase in unemployment during the Great Recession, leaving plenty of room for aggregate demand led unemployment.

Why not? Matt Yglesias objects to my post yesterday, holding it up as an example of why nobody likes economists. He says that my analysis ignores the fact that “big part of the point of prostitution prohibition laws is to express social disapproval of prostitutes and prostitution”:

Indeed, people seem generally quite unconcerned about whether prostitution is occurring someplace out of sight and out of mind. But they want to reserve the right to strongly disapprove of both the prostitution and especially the prostitutes. You can analogize a person who engaged in a form of sexual or commercial conduct of which you disapprove by referring to that person as a “whore.” It’s an insult. Its insult status reflects and upholds a social consensus that whores are bad people, not just that whoring is a kind of undesirable nuisance. Side-payments can’t address this issue.

The first thing I would point out is that he seems to agree with me with respect to the actual welfare analysis of the voluntary exchange of prostitution.  This at the very least suggests that there should be a pareto improving legal framework where the only effect of the law is that any visible signs of prostitution are banned, including advertising, streetwalking, etc. This would demonstrate social disapproval while allowing exchange. It also suggests that given that there are anti-prostitution laws, the optimal enforcement, with the exception of the public nuisance element of streetwalkers (which I’ll talk about later), should be zero.

Is this what we observe now? Crackdowns on very secretive and high-priced prostitution rings do occur, and Rhode Island recently passed a law that moved the state from legalized behind-closed-door, no advertising, prostitution to full prohibition.

The other, arguably more important, issue raised here is that I was specifically addressing externalities of prostitution. Should people’s preferences over laws regulating some good or service be considered externalities of that good or service? I think the answer here is clearly no, since they are unrelated to the quantity of the service produced.

However, one might still argue that these preferences should be included in welfare analysis as a cost or benefit of the law. This is an interesting question.

One concern here is that voters have preferences over most laws, and as Bryan Caplan argued in The Myth of the Rational Voter, those preferences suffer from fundamental biases not related to the costs and benefits of those laws. He documents 4 biases:

1. Make-work bias

2. Anti-foreign bias

3. Pessimistic bias

4. Anti-market bias

If we are to accept that voters preferences over laws -as opposed to preferences over the direct outcomes of those laws- should be included in cost benefit analysis, then we should be prepared to consider laws which satisfy voters inherent anti-foreign bias as a legitimate benefit.

One could argue that public policy, and cost-benefit analysis therein, should not weigh the enjoyment some get from lowering the status of others. When weighing protectionist measures, for instance, should we consider the fact that they satisfy anti-foreign bias as a benefit?

Then again, one could make an argument that the costs and benefits of the expressive value of laws should be taken into consideration. After all, if laws lower the status of some group, and they have negative disutility from that which they’d be willing to pay to remove, then that is a real cost. When framing the problem as one of harming some group like this  it seems more worthy of consideration. But both costs and benefits must be considered. This would mean weighing the cost of lower status of prostitutes against the benefits of those who wish to lower their status. Likewise one could weigh the benefits of satisfying anti-foreign bias against the costs to those of us who find that bias reprehensible.

Matt seems to think the reason people don’t like economists is because they miss these things or they ignore them. That’s a fair enough criticism (although again, in my case I was addressing the particular question of externalities). But he should consider Robin Hanson, whose willingness to wrap any cost or benefit into welfare analysis, no matter how egregious, is surely the purest form of economic thinking. No offense to Robin, but I don’t think people would like economists more if they all conducted economic analysis more like him.

More on streetwalkers later.

In the comments on my previous post contrasting minimum wage and prostitution, Sister Y argues that prostitution in fact has an externality. Some individuals find prostitution morally objectionable, and so they suffer mental costs when someone else hires a prostitute. The idea that we have preferences over each others actions, and that this can lead to conflicts between welfare analysis and various notions of liberty, is a longstanding issue in economics that owes much to Amartya Sen. However, I think the prostitution-as-externality argument is fairly easily resolved and doesn’t generate any conflicts between liberty and welfare analysis.

To illustrate, allow me to use characters from HBO’s Hung, which stars Tom Jane as middle-class, suburbanite, male prostitute Ray Drecker.

