EclectEcon

Enviro-nazis and Garbage Inspection

Among my various FaceBook friends there has been considerable discussion of the "Green Police" superbowl ad:

The ad hit pretty close to home. In our community, we are now required to use clear garbage bags so the garbage collectors can examine our garbage to make sure we are recycling instead of just dumping recyclables into the garbage. (But let me add that I have not heard of a single instance where a curbside garbage collector has actually looked at a garbage bag and rejected it because it contained recyclables. There's a pretty serious principal-agent problem here since the garbage collectors are competitive profit-oriented private businesses who have an incentive to keep us happy and collect whatever we put out.)

The requirement for clear garbage bags came into effect largely because the landfill site had been filling up faster than expected, and for some reason the proprietors of the site did not choose to raise  the tipping fee at the dump site again.

Interesting ramifications:

• People objected to loss of privacy, so we are now all allowed to use one small "personal" opaque bag inside a clear garbage bag for "personal" disposables. 
• People responded so much that there is now concern that the dump site operator is losing money. Duh. They couldn't see this coming? Anyway, I find this ironic and amusing.

Recall that in this town we pay $2/bag for garbage pickup and there is competition between two different private services to pick up our garbage. Raising the tipping fees led to a price increase from $1. I am puzzled as to why tipping fees could not have been raised to accomplish this same result and meanwhile reflect the true opportunity costs of using the dump site.

I'm waiting for the enviro-nazis, akin to those in the ad/video, to go along the curbs some day, examining everyone's garbage, and warning those of us who might have put some recyclables into the garbage. I can imagine the local weekly doing a story along these lines. I can also imagine my reaction, especially when the recycling person rejects something that the garbage nazis think is recyclable and I'm caught in the middle.

Interest Rates as a (mis)indicator of Monetary Policy

Back in the late 1960s and early 1970s, as inflation was beginning to accelerate in the US, many economists pointed out that just looking at interest rates was not a good way to assess what central banks were doing. Low interest rates did not necessarily mean that central banks were pursuing easy money; and high interest rates did not necessarily mean that central banks were pursuing tight-money policies. One important piece showing this result was that by Dennis Starleaf and Jim Stephenson, which is reviewed here.

The point of their work was that interest rates might well be high (or rising) because the demand for lendable funds is high (or growing faster than the supply of lendable funds); similarly interest rates might be low because the demand for lendable funds is lower than expected and the excess quantity supplied of lendable funds has pushed interest rates downward. In other words, interest rates are determined by both supply and demand for lendable funds, not just by the supply, as controlled (or not!) by a central bank.

One of the early economists to forget the fundamentals of the previous paragraph was Joan Robinson, who seemed to completely ignore the effects of expected inflation on nominal interest rates. Here is a summary by Scott Sumner, as quoted by Robert Murphy:

The Joan Robinson interpretation

As you may recall, I like to mock Joan Robinson’s statement that the German hyperinflation could not possibly have been caused by easy money; after all, nominal interest rates were not low in Germany during the early 1920s. I think it is fair to say that Joan’s views are no longer part of the standard model. It is now widely believed that the German hyperinflation was caused by easy money, and hence nominal interest rates cannot be the right indicator for the stance of monetary policy. When economists say “easy money” they can’t possibly be referring to low nominal interest rates, otherwise they’d have to accept Joan rather eccentric views.

Robinson ignored what I call "The Fisher Effect", namely that the nominal rate of interest increases with an increase in the expected rate of inflation due to both a reduction in supply and an increase in demand for lendable funds.

The problems with using the interest rate as an indicator of monetary ease or tightening just won't go away, nor will they be acknowledged during good times. Four years ago, while I was visiting the Bank of England with some students, we asked the person who told us about Bank policy why they focus on interest rates. She patiently explained that when the Bank increased the supply of money, interest rates would fall, etc. etc. without acknowledging that changes in the demand for lendable funds might also affect interest rates.

Three years ago during an informal session with current and former central bank economists visiting UWO to honour David Laidler, I asked the same thing. They gave pretty much the same answer. But when pressed, they acknowledged that changes in demand could also affect interest rates but argued that they didn't think it would be much of a problem since central banks in the UK, US, and Canada had been successfully targeting inflation rates for so long.

But it looks as if they got it wrong.

