August 18, 2008
Econ Academics
Christian Zimmerman has set up a new blog aggregator for academic economics, called Econ Academics. Looks very good.
That reminds me I need to update my blogroll. Just need to get all my changes together and do it all at once.
Posted by William Polley at 4:07 PM | Comments (0) | TrackBack
August 7, 2008
Economic impact of the Midwest floods
Via Tim Schilling, we find this excellent piece from Rick Mattoon of the Chicago Fed.
He starts with the basics...
From a conceptual viewpoint of our economy, natural disasters impact our economic well-being in two basic ways. First, they destroy what we have produced in the past—our “capital stock”—including lives, homes, commercial buildings, public infrastructure and property. Second, they often interrupt normal commercial activity and production. Transportation and deliveries do not take place, people cannot get to work and work places become dysfunctional until normalcy is restored.
...
... Following the 1993 floods, estimates for the third quarter reduced personal income by $9 billion and forecasted uninsured losses to be $2 billion. Losses to proprietors’ incomes were estimated at another $1 billion.
Remarkably, such initial losses soon appear to translate into economic gains as business and households rebuild. The rise in construction activity and the resumption of business activity often boost gross domestic product (GDP) estimates for future quarters, as households and businesses attempt to rebuild their physical capital and, in the case of businesses, to fill order backlogs. For example, following Hurricane Andrew, annualized GDP growth hit 5.7% in the fourth quarter of 1992, spurred by rebuilding activities.
But take heed, gentle reader...
However, such rebuilding does not reflect an actual economic gain in the broad long-term perspective. In most cases the rebuilding merely replaces lost capital stock—meaning that, in the long term, the nation’s product will not exceed what would have been produced without the disaster. While the immediate burst of economic activity is quite evident, the losses from the foregone output of interrupted and diminished business activity may go largely undetected because the diminished growth takes place in small amounts spread over many years.
The last sentence is so true, yet so often forgotten.
Most of the rest of the article goes on to estimate the actual losses. Mattoon finds that the aggregate losses will likely be smaller this year than in 1993, in part because the geographical footprint of the flooded area is smaller.
He finishes with another comparison--one of which I know something from my western Minnesota roots--the Red River flood of 1997 which devastated Grand Forks, ND.
For business, the greatest disruption was for restaurants, bars, hotels and any business where discretionary spending is important. Many of these businesses had to lay off workers. Other businesses such as banks, health care and manufacturing suffered lost sales but did not suffer drastic employment declines. In fact given the gains in construction jobs, employment in Grand Forks rebounded to its pre-flood level in five months. To some observers, the newly rebuilt Grand Forks with its improved infrastructure and new capital stock is better positioned for growth than before the flood, but this is only true because of significant government subsidies and 10 years of hard work. And of course, it is not true for every household and business impacted by the flood, as many chose to leave Grand Forks.
Well said.
I'd sum it up this way. Natural disasters are not a net benefit for the economy. They result in arbitrary transfers of wealth and temporary changes (both positive and negative) in spending and income. The resulting equilibrium (new capital stock and all) is not a Pareto improvement.
Let me state it even more plainly. Anything a natural disaster can do could also be done by a government through the use of forced relocation, bulldozers, and other people's tax dollars.
Posted by William Polley at 2:52 PM | Comments (2) | TrackBack
March 31, 2008
Back to the blog
With no major meltdowns in the financial markets in the last couple weeks, I have been trying to catch up on other things. Trying.
But here are a couple of things that caught my attention lately.
Tim Schilling writes a nice essay on the economic way of thinking about Romeo and Juliet. This post is just about Act I. Looking forward to the rest.
Professors who teach principles of micro... bookmark these articles for the next time you do supply and demand. Both the NY Times and WSJ describe how farmers will be planting less corn and more soybeans this year. Cost increases and relative price changes are the reasons given. The exam questions practically write themselves.
Sticking with the agricultural theme, this article on the lack of convergence in futures and spot prices is beyond the principles level. Give it to your grad students.
Give this one to your students who are going on the market soon. The FDIC is hiring. No need to guess why.
David Tufte links to this interview with Ed Begley Jr. At about the same time that this came out, Begley visited WIU and gave the same message.
It's a busy week ahead. The final push to the end of the semester is about to begin.
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February 8, 2008
Around the web
Lawrence White explains why the gold standard may not be such a bad idea. It's a Cato podcast... with a briefing paper to go along with it.
Tim Duy gets frustrated with people comparing our current problems with Japan in the 1990s. Me too. He also gives his take on Plosser's speech and more.
Jeff Frankel is blogging. Go. Read. Now.
Andrew Samwick is disappointed with congress over the stimulus package.
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November 30, 2007
A really good paper on bankruptcy reform
Every so often, you see a paper that just reaches out and grabs your attention by its sheer size and comprehensiveness. This is one of those papers.
"A Quantitative Theory of Unsecured Consumer Credit with Risk of Default" by Satyajit Chatterjee, Dean Corbae, Makoto Nakajima, and Jose-Victor Rios-Rull (Econometrica vol. 75 no. 6, Nov. 2007 pages 1525-1589.)
Non-gated version here. Homework assignment (!) based on the paper here.
I was Dean's TA for the graduate macro class at Iowa back in the day. I think he was already working on the seeds of this paper at that time (a dozen years ago or so). According to the note at the end of the paper, almost 5 years elapsed during the review process. This paper has a theoretical model with all of the requisite proofs befitting a lead article in Econometrica as well as a computer simulation of the calibrated model. They conduct a policy experiment similar to the recent change in bankruptcy laws. Their model predicts a significant increase in average consumption.
At first glance, the welfare gains they find are surprisingly large. I wonder how sensitive the welfare effects are to the parameters. This is a difficult question in any model with a complicated simulation (this I know from experience in my own papers), and their paper is already 65 pages long. So that question will probably need to be explored further in another paper. This paper will be of most interest to specialists who deal with quantitative macro models of heterogeneous agents. It's probably not destined for first year reading lists. But if you do any kind of work with these models or have an interest in the frontier of macro research on bankruptcy issues, then you should look at this impressive paper.
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November 12, 2007
Milton Friedman interview released by Dallas Fed
This interview was conducted in October 2005 but not released until now. Hat tip to Greg Mankiw.
Posted by William Polley at 2:46 PM | Comments (0) | TrackBack
October 30, 2007
Setting the record straight on Milton Friedman
Edward Nelson and Anna Schwartz of the St. Louis Fed and NBER respectively have published a working paper which responds to Paul Krugman's essay in the New York Review of Books, "Who Was Milton Friedman?"
The paper is titled: The Impact of Milton Friedman on Modern Monetary Economics: Setting the Record Straight on Paul Krugman’s “Who Was Milton Friedman?”
The abstract:
Paul Krugman’s essay “Who Was Milton Friedman?” seriously mischaracterizes Friedman’s economics and his legacy. In this paper we provide a rejoinder to Krugman on these issues. In the course of setting the record straight, we provide a self-contained guide to Milton Friedman’s impact on modern monetary economics and on today’s central banks. We also refute the conclusions that Krugman draws about monetary policy from the experiences of the United States in the 1930s and of Japan in the 1990s.