Say Ray’s friend Lenore wants to purchase Ray’s prostitution services and she values them at $400. But when Lenore does this it bothers Ray’s other friend Tonya. If the negative utility Tonya experiences is worth more than $400, then the market provides a mechanism for Tonya to satisfy her wants: she can pay Ray $401 not to sleep with Lenore.

You might argue that contracts aren’t complete enough to guarantee that Ray won’t sleep with Lenore anyway the moment Tonya turns her back. But what Tonya can buy from Ray for $401 is only an hour of not sleeping with Lenore, because that is what one hour of his time is worth. If she wants to pay Ray to never sleep with Lenore she has to pay the net present value of all of the future services.

For those who morally object when Ray sells himself to anyone, not just Lenore, this is a moot point because there are other clients anyway, so paying to not sleep with Lenore doesn’t accomplish much less prostitution. The point is that because prostitutes offer a flow of services Tonya has to pay Ray not to sleep with all of his potential clients if she wants him to not be a prostitute. Essentially she has to buy the entire flow of services.

This makes contracting much less simple: if you don’t like prostitution then you can hire the prostitute to do something else. In this way the presence of lots of people who object for any reason, moral or otherwise, to prostitution can drive down the quantity of prostitution services by bidding up their price. What this means is that markets are fully capable of internalizing the mental costs borne by those who dislike prostitution.

People will probably object that this is unbelievable, and that even if it happened once in a while, in the real world this would never be enough objectors to affect the quantity of prostitution. I think this is correct. After all, the objectors would have to value preventing prostitution at more than average rate of $300 an hour in order to outbid the existing buyers. But what this tells you is that the marginal utility gained from prostitution by consumers would vastly exceeds the marginal disutility to objectors.

I think objectors know. After all, market based solutions are possible and yet you never hear objectors push for anything but prohibition. This tells me that their willingness to pay is pretty low, and therefore so is their disutility.

I have argued that the slippery slope of paternalism is real, and we are sliding down it. Defenders of paternalism argue there is no slippery slope because a) where would we fall from here? and b) why haven’t we begun sliding yet? I rush to point out paternalism that targets sugar and salt, and the defenders argue “Well, that’s just good policy. Let me know when we’ve actually started sliding down the slippery slope”. What happens is paternalists are forever moving the goalposts, and declaring the newest ban or tax just reasonable policy. Their burden of proof demands that that we slide two, three, or four steps down the slope at once instead of one step at at time, since the one step we’re taking now is just reasonable. We’re always seemingly at the bottom of the slope, and things aren’t so bad from here are they?

Well folks, we’ve reached a new slope bottom: San Francisco has banned the McDonalds Happy Meal.

Since paternalism defenders will surely claim this is “just reasonable policy, and if there is a slippery slope then where could we possibly slide to next?”, let me repeat what I wrote awhile ago:

I think it would be useful to for critics of the slippery slope theory of paternalism to demarcate now what future policies would constitute evidence that they are wrong, because my guess is the point of demarcation will move right along down the slope with policy. Several years ago many of todays critics of slippery slope theory would have said that an attempt to regulate salt would constitute evidence. But now, farther down the slope, salt regulation is just sensible policy.

Robin Hanson and Bryan Caplan have noted recently that when it comes to regulation people are biased against large producers, and that this doesn’t make any sense. In most markets this is certainly the case. For instance, there is no reason why a locally owned mom-and-pop grocery store should be less regulated than Walmart, and yet Walmart faces much greater opposition when they want to build in a community. However, when it comes to music and other entertainment laws and regulations favoring small producers can be efficient.

The optimal copyright policy would ensure that any possible products for which total benefits (social plus private) are greater than total costs are created. For large producers, e.g. the most popular artists, the profits they receive are more likely to exceed the minimum amount needed to incentivize them to create. For small artists this constraint is much more likely to be binding, and products with positive net value are unlikely to be created due to suboptimal copyrights.

Imagine, for instance, how much additional music would be created if small artists could perfectly price discriminate, meaning they could charge the maximum that each individual consumer would be willing to pay. Now consider how much more superstars would be willing to create if they could do the same. The latter will be much less marginal creation due to wealth effects -meaning the richer artists are the more they’ll want leisure over work- and because they are more likely to be producing closer to a quality adjusted full capacity.

This suggests that if it increases profitability of small producers at the expense of large ones, illegal downloading may be welfare enhancing. A new NBER paper in fact supports this notion. The authors argue that music piracy decreases the demand for recorded music from all artists, but increases the demand for live performances for small artists but not large, well-known artists. Here is the abstract:

Changes in technologies for reproducing and redistributing digital goods (e.g., music, movies, software, books) have dramatically affected profitability of these goods, and raised concerns for future development of socially valuable digital products. However, broader illegitimate distribution of digital goods may have offsetting demand implications for legitimate sales of complementary non-digital products. We examine the negative impact of file-sharing on recorded music sales and offsetting implications for live concert performances. We find that file-sharing reduces album sales but increases live performance revenues for small artists, perhaps through increased awareness. The impact on live performance revenues for large, well-known artists is negligible.

Given the logic above, these results suggest that illegal downloading may be welfare enhancing.

There is a very interesting article at the Atlantic from David Just and Brian Wansink from the Cornell Center for Behavioral Economics in Child Nutrition Programs. They discuss their work on improving healthy eating in school cafeterias using the subtle wizardry of behavioral economics. There have been some impressive results:

One school in upstate New York was able to increase consumption of salads by close to 300 percent by simply moving their salad bar six feet from the wall and placing it near a natural bottleneck in the check-out line. Another school increased fruit sales by 105 percent by moving the apples and oranges from stainless steel bins into a well-lit and attractive basket.

It is encouraging to see behavioral economics being put into creative use like this. The authors argue that “It is difficult to teach a high school student how to make healthy choices in the real world if only escarole and tofu on are on the school lunch menu”. But is this teaching them to choose better or tricking them into choosing better? After all, if behavior is so amenable to subtle tricks like this then what hope can there be that any behavioral changes will actually last? I can’t tell if articles like this should make us more or less hopeful. Yes, the good scientists here are making a difference, but are we really so impressionable?

I once had a macro professor offhandedly suggest -in between demonstrating with Hamiltonians and representative agent models how rational bubbles could exist- that one way to identify a bubble would be the the number of complete amateurs lured into an industry. Similarly, my main data point in identifying the housing bubble was Flip That House and other shows like it.

What was happening on those shows defied everything micro theory says about how a market should behave. It wasn’t just that the behaviors couldn’t be explained by neoclassical, perfect information, Chicago School micro theory. There was no amount of information asymmetries, market power, or principal agent problems that could explain what happened on those shows.  Complete novices buy a house, spend four weeks doing a shoddy remodel, and sell it for 150% what they paid for it. This was clearly Animal Spirits.

“What is happening here cannot last”, I would tell people. If there are such insanely outsized profits to be had, surely professionals will put these amateurs out of business, owners of houses in need of rehabilitation will ask higher and higher prices,  and competition will drive prices down. Yet the shows went on for several seasons, with witless novices making profits that defied gravity.

The longer the show went on the more of a bubble I assumed was building. On the more professional home renovation shows they were leveraging up big time as well. And everyone knows hows it all ended.

I was reminded of all of this today by an excellent post from Mike Konczal pointing out this exact phenomenon across bubbles and industries:

In my personal opinion, in the same way middle-class people turned amateur stock analysts was the sign of a tech bubble, or middle-class people turned amateur realtors was the sign of a housing bubble, middle-class people turned amateur credit risk analysts and credit channel intermediaries was the surest sign of a credit bubble.

The amateur credit risk analysts he is talking about are the person-to-person lending websites that were once very overhyped in terms of their potential. This is an amateur market I had not considered, but it certainly makes sense.

The lesson here is beware the amateurs. Wherever they gather in huge profitable masses a bubble has surely formed, and the longer they are able to walk around blithely picking up $100 bills off the sidewalk, the bigger the bubble is.

Dana Goldstein seems bothered about a new program where teachers from Teach for America work at Goldman Sachs over their summers. Her concern is that this will lure TFA teachers from the profession since a starting position at Goldman pays $60,000 plus bonuses, which is more than double what a starting teacher makes in a poor district. But will this harm retention?