Hat tip: RGE Monitor
Posted by William Polley at 10:38 AM | Comments (3) | TrackBack
October 29, 2007
Here comes the taxman....Boo!
Now we tax based on intent. A scary thought for your Halloween. You can't make this stuff up. The Tax Foundation quotes from the Iowa Department of Revenue. Yes, my beloved Iowa has taken it upon itself to engage in this kind of silliness.
The Department recently refined its position on whether pumpkins are subject to Iowa sales tax to more closely match what we believe to be their predominant use.
In the past, pumpkins were exempt from sales tax as a food (edible squash), even if they were to be later made into jack-o'-lanterns or used as decorations.
Our position now is that pumpkins are taxable if:
1. They are advertised to be used as jack-o'-lanterns/decorations, or
2. It is understood that they will be used as jack-o'-lanterns/decorations
Pumpkins are exempt in the following circumstances:
* The buyer completes a sales tax exemption certificate stating they will be used as food, or
* The pumpkins are a specific variety used to make pumpkin pies and are advertised in that way, or
* They are purchased with Food Stamps.
Retailers who sell pumpkins should keep these guidelines in mind and make any necessary changes to their tax treatment of pumpkin sales.
I predict a surge in sales of pumpkins for pie making.
Hat tip to King at SCSU Scholars
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October 28, 2007
RePEc has a blog
My economist readers probably are familiar with RePEc. Christian Zimmerman has added a blog to the impressive list of resources over there. Here's what he says under the heading "about this blog".
We, the RePEc team, discuss here the workings of RePEc and seek input from the community on how we can improve. We also want to give more volunteers opportunity to be part of this project and provide valuable services to the profession. Finally, we also discuss issues about the dissemination of research on Economics.
Here's what he means by addressing the dissemination of research. On the topic of peer review...
We can think completely differently. Think of this blog. I rant on a topic, and then others can comment on it and openly declare whether this rant was valuable or not. Why not do this with academic work? An early attempt was done with WoPEc. This was the first RePEc service, similar to IDEAS and EconPapers today, which offered for some time on each paper’s abstract page a discussion section. Participation was minimal and there was very little value added (see an example, I could not find one that actually had comments). This aspect of WoPEc was finally abandoned. A second attempt was organized by SOLE (Society of Labor Economists), that would post every two weeks a new paper to discuss. Again, participation was small, and the project was finally abandoned.
The latest attempt is the Economics E-Journal, which allows registered users to rate and comment on discussion papers. Once the editors find that a paper has generated sufficient interest, it is promoted to the journal, where it can still be discussed. This initiative started this year, so the jury is still out whether it will be successful in the end. So far, it looks very promising.
From time to time, members of the RePEc team are approached and asked whether a discussion section could be added to our services. Given the past experience with WoPEc and the large monitoring costs involved, we are not enthusiastic. Of course if other volunteers are interested in working on this, we may think about it. But first we need to understand whether there is really a demand for this. Maybe RePEc is now too large for this and such initiative should be left to field specific initiatives (SOLE again?).
RePEc is a quality operation. Zimmerman has been one of the driving forces for the site in recent years. Though there is a long history going back to the now-defunct WoPEc as he mentions. (The site still exists but is no longer updated.) One could also trace its lineage back to the working paper site (EconWPA) at Wash U started by Bob Parks. Bill Goffe's Resources for Economics also came out of those early years. Zimmerman also had a quantitative macro and RBC site that is now part of RePEc that goes back to 1995 according to the copyright. (It's a trip down memory lane thinking about all those early sites.) That sounds about right. That was about the time that I was starting grad school and was pretty early in "Internet Time." The RePEc blog might be a good way to get more people involved, and that would be positive for the site and the profession.
Hat tip to Greg Mankiw.
A footnote: The Wash U connection to all those early internet archives is everywhere. As a minor in computer science in college, I remember well the freeware archive at Wash U. It was probably the first internet address that I memorized... wuarchive.wustl.edu. If you were a CS student in the early to mid '90s, you used it. Sadly, this too is defunct. Does anyone else remember wuarchive?
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October 19, 2007
Another argument for econoblogging
King Banaian gets it. Responding to Rodrik's discussion starter, he writes,
Because I read more now, I think research is improved too.
I'll second that. And...
I worry about the lemons problem only insofar as one thinks econoblogging is about spreading the word of what's on the cutting edge of economics research or the policy debates. I have never concerned myself with the former, and as to the latter, I'm not terribly convinced that the best policy analysis comes from the economists with the longest c.v.'s. Again, that might be about where I'm from and what I do, a personal bias.
Since I, like Banaian, am on the faculty of a "Non-Flagship State U" we share a similar perspective. I agree that excellent policy analysis can come from economists without a long c.v. So if you can't judge a blog's quality relative to the market solely on the basis of the academic prestige of the author or his/her institution, does that lead to a breakdown of the market? No. Links are the currency of the realm here, and they are the way that information gets passed along. Suppose a brand new blog reader drops in on the economic corner of the blogosphere tonight. After how many minutes of clicking around will he or she figure out who the heavy hitters are? It probably wouldn't take long to get the lay of the land. A lot of those readers will never pick up a copy of the American Economic Review, much less Econometrica. And yet, they will figure out whose blogs are worth reading (and probably figure out who's got the best academic pedigrees as well). Whether their list of favorites would put their c.v.'s in rank order or not, well... de gustibus non est disputandum.
The blogosphere, even just the economics corner, is a big place with room for many styles and approaches. Rodrik seems to have come around on the question that kicked off this whole discussion as well. We'll gladly give him a mulligan on this one. In the world of blogging, that happens, and that's one of the things that makes all this interesting...and valuable.
Posted by William Polley at 9:40 PM | Comments (1) | TrackBack
A great week for Bloomberg podcasts
Wow. Check these out. Here are some of the names: Arrow, Fischer, Krugman, Sen, Chari, Schelling, Samuelson, Fudenberg. If it's more than you'll have time for this weekend, download them now and savor them one at a time.
Posted by William Polley at 9:28 PM | Comments (0) | TrackBack
The opportunity cost of blogging
Dani Rodrik notes Greg Mankiw's recent post announcing the end of comments on his blog and wonders, "Is the econ-blogosphere sustainable?"
At this rate, in any case?
Two things happened in the last twenty-four hours which made me wonder if some of the best economics blogs may be on their way out. First, an economist with a very high-quality blog told me that he was not sure if he had made the right decision by starting it. He said he worried about coming up with new content on a daily basis, and that he may run out of energy at some point. Then, Greg Mankiw declares that he is too busy to be reading and filtering all the comments he gets on his site and turns off the comments section. In a long post, he says the whole blog thing is taking too much of his time, and intimates that he may not be doing this for ever.
So if economists with high opportunity costs of time start to get out, shall we have a lemons problem on our hands? Will eventually the only prolific bloggers remain the ones that are not worth reading?
It is ironic that this post comes in a rather slow period in my own blogging. My excuse? Working on getting a conference paper out. Not to mention the fact that conferences aside, as late October rolls around a lot of us in the academic community find ourselves in a pretty busy time. It's what I call the rhythm of the semester. In my case, a lot more is hitting right now than would be usual even for late October. Opportunity cost, baby!
But to call this a "lemons" problem is to imply that there is some information asymmetry in the market. In other words, when there are a lot of blogs out there, it is harder for people to tell which ones are the "good" ones and which ones are the lemons. Unable to command a price to cover their opportunity cost, the "good" bloggers exit and you're left with lemons.
Nah.
Finding a good blog is a lot easier than finding a good used car, and the commitment factor is a lot less of an issue. If you buy a lemon used car you're stuck. If you find you're reading a sub-par blog, you can move on. Information is passed in the form of links that tie us all together. Yes, there can be a bit of an echo chamber in some corners, but particularly in the economics wing of the blogosphere there is also a lot of cross-traffic between writers of different ideological persuasions. I mean, I comment at Angry Bear once in a while. They haven't kicked me out yet. My comments and their responses there and here build a stock of information about our blogs that makes it way around the network of readers. That helps people make decisions about who to read. So while I wouldn't say that the econ-blogosphere is a picture of a perfect market of ideas, it's got a lot of things going for it. I don't think the lemons issue is much of a problem.
I have a feeling that the stable long run equilibrium will have some of the better blogs that feature mostly economics and less of the daily political bloodsport will post better items less frequently. Also, blogs by academics will be subject to bursts of activity and periods of relative quiet. Readers who become familiar with that rhythm will accept it the same way that TV viewers are accustomed to sweeps week and summer reruns.
In other words, the death of the econ-blogosphere has been greatly exaggerated. It seems much more likely to me that the medium is simply entering another stage in its development.
Posted by William Polley at 12:23 AM | Comments (2) | TrackBack
October 15, 2007
Hurwicz, Maskin, and Myerson share Nobel
Here is the press release from the Nobel Foundation:
Adam Smith's classical metaphor of the invisible hand refers to how the market, under ideal conditions, ensures an efficient allocation of scarce resources. But in practice conditions are usually not ideal; for example, competition is not completely free, consumers are not perfectly informed and privately desirable production and consumption may generate social costs and benefits. Furthermore, many transactions do not take place in open markets but within firms, in bargaining between individuals or interest groups and under a host of other institutional arrangements. How well do different such institutions, or allocation mechanisms, perform? What is the optimal mechanism to reach a certain goal, such as social welfare or private profit? Is government regulation called for, and if so, how is it best designed?
These questions are difficult, particularly since information about individual preferences and available production technologies is usually dispersed among many actors who may use their private information to further their own interests. Mechanism design theory, initiated by Leonid Hurwicz and further developed by Eric Maskin and Roger Myerson, has greatly enhanced our understanding of the properties of optimal allocation mechanisms in such situations, accounting for individuals' incentives and private information. The theory allows us to distinguish situations in which markets work well from those in which they do not. It has helped economists identify efficient trading mechanisms, regulation schemes and voting procedures. Today, mechanism design theory plays a central role in many areas of economics and parts of political science.
Here is the scientific background paper. Arnold Kling calls it a "Nobel Prize in abstraction". Marginal Revolution provides a translation as well as links about Leonid Hurwicz, Roger Myerson, and Eric Maskin. Mark Thoma lists some other media links as well.
In this post, Tyler Cowen muses about the practicality of their research, asking "Did these guys get at the real reasons why we don't organize the entire economy as a second-price auction?" That's a fair question. But the seminal contributions of these three to the theory of mechanism design are already central to the study of auctions, regulation, and social choice. Those are precisely the sort of things that the Nobel Committee likes to reward. For laying the foundations of this work, Hurwicz was a great choice. Maskin and Myerson are a little on the young side for an economics Nobel, but very appropriate choices to complement Hurwicz.
After hearing about this, I was having flashbacks to my Ph.D. micro courses all morning. Despite what you might think, that's not entirely a bad thing. I remember well the days and nights I spent poring over the work of these three prize winners. I learned a lot from their papers, and I'm happy to see them get the prize.
Posted by William Polley at 12:01 PM | Comments (1) | TrackBack
October 9, 2007
Any thoughts on the Nobel?
The previous post reminds us that The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel will be announced on Monday. Any picks? For years, I've been thinking that Jagdish Bhagwati would be a very good choice. Oliver Hart, Bengt Holmstrom, and Oliver Williamson would make a good trio of winners in the area of the theory of the firm. At the moment, Gene Grossman and Elhanan Helpman are the front-runners on the Thomson Scientific poll. Eugene Fama is also a possibility.
But never underestimate the committee's ability to surprise us. Edmund Phelps was not on a lot of short lists last year. Perhaps this year's will also be unexpected. Nonetheless, all of those mentioned above are deserving and will probably have their day eventually.
Comments are welcome.
Posted by William Polley at 10:16 AM | Comments (1) | TrackBack
July 31, 2007
Today would have been Milton Friedman's 95th birthday
Baseball, Free Markets, and Milton Friedman (Mackinac Center for Public Policy)
Wall Street Journal Op-ed by Thomas F. Siems
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July 2, 2007
Of economists and weathermen
PGL at Angry Bear points us to this TPMCafe piece by Jared Bernstein. They both reference the Barry Schwartz piece I discussed here in my last post.
Bernstein uses the Schwartz article as a springboard for detailing the shortcomings of the economics profession, including forecasting (thus the title of this post). Two of his critiques stand out:
2. Economists are reductionists.... the world doesn’t work like the textbooks say it should.
...
3. And one reason for that is, as the NYT oped argues, we misunderstand incentives. To be specific, we exaggerate them.
I have frequently argued (e.g. in this recent post about Iranian gasoline) that the textbook model is not perfect but still useful. In my discussion of the Schwartz op-ed, I conclude that monetary incentives can have nonstandard effects in certain circumstances. We don't completely understand those circumstances and therefore more work is needed. I'm not ashamed to admit that perhaps a little more humility is also needed when considering the possibility of these non-standard effects. But it still remains that the incentive story that drives most economic models is mostly right. The question of whether we exaggerate the magnitude of these effects in our rhetoric (even when we are correct about their existence) is another matter, and I'd be more comfortable if Bernstein didn't lump them together.
I should note also that I have responded to PGL's post in the comments over there. This whole issue of responding to incentives and the usefulness of textbook economics is a worthwhile topic and generates some of the more interesting conversations on the blog. I hope to flesh out some more ideas on this over time.
Posted by William Polley at 10:26 PM | Comments (4) | TrackBack
April 17, 2007
Creating value
Bruce Bartlett on why blogging is like a seminar...only better.
Yep, in the grand accounting scheme of the intellectual debate, I'd say that blogging is on the plus side of the ledger.
Via Mark Thoma.
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February 15, 2007
What was that I was saying about broadband?