A 2008 study by Morgaen Donaldson looked at “whether, when, and why” TFA teachers leave the profession. One of their findings was that science teachers that majored in science in college were more likely to leave the profession than science teachers who didn’t. Donaldson finds this to be consistent with previous literature showing that science majors are more likely to leave the profession than humanities majors due to the higher salaries they can get in science, technology, and engineering careers. This, the author argues, shows that teachers can be pulled out of a teaching career as well as pushed out.

On the other hand, the ability to intern at Goldman Sachs may increase the lure of enrolling in TFA. There may be potentially talented teachers that would enroll in TFA but choose work at an investment company instead who might now be tempted by this opportunity.

Then again, retention is considered more of a problem for TFA than supply of applicants. Indeed, a frequent criticism of the program is that too many TFA teachers leave the profession, which means it’s potential is extremely limited. But I think the reality here is frequently exaggerated. First, keep in mind that 40-50% of all teachers leave the profession within the first 5-6 years. In addition, 15% of teachers in low income schools leave those schools annually. So the status quo is not so great in this regard.

In comparison, 61% of TFA recruits are teachers for longer than the required 2 years, and 24% stay teachers for at least 6 years. So TFA teachers are less than twice as likely to leave the profession in the first 6 years relative to all public school teachers, which I think is much closer than most would believe. I suspect these rates would be even closer when compared to public school teachers in low-income areas rather than all public school teachers.

The program is only for 20 internships at Goldman right now, so it’s nothing to worry about in either case. But I would argue that the willingness to experiment and break from the traditional mold of teacher education is what made TFA, and they should be encouraged to continue trying different things.

Karl responded recently to a post by Barbara Kiviat who wondered “why should we care about the minimum wage?”. Karl’s general point is that the minimum wage is harming lot’s of families, and Barbara’s point is that we shouldn’t spend so much time on a policy that has little affect on the economy and doesn’t help low income families anyway. But if Barabara thinks both sides care too much about this issue, then shouldn’t she be arguing for Democrats take advantage of the Republican’s foolish obsession and trade a repeal of the minimum wage for a policy that actually benefits poor people?

I’ve argued before that the balance of new minimum wage evidence shows that the minimum wage causes unemployment, so I won’t rehash that evidence here (if you’re under the assumption Card/Krueger is the end of the debate, I’d encourage you to follow the link). But I do want to focus on the inefficiency of the minimum wage. This report from the CBO shows that showed the 2007 increase in the minimum wage cost employers $11 billion, of which $1.6 billion benefited poor families. In contrast, an expansion of the earned income tax credit (EITC) would have cost $2.4 billion, $1.4 billion of which would have gone to poor families. The EITC is cheaper and more targeted. Note that this is only the marginal cost of the most recent increase in the federal minimum wage, not the total cost of federal and state minimum wages, which would be much higher.

What the minimum wage does is effectively push the costs of a multi-billion dollar, illusory, anti-poverty program onto employers. It’s an inefficient way to help poor people, and a hidden tax on businsses that forces them to spend $4 so that the government doesn’t have to spend $1.

Considering how low Barbara believes it’s cost would be in terms of impact on poor people,  she should want Democrats exchange a repeal of the minimum wage for a policy that actually helps poor people. After all, what do you do when someone values something more than it’s worth to you? Sell it and buy something better.

When the Institute of Medicine recommended broad, draconian regulation of salt last year, I pushed back against the idea, one might say, obsessively. Now, via Marion Nestle, comes a new paper in The American Journal of Clinical Nutrition arguing that the current level of sodium intake is not a problem for the population. The article comes with an accompanying editorial titled  “Science trumps politics: urinary sodium data challenge US dietary sodium guideline” that closes with this appeal:

The analyses of extensive measurements of 24-h UNaV, which these 2 reports have collected from the medical literature over the past 5 decades, are compelling. They provide plausible, scientific evidence of a “normal” range of dietary sodium intake in humans that is consistent with our understanding of the established physiology of sodium regulation in humans. This scientific evidence, not political expediency, should be the foundation of future government policies, thus respecting the known and unknown scientific complexities surrounding sodium’s role in health and disease. Guidance for sodium intake should target specific populations for whom a lower sodium intake is possibly beneficial. Such an approach would avoid broad proscriptive guidelines for the general population for whom the safety and efficacy are not yet defined. An appropriate next step is not to lower the sodium guideline further.

You can find my previous coverage of salt regulation here, herehereherehere, and here.

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