Roll the tape.... from Tuesday:
...I would be wary of a government managed plan for universal broadband access. My fear would be that they would adopt a 20th century solution to a 21st century problem.
Broadband technology (particularly the new wireless broadband) is still evolving. Once you make it a government program, you introduce a lot of rigidity. Better to keep some flexibility until we see which technology is superior. We can, I believe, afford to do that in this case because wireless is a low fixed cost operation compared to high fixed cost utilities such as the electrical grid, the copper wire laid down by Ma Bell, and even cable TV. There will be competition just as there is for wireless phone service--speaking of an industry that went from high class luxury to practically universal access in about a decade.
Friday's Wall Street Journal editorial has this to say:
Much of this [telecommunications sector] growth has been fueled by increased broadband deployment, which makes high-speed Internet services possible. The latest government data show that broadband connections increased by 26% in the first six months of 2006 and by 52% for the full year ending in June 2006.
Also noteworthy, notes telecom analyst Scott Cleland of the Precursor Group, is that of the 11 million broadband additions in the first half of last year, 15% were cable modems, 23% were digital-subscriber lines (DSL) and 58% were of the wireless variety. Between June 2005 and June 2006, wireless broadband subscriptions grew to 11 million from 380,000.
This gives the lie to claims that some sort of cable/DSL duopoly has hampered competition among broadband providers and limited consumer options. That's the charge of those who want "network neutrality" rules that would allow the government to dictate what companies like Verizon and AT&T can charge users of their networks. But the reality is that the telecom industry has taken advantage of this deregulatory environment to provide consumers with more choices at lower prices. Verizon's capital investments since 2000 exceed $100 billion, and such competitors as Cingular, T-Mobile and Sprint are following suit. So are the cable companies.
Memo to Congress: Don't mess this up.
Posted by William Polley at 10:58 PM | Comments (4) | TrackBack
January 30, 2007
Long bets against the doomsayers
John Tierney writes in the NY Times:
Five years ago, Dr. [Martin] Rees posted this prediction: “By 2020, bioterror or bioerror will lead to one million casualties in a single event.” He reasoned that “by 2020 there will be thousands — even millions — of people with the capability to cause a catastrophic biological disaster. My concern is not only organized terrorist groups, but individual weirdos with the mindset of the people who now design computer viruses.”
He didn’t get any takers on LongBets.org, which seems to me a missed opportunity. So I’ve posted an offer there to bet him $200 — not a huge sum, but enough to put both our reputations on the line. I realize that betting on disaster may sound ghoulish, but neither of us will personally profit (if I win, the money goes to the International Red Cross). And I think bets like this serve a purpose.
This jogged my memory. In August 2005, he proposed a bet with Matthew Simmons concerning the price of oil. Simmons predicts we will see $200 per barrel by 2010. Here's what I said:
I'm sure someone has already told them that they should get their bet on the record for all to see at longbets.org. If not, I just did.
I e-mailed Tierney as well. Whether it was me or someone else who got him to check out longbets.org, he appears to have latched on to the concept.
Oh, and I hope Tierney wins this one too.
Posted by William Polley at 9:17 AM | Comments (0) | TrackBack
January 29, 2007
Milton Friedman Day
Today is Milton Friedman Day. I urge everyone to watch the documentary The Power of Choice on PBS tonight (check your local listings). If you want to see the old Free to Choose series, go to IdeaChannel.tv.
Many economists credit Friedman in some way with inspiring them--either directly as his students (we should all have been so fortunate) or indirectly through reading his books and articles or watching Free to Choose. As a beginning student, I found Friedman's popular articles extremely compelling and fun to read. Capitalism and Freedom was an early favorite of mine. His essay arguing that the social responsibility was to increase profits also caught my attention as a college sophomore. At that time, most college macro texts had not fully embraced rational expectations. In the macro texts at the time, there was still a lot of discussion of Keynesianism vs. Monetarism. I found all that to be very interesting, and I sided with Friedman for a lot of it. But to try to be fair, I also read a lot of Keynes's work. This I did on my own on a number of evenings in the library--especially when working on my senior honors thesis. It was worth it.
While my graduate school years were filled with rational expectations and dynamic programming, I never forgot those early days of hanging out in the library clandestinely reading those Friedman articles that we were never assigned in class. I even managed to eke out some time for those readings in grad school. Some of them were even assigned readings.
On this day dedicated to remembering Milton Friedman, I would like to encourage today's students to take a little time to browse the library for the works of the masters--Friedman in particular. You don't have to become a scholar of the history of thought, but you should be familiar with some of the ideas that changed the discipline. You might even get hooked on some of those ideas. I firmly believe that students should find something in their discipline that inspires them, and many people would tell you that Milton Friedman's work is fertile ground for those ideas.
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January 28, 2007
Who do you trust?
In the NY Times, Ben Stein ably defends capitalism but correctly recognizes the glue that holds the system together--trust.
When I see what the top dogs at all too many corporations are now doing to that trust, I feel queasy. Outrageous — yes, obscene — pay. Greedy backdating of stock options, which in my opinion is straight-up theft. Managers buying assets from their trustors, the stockholders, at pennies on the dollar, then forestalling competing bids with lockups and insane breakup fees.
These misdeeds and many, many more are hammer blows at the granite foundation of trust we built in the 1940s and ’50s. How long democratic capitalism can survive these blows before it gives in and gives birth to revolution or to an out-and-out aristocracy, I am not sure.
As I have repeatedly pointed out, capitalism is not a no-holds-barred "greed is good" system as it is often portrayed. The success of capitalism depends on the rule of law, enforcement of property rights, and, yes, trust.
As we approach Milton Friedman Day, it is fitting that we remember that when he said that the social responsibility of business was to increase profits, he added the qualifier,
...so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.
Posted by William Polley at 1:31 AM | Comments (0) | TrackBack
January 22, 2007
Richard Musgrave 1910-2007
David Warsh places Richard Musgrave's work in the context of one of the more interesting discussions in economics. Economists are increasingly speaking of goods being either rival or nonrival rather than public or private. The distiction between rival and nonrival deals essentially with the question of whether the good can be enjoyed by more than one person at once. The pen in my pocket is rival. The movie I saw on the screen in the theater a couple weeks ago was nonrival. Musgrave originated the use of that terminology, but it took a while for it to enter general use.
Go read it at Warsh's site, Economic Principals. A Week, Long Ago, in Biarritz
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One more interview with Milton Friedman
Today, the Wall Street Journal publishes an interview of Milton Friedman conducted via e-mail last July.
Posted by William Polley at 1:28 AM | Comments (1) | TrackBack
January 5, 2007
Off to the ASSA meetings
Hope everyone had a great New Year's holiday. I have been trying to catch up on things. Unfortunately blogging has suffered. Now I'm off to the ASSA meetings, so blogging will be light for a couple more days and then return to a more normal schedule.
Posted by William Polley at 1:40 AM | Comments (0) | TrackBack
December 28, 2006
David Warsh takes on Duncan Foley
In Economic Principals, Warsh reviews Duncan Foley's new book, Adam's Fallacy: A Guide to Economic Theology. (hat tip to Mark Thoma):
Foley dwells entirely on what economists have managed to make so far of The Wealth of Nations, and gives short shrift to Smith's other book, The Theory of Moral Sentiments, and to the relationship of the one to the other.
He wouldn't be the first. Nor, I fear, the last.
As they say, read the whole thing. Also, Mark Thoma links to these Brad DeLong posts which include a rejoinder from Foley.
Posted by William Polley at 9:04 PM | Comments (0) | TrackBack
December 11, 2006
Forecasting the Fed is only as easy as forecasting inflation
That is to say, it's easy over very short time horizons and almost impossible over longer horizons. In Monday's Wall Street Journal, E.S. Browning continues the chronicle of the widening disconnect between the Fed and the market.
The Fed is expected to leave target interest rates unchanged, fueling hopes that it will start cutting rates some time next year, which would be good news for stocks and bonds.
But worries are spreading that, longer-term, investor hopes for interest rates may have gotten a little out of hand. If so, stocks and bonds both could be in for some rough waters in the coming months.
Later in the article, his interview subject expresses thoughts that should be familiar to any reader of this blog.
"Inflation is the key here," says Ethan Harris, chief U.S. economist at Lehman Brothers. "Inflation is the enemy of all markets. If you get serious inflation, if the Fed's fears materialize, then you will have the Fed hiking instead of cutting, pushing growth weaker. That is a lousy environment for both" the stock and bond markets.
Mr. Harris isn't forecasting a resurgence in inflation. He thinks it could remain more or less steady.
But, like the Fed, he doesn't think that is a sure thing, and he thinks investors could be making a mistake to assume that inflation is dying....
Sorry. No "one armed economists" here. On the one hand inflation could be under control. On the other hand the battle may not yet be over.
Some people find a certain irony in all this.
Now, Mr. [Jim] Bianco [of Bianco Research in Chicago] notes, "the guy that is holding the Fed back from easing is Helicopter Ben. We got him all wrong, at least for his first 10 months" in office.
It is really hard not to say, "I told you so."
Anyway, while we sit here and think about the implications of what the Fed may or may not do, Ed Prescott reminds us in a Wall Street Journal op-ed today that it may not matter all that much. The op-ed is titled "Five Macroeconomic Myths" and is sure to provoke a response from people who, for example, think that the national debt is too large (it's #4 on his list). Read the whole thing. Here's part of myth #1 that monetary policy causes booms and busts.
Between 1975 and 1980, the inflation-corrected federal funds rate was low; at the same time, output trended upward until late 1978. So far, things look somewhat promising for the mythmakers. But looking closer at the data we see that output began its downward trend in late 1979 while monetary policy was still easy through most of 1980. Also, output continued its decline through 1982, when it began to climb at a time when monetary policy remained tight.
These facts do not square with conventional wisdom. Our obsession with monetary policy in the conduct of the real economy is misplaced.
Where monetary policy's effect on output is concerned, expectations matter. That is a fact which is not lost on Mr. Bernanke, especially these days.
Posted by William Polley at 1:16 AM | Comments (0) | TrackBack
November 25, 2006
Seigniorage with a new face (make that 37 new faces)
The mint is taking another run at making a dollar coin people will use. In reality, it sounds like a dollar coin that people will want to collect. (NY Times)
The United States Mint is unveiling four designs for one-dollar coins today, featuring likenesses of the first four presidents. They begin a series that is to last a decade and portray every deceased president.
The United States Mint is planning a series of one-dollar coins to feature every deceased president, with the date stamped into the edge.
The first coin, displaying George Washington on one side and the Statue of Liberty on the other, will go into circulation in mid-February, in time for Presidents’ Day. After that, coins with John Adams, Thomas Jefferson and James Madison will be issued at three-month intervals.
...
The size, color and metal content of the $1 coins will be identical to those of the current Sacagawea dollars, but their luster should last longer because of a new anti-tarnishing compound that will be applied to blank coins between the time they are annealed, or softened by heating, and struck with the design.
The date and some inscriptions will be stamped into the edge, airing out the designs.
The director of the Mint, Edmund C. Moy, said the number of each presidential dollar coin issued would depend on circulation demands forecast by the Federal Reserve, regardless of how well known a president was. “This could be a renaissance for some of our lesser-known presidents,” Mr. Moy said in an interview.
...
Hopes are that the new dollars will be as popular as the state quarters, many of which have been taken out of circulation by collectors. The government has earned $4 billion to $5 billion on the state-quarter series since 1999.
I like dollar coins. We really should emulate Canada with both $1 and $2 coins. Count me in as collecting this series. I also love the quote from the director of the Mint. The number issued will be determined by circulation demand, not the popularity of the president. Be prepared to observe Gresham's Law in action. Andrew Johnson coins might circulate at face value while collectors hoard all the Jeffersons.
Here's the announcement from the U.S. Mint. Note that Grover Cleveland gets two coins for his non-consecutive terms.
Posted by William Polley at 12:52 AM | Comments (2) | TrackBack
November 18, 2006
More Friedman links
Paul at Truck and Barter has done heroic work in putting so many links together.
OpinionJournal has a sampling of Friedman's many pieces written for the Wall Street Journal. Thomas Sowell has a tribute piece as well.
Lawrence Summers shows his class in his NY Times op-ed.
UPDATE: Robert Frank suggests a way to expand the earned income tax credit to be more like what Friedman envisioned while also getting the incentives right. Not an easy assignment, but worth discussing.
Posted by William Polley at 8:01 PM | Comments (1) | TrackBack
November 16, 2006
Milton Friedman 1912-2006
Relatively few of us live to age 94. Fewer are still professionally active at that age. Even among academics, who are noted for their ability to continue the intellectual enterprise under the title "emeritus", 94 years is an extraordinary age for a public intellectual.
Milton Friedman certainly was extraordinary in more than just this respect.
His scholarly accomplishments are being lauded widely today, and there is a lot to praise. But it was more than just the papers that he authored that made him so influential. It was that his ideas were infused into the very heart of the discipline. Ideas that he, his students, and his followers advanced have become the standard currency of the realm. Pick up a journal containing macroeconomic research today. You will be looking at his legacy. And what a legacy it is.
I never met the man, but I'm sure many of you would agree that after watching so many hours of his television interviews and specials over the years it was hard not to feel like you knew him. I so enjoyed and admired the way that he conducted himself in the public eye. In those interviews he had a twinkle in his eye that only comes from true passion for the ideas he advanced. He made no apologies for his position. He was staunch and steadfast but at the same time a consummate gentleman.
Whether you agreed with him or not, he forced you to think. As Bill Conerly wrote on his blog (Businomics) today, he did not tolerate sloppy economics. He didn't tolerate sloppy arguments of any kind. He made short work of many a question by an interviewer, sometimes in a way that made you feel for the person who just got put in their place. But there was no malice. He wanted to win people over not by browbeating them, but by convincing them with the strength of his argument. However his quickness could catch even a great interviewer off guard. He came up with the perfect answer right away whereas us ordinary folks would have taken some time to ponder the theory or plumb our memory for an example. It was as if he was one step ahead all the time.
But then he was extraordinary.
What gives me the greatest sorrow today is that there will never be another of those interviews for us to enjoy. No longer will we be able to hear his insight on the momentous economic events of our time. Even at age 94, he had so much more to give, as this op-ed in the Wall Street Journal (dated Friday) illustrates. He was as sharp as ever, right up to the end.
Over the upcoming Thanksgiving break, I plan to re-read parts of Two Lucky People and Capitalism and Freedom. The latter was an inspiration for me as I began my study of economics (by no means was my experience unique). Though I do not fully endorse every single idea in the book, I find it to be so engaging and thought provoking that it inspires new ideas in me no matter how many times I read it. Reading the words of Friedman, like reading the other true giants of the discipline regardless of their position on the political spectrum, sharpens your mind and refines your arguments.
His and Rose's memoir, Two Lucky People is special to me because it came out in paperback right about the time that I proposed to the woman who would become my wife. I told her about Milton and Rose, what a beautiful marriage they had, and what an inspiration he was to me professionally. The more I read about Milton and Rose, the more they became an inspiration to me personally. My future wife agreed and gave me the book as a gift. We celebrate our sixth anniversary on Saturday. That's not even one-tenth as long as Milton and Rose spent together. My wife and I hope and pray that we can enjoy that kind of longevity as a couple. The word "extraordinary" falls short of fully describing it.
In the coming days and weeks, I will offer some additional thoughts on Friedman's contributions and what we can still learn from his ideas, even those that have met with less success than others. Tonight, however, my thoughts tonight are for his family.
NY Times Obituary
WSJ Obituary
UPDATE: Paul at Truck and Barter has an extensive listing of links, including a link to David Friedman's blog.
Posted by William Polley at 11:23 PM | Comments (1) | TrackBack
November 15, 2006
Poverty and income mobility
This month's fedgazette from the Minneapolis Fed features poverty as its theme. There are a number of interesting articles that are worth your attention. In this post, I call your attention to one in particular on income mobility--the ability of individuals and households to move through the income distribution over time.
Income mobility is one of those things that we like to talk about and make claims about. We like to hear stories of "rags to riches", but how often does it really happen? It turns out that we understand relatively little about mobility from a statistical standpoint. Ronald Wirtz writes in the fedgazette article,
Bhashkar Mazumder, an economist at the Federal Reserve Bank of Chicago, has authored several mobility studies in recent years. He said, also via e-mail, that prevailing mobility research throws water on the common notion that U.S. income is highly mobile and more mobile than other countries. More recent studies, like his own, have used much richer longitudinal data that track income over longer periods of time, giving a more accurate reading of lifetime incomes in the United States. Research over the past decade and a half shows that “mobility is relatively low in the U.S. and lower than we thought,” said Mazumder.
...
Nathan Grawe has also done research on income mobility as an economics professor at Carleton College in Minnesota. In his estimation, the four best studies done to date on intergenerational mobility have both positive and negative findings, and most results were not statistically significant; in other words, the findings aren't particularly trustworthy. “All told,” Grawe said via e-mail, “I'd say we have no evidence of change.”
Part of the problem is that studies done before about 1990—which generally concluded that the United States had high mobility—are widely discredited today as faulty, mostly because they relied on very small windows of income data, often just a few years or less. In 1992, Solon published one of the first papers suggesting that U.S. mobility was not as high as everyone thought.
Mazumder's research comes to the same conclusion. But his most recent effort with Daniel Aaronson (also of the Chicago Fed) might have something of a silver lining. They found that current mobility might simply be returning to its historical trend line after experiencing an uptick in the 1970s. In other words, mobility might be worse compared to the 1970s, but it might well be in line with the country's historical average.
Obviously, a lack of longitudinal data going way back will remain a problem. Maybe in fifty years we'll be able to put the current period in historical perspective. Too long for some. You know what Keynes said about the long run. While the evidence here is conflicting and the conclusions not quite conclusive, the situation is better than that concerning the question of how much mobility is optimal.
The notion of perfect mobility—an equal chance for any outcome, regardless of where you start—has a hint of social and economic chaos, by virtue of the fact that it implies a lack of predictability in outcomes regardless of the very things that families and societies tend to value: effort, ability, education and other human capital investment, and parenting.
Economists believe incentives motivate behavior. Grawe, from Carleton College, noted that mobility research was often written “in ways which suggest more mobility is better.” But a society with no obvious determinants for income “would clearly have all sorts of incentive problems.”
For example, parents' attempts to offer certain advantages to their kids—reading to them, sending them to better schools, saving for college, transmitting certain values—might be for naught in a world where these things have no lasting economic effect. In a 2002 working paper on the notion of perfect mobility, sociologist Adam Swift of the University of Oxford wrote, “Even those that regard current mobility patterns as evidence of morally unacceptable unfairness should acknowledge that some mechanisms by which parents transmit advantage—or disadvantage—to their children are unobjectionable and would exist even in an altogether just society.”
In other words, there is no clear guidance at all on how much mobility is optimal or even what we mean by optimal mobility. One cannot escape the fact that mobility requires an appeal to long run incentives, but people do not always behave in accordance with those long run incentives. Hence, a divergence between opportunity and outcomes is assured. This is the world in which we live. And this is why the solution to the problem of income inequality is more difficult than many people realize.
Posted by William Polley at 11:30 AM | Comments (1) | TrackBack
October 29, 2006
Social Security taxes and the permanent income hypothesis
As the last couple of paychecks of the year approach, many people get a temporary pay raise, as Ron Lieber of the Wall Street Journal explains:
By now, many of the 8.9 million Americans who earn more than $100,000 annually have already hit six figures; scores more will do so in the next few weeks. Here's what they may miss if they don't watch their paycheck carefully: A nice-sized raise that appears without warning, then vanishes just as quietly on Jan. 1.
Sound odd? It's a function of tax rules. Most workers have their paychecks docked 6.2% to fund Social Security. But they stop paying that tax on income above a certain level each year. This year, the threshold is $94,200. Next year, it is $97,500.
...
There's no excuse for frittering the funds away. Be deliberate, and start with the obvious checklist: If you haven't maxed out your 401(k), especially the portion that your employer matches, increase your withholding. (Then consider just leaving it there come January to see if you miss the money.) Pay off your credit-card debt, and if you can't get rid of all of it, at least pay down the higher-interest cards. Fund a Roth IRA if you're eligible, and take advantage of the tax-free earnings you'll be able to withdraw once you're older.
Sounds like an application of the permanent income hypothesis. However, since this comes at the end of the year, a lot of people probably do use it to cover their holiday bills. December always throws off my consumption smoothing plans a bit.
Posted by William Polley at 2:42 AM | Comments (3) | TrackBack
October 26, 2006
Health, wealth, and happiness
Robert Frank considers the relation between economic growth and happiness in today's NY Times
Does money buy happiness? The rapidly expanding literature on what determines “subjective well-being” appears to suggest a negative answer to this timeless question. Studies consistently find, for example, that when the incomes of everyone in a community grow over time, conventional measures of well-being show little change.
Many critics of economic growth interpret this finding to imply that continued economic growth should no longer be a policy goal in developed countries. They argue that if money buys happiness, it is relative, not absolute, income that matters. As incomes grow, people quickly adapt to their new circumstances, showing no enduring gains in measured happiness. Growth makes the poor happier in low-income countries, critics concede, but not in developed countries, where those at the bottom continue to experience relative deprivation.
All true. But these statements do not imply that economic growth no longer matters in wealthy countries. The reason, in a nutshell, is that happiness and welfare, though related, are very different things. Growth enables us to expand medical research and other activities that clearly enhance human welfare but have little effect on measured happiness levels.
Interpersonal utility comparisons are tricky, to say the least. Later in the article...
Since life is a continuing competitive struggle, this is as it should be. Accident victims who can recover their psychological footing quickly will function more effectively in their new circumstances than those who dwell unhappily on their misfortune. Windfall recipients who quickly recover their hunger for more will compete more effectively than those who linger in complacent euphoria.
...
These observations highlight the weakness of subjective well-being as a metric of welfare. The fact that people adapt quickly to new circumstances, good or bad, is just a design feature of the brain’s motivational system. The fact that a paraplegic may continue to be happy does not imply that his condition has not reduced his welfare. Indeed, many well-adjusted paraplegics report that they would undergo surgery entailing substantial risk of death if doing so promised to restore their mobility. Similarly, the fact that people may adapt quickly to higher incomes says nothing about whether economic growth makes them better off.
Critics of economic growth cite its threat to the planet’s survival. Yet it is not growth per se that threatens, but rather certain kinds of growth. Driving more S.U.V.’s causes harm, but taking more piano lessons does not. Any country with a government not beholden to corporate interests could easily curb environmentally harmful activities through taxation and regulation, redirecting spending toward things that really matter. Across developed countries, higher growth rates are actually associated with cleaner environments, not dirtier ones. The United States is the world’s largest emitter of greenhouse gases not because of its wealth but in spite of it.
Frank is angling for membership in Greg Mankiw's Pigou Club.
But growth’s most compelling promise is continuing progress against premature death, perhaps the most devastating of life’s tragedies. American families with five children in 1800 often saw two or three of them die before the age of 10. That this no longer happens has been a landmark achievement.
Intelligently managed growth will hasten our quest to defeat diseases that continue to strike people down in the prime of life. The mere fact that rising incomes do not bolster self-assessed happiness levels is no reason to abandon this quest.
It certainly is true that progress against premature death is one of the most important results of modern economic growth. But I have to ask if that was a result of intelligently managed growth or just plain growth. Intelligently managed growth sounds a bit too much like social engineering for my tastes. Of course there are limits to what an author can do in one short op-ed column. However, I wish Frank was a little more forthcoming about what he means by "intelligently managed." I wouldn't exactly say that the present growth picture qualifies as intelligently managed. What is the scope of the policies that would make our future growth intelligently managed.
I enjoy Frank's writing, and I certainly am in his camp in praising modern economic growth for what it has done for human welfare even if it doesn't show up in happiness studies. But the end of this column is a little hard for me to swallow. Who will manage the growth? What social welfare function will they maximize? Pigouvian taxes to correct well-defined, measurable externalities are one thing. Intelligently managed growth that taxes some activities and subsidizes others without reference to a specific market failure is quite another.
Posted by William Polley at 12:46 AM | Comments (5) | TrackBack
October 24, 2006
Money and opportunity cost
We'll come back to the price gouging discussion another time. But that episode does remind me that there are so many interesting questions involving basic economics that can generate a lot of interesting discussion.
One difficulty in writing for a general audience (including blogging) is that basic economic ideas tend to oversimplify reality. It's unavoidable really. But we should always remember that the basic textbook theories are useful as a starting point--a model, and not a literal description of reality. For example, a significantly higher minimum wage is sure to reduce employment in a ceteris paribus world. However, it will be nearly impossible to identify the winners and losers from a very small change in the minimum wage so it may not be worth getting too worked up about in a world where ceteris is not paribus. (Russ Nelson, however, would not be moved by this argument. On principle, I agree. But from a pragmatic policy perspective...)
Actually, any discussion in which we talk about "the wage" or "the labor market" is already oversimplified. But we do this anyway. The reason we do is that it can be difficult to go into the details in the length of an op-ed or blog post. We simply cannot possibly discuss a multitude of elasticities and other details. We use economic shorthand. The reader fills in the gaps, sometimes by making assumptions that were not intended. In blogging, at least the comments provide for discussion. Remember, just because the writer didn't say it doesn't mean it can't happen or that the writer didn't think about it or is dismissive of it. It just means that the writer wanted to emphasize something else. Occasionally it matters, but a lot of times it doesn't. Some of the best comment threads are where a commenter and I have agreed about most everything but disagreed about some finer point. Perhaps this post will generate some discussion about the assumptions we make, good or bad.
In the Financial Times, Tim Harford answers his "Dear Economist" mail.
How would an economist respond to the phrase “money is the root of all evil”?
Harford answers,
Economists always seem to talk in dollars and cents, yet few economic models contain any reference to the stuff.
The reason why economists will use strange phrases such as “the value of a kiss is $49” is not that they think money is particularly important, but simply that it is a convenient way to measure things. If a toffee apple is worth $7 then a kiss is as good as seven toffee apples; however if the toffee apples cost $6 and the kiss costs $50 then the toffee apples are a better buy.
I am, of course, reminded of this post from last year. In that post, I quote this article by Robert Frank, who poses a question:
"You won a free ticket to see an Eric Clapton concert (which has no resale value). Bob Dylan is performing on the same night and is your next-best alternative activity. Tickets to see Dylan cost $40. On any given day, you would be willing to pay up to $50 to see Dylan. Assume there are no other costs of seeing either performer. Based on this information, what is the opportunity cost of seeing Eric Clapton? (a) $0, (b) $10, (c) $40, or (d) $50."
I still get a bunch of hits from search terms "clapton dylan opportunity cost frank" and variations on that theme.
Harford is doing what Frank did in quantifying the concept of utility in terms of dollars so that comparisons can be made. Economists think like this all the time. Non-economists, not so much. The idea in both is "willingness to pay," which is one of the basic building blocks of economic thinking. It is not surprising to see the idea surface in Harford's column. It will undoubtedly come up again.
What do you think about this? Is this a simple abstract idea that has little application? How does reality complicate the story?
What about the concept of opportunity cost itself? How would you improve our textbook presentation of the idea?
UPDATE: No takers yet? Restating the question: Should opportunity cost be thought cost net of benefits or only what is literally given up with no regard to benefits? Does it matter?
Yes, I know that the original Dylan/Clapton question has been criticized for being poorly worded. Largely that is because it does not explicitly clue in the reader that it is asking for the net cost. One possible reason for confusion is that the textbook definition of opportunity cost is too trivial. Most textbook problems on opportuntity cost don't require any complex thought concerning net cost (e.g. the opportunity cost of 1 apple is 2 oranges or the opportunity cost of sleeping in is going to class). Even the old stand-by example that the opportunity cost of going to college is tuition paid plus foregone wages is stripped of all kinds of interesting details (like the life-changing benefits of socialization in a college atmosphere, etc.) because they are hard to quantify. But when opportunity cost is lurking (unstated) in the background of more complicated quantitative problems it helps to have thought about Harford's example or the Dylan/Clapton question. It is in bridging that gap that most principles texts are lacking.
Thoughts?
UPDATE 2: Gavin Kennedy reminds me that Harford's "Dear Economist" letter misquoted I Timothy 6:10 "The love of money is the root of all evil." I apologize for missing that. As such, Harford gives a terrible theological answer. I did not mean to suggest that his answer was appropriate to the question. I merely wanted to work his answer into this other discussion.
Comments are open to both aspects of the post. If there is sufficient interest, I'll split them off to a separate post.
Posted by William Polley at 2:06 AM | Comments (16) | TrackBack
October 20, 2006
Additional thoughts on price gouging
In response to my last post, Spencer comments:
After disasters major corporations like Wal Mart, Home Depot, etc.., usually do a very good job of resuppling the damaged area with the suplies they need without a significant increase in prices.
Do you have any evidence that a bunch of "price gougers" in pick-up trucks would ever generate a significant increase in the supply of basics like gasoline, electricity, food, medicine and water. Or, is this just another example of assuming a can-opener.
The question got me thinking about those "price gougers in pick-up trucks". Because that is often how they are portrayed in the media. They swoop in with a load of water or chainsaws, charge a bundle, and they're gone. They tend to be from out of town, and the local politicians see it as their duty to keep such opportunists out.
Of course the very reason that price gougers often fit this profile is the fact that the state has made the act illegal. There is a risk to doing what they are doing. That alone contributes to the higher prices that they charge. It also means that it may attract people who are have less to lose, people who are willing to take a risk. The risk is not that the entrepreneurial venture might fail, but that the law might come after them. Established, reputable firms do not want to run afoul of the attorney general, and so you don't see them doing the price gouging. Reputable firms use the opportunity to create goodwill.
Case in point: Culligan donated five semi-truck loads of bottled water after Hurricane Katrina (see the list for a number of other corporate donations). Nice sentiment, and I'm sure the people who received it were grateful. But we wouldn't be having this conversation if a donation of five semi-truck loads was enough to satisfy the demand for water after the hurricane. I did not hear stories of Culligan increasing their sales of water in the area. A brief Google search doesn't turn up much either. But I do find multiple sites mentioning the five donated truckloads.
Consider Spencer's mention of Wal-Mart and Home Depot. Again, a lot of what they provide was donated. And while that is a wonderful thing, there is something a bit odd about the overall picture. What the large companies do in providing donations is good, but falls short of meeting the total demand for these items. Again, the fact that we are having this conversation suggests that in a perfect world these companies would do even more. Are they instead doing just enough to generate some goodwill, some TV ad copy, and a feeling among the residents that they care more than the price gougers in pick-up trucks?
It is also important to note the relevant time frame. The typical pattern as I have observed it reported in the media is that the price gouging tends to be worst in the immediate aftermath. As basic utilities are restored and transportation becomes easier, then the regular retail function of Wal-Mart, Home Depot, et al. can resume. And then price gouging (be it by big boxes or guys in trucks) becomes less of an issue.
Another possibility to consider is that the national chain stores could take a loss on bottled water for a short time in a localized area in the interest of goodwill with the community. That adds an insurance dimension to the problem. Remember that the increase in price after the disaster is associated with the cost of arbitrage across locations. That cost is likely to be smaller for a retailer with a national distribution network, and they might just eat all or part of that cost.
But as long as these disasters continue to lead prosecutors to start a "witch hunt" for anything even resembling a profit motive, reputable companies will not do enough to satisfy the demand. Sure, the token five truckloads of water will come, but that is, pardon the pun, a drop in the bucket. All you will see are guys in pick-ups, who make good targets for politicians wanting to score points with the voters.
There is that which is seen, and that which is unseen. What is unseen here is that Wal-Mart, et al. could possibly satisfy more of the excess demand if they weren't afraid of being punished for trying.
The fact that we treat bottled water in a disaster area in a manner that encourages reputable, national firms to make token donations rather than engage in the unseemly profiteering that might actually help more people should give us pause. The fact that this attitude in government also makes the actions of the less scrupulous profiteers more harmful by forcing them to take additional risks and fly under the radar should also give us pause.
So no, I don't have evidence that guys in pick-up trucks would do a better job. That's the wrong question. I do have a very strong reason to believe that large companies could do a much better job if they knew they wouldn't be excoriated by politicians and the media for making a modest amount of money from it. While I praise them for their generosity, I think you'd get more than five truckloads from Culligan if they could charge a modest amount for their trouble. The fact that there are still guys in pick-up trucks means the established, reputable companies are not doing enough.
The guys in pick-up trucks are a second-best solution to the problem. The first-best solution is for established, reputable firms to enter those areas and drive the high cost risk takers out of business. But that will only happen if the government eases ceases vilifying the notion of profit, even a modest amount, in these situations.
I do have evidence that the government does an absolutely lousy job of providing these goods and services. I don't think that the private sector would do this.
Posted by William Polley at 4:31 PM | Comments (7) | TrackBack
October 17, 2006
Watching the odometer turn
Remember when you were a kid and you couldn't wait to see the odometer in the family car turn over to some multiple of 10,000. Of course in today's cars the odometers are digital, so it's about as exciting as seeing your digital watch tick past midnight. Those old odometers looked like they really had to work to turn that last digit.
And so it is with the U.S. population clock which, as I write this, stands at 299,998,288. You can check the current number for yourself by going to the Census Bureau web site. In the morning, the big three-oh-oh (million) will have been reached. The Census Bureau's clock, like my odometer, is digital. The addition, be it by birth or by immigration, will arrive seemingly effortlessly. I think that is a good analogy. We're not running out of room in this country by any stretch of the imagination. Our society and economy will absorb the 300,000,000th person as readily as the 299,999,999th. And by 2050, we'll be adding number 400,000,000--a fact which causes Joel Kotkin to opine in the Wall Street Journal:
Unless there is some sort of cultural revolution, most people, particularly families, are likely to continue migrating to places where they can acquire a spot of land and a little privacy. And despite the much ballyhooed "return to the city" by aging boomers, most experts suggest that most are either staying in the suburbs or moving to towns farther out in the hinterland. At least 30% of Americans, according to surveys by the National Association of Realtors and the Fannie Mae Foundation, express the desire to move to the country or a small environment, far more than live there now. The scale of this dispersion depends largely on urban governance. If cities cannot, due to economic or regulatory constraints, provide sufficient