First, the supply of lendable funds grew faster than most people expected as foreign savings placed in the US grew. Second, the phenomenal growth of liquidity via shadow banks and off-balance-sheet operations in the early and middle portions of the decade kept the supply of lendable funds much greater than most of us could imagine. These two things kept interest rates low, but especially in the mortgage market, with the attendant spillover effects into the rest of the economy, and the resulting distortions that led to the housing boom and bust. 

Following the housing bust, the demand for lendable funds shrank significantly. But at the same time, the supply of lendable funds shrank even more as 40% of the economy's liquidity dried up almost overnight with the near demise of the shadow banks. Interest rates fell, and even though they reached near zero for Fed Funds, they may not have fallen enough. Or, to be more precise, they may not have been a good indicator of the monetary ease (or tightening) by the Fed. The economy was in a recession and there was great uncertainty throughout the economy; thus the demand for lendable funds had plummeted. Focusing on just the interest rate as an indicator of central bank policy likely missed much of this reason for the decline in interest rates. [addendum: and as several of us pointed out back then, deciding to pay interest on commercial bank deposits at the Fed probably shrank the supply of lendable funds, offsetting whatever else the Fed was doing to pump liquidity into the markets.]

The Taylor Rule tries to account for both the supply of and demand for lendable funds by using a sort of reduced form equation to formulate interest rate policy. But if it doesn't point adequately to the sources of the changes in supply and demand (Taylor actually pooh-poohed the argument that there was a savings glut in the rest of the world in 2003-05 keeping US interest rates low, despite considerable evidence to the contrary), then it provides little if any, guidance for a central bank.

As with the use of the interest rate as an indicator of monetary policy, the Taylor Rule works well in a stable economy. But when there is a savings glut from abroad, and when there is a liquidity glut from shadow banks beyond the control of the central bank, unless the central bank has a really close awareness of what is happening to the supply and demand for lendable funds, interest rates won't provide much guidance.

Sunderland-Stoke, 0-0: At least in curling they changed the rules to get some scoring

After waiting all weekend to watch the Sunderland-Stoke football game, I was bored to tears by the lack of scoring. If I had been in the crowd, I might have booed, too. I saw some fine athleticism, as well as some shoddy play, but nil-nil scores are about as boring as pitching duels in baseball or defensive struggles in American football.

When the lack of scoring outraged fans of curling two decades ago, the authorities realized they had to do something to boost the interest in the sport (and the audiences on television), so they implemented the free-guard zone, an innovation of Russ Howard's rink in their practices. Now people rarely, if ever, shout "booorrrr-iiinnngggg" during curling matches. But if soccer/football is going to attract more fans and keep them, it too should do something to increase the scoring in their games.

What the iPad-2 Should Become (assuming iPad-1 Survives the iEdsel Phase)

Following up on my previous postings on this topic, here's what I was hoping the iPad would be:

• Mac Air guts: power, reliability, speed, lightness
• twist-top tablet screen so you can use a real keyboard or use it as a tablet (I think some of the Fuji Lifebooks had this feature). This feature would also allow users to carry it with less concern about potential damage to the screen. Having to type on the screen is not at all convenient or comfortable.
• Touch screen to take advantage of all the wonderful possibilities.

In other words, I would see it as a potential replacement for my laptop, not as just an over-grown, snazzy version of the iTouch.

iPad Trademark Problems? How about iEdsel?

It has quickly emerged that many products already exist with the name iPad, including bra pads and shoulder pads:

[T]here is an iPad made just for Victoria and her secrets. A small Canadian company called Coconut Grove Pads Inc. has been making a line of polyurethane bra inserts and shoulder pads registered as the iPad, since 2007.

.... There also may be a more serious issue. Japanese computer company Fujitsu Ltd. also markets a device called the iPad. The handheld device is made for retail stores to help them manage inventory, do checkouts on the spot and communicate with co-workers. The Fujitsu iPad has been in use since 2002. The company applied for a trademark on the name in 2003, according to U.S. Patent and Trademark Office records. The trademark was never granted to Fujitsu, however, and a fight is now brewing as Apple considers whether to file an objection with the agency to claim its right to the name.

I haven't seen an iPad (of any type, insert or electronic). But based on what I have read, I don't think I would want one of Apple's. It is not as convenient to use as an older-style tablet PC and it is too big to carry in my pocket. In other words, it would be yet another gizmo to carry around, and it wouldn't fit in my pocket.

My reaction: why bother? and judging from the slight downward trend in the price of Apple's stock since news of the product began coming out over a month ago, maybe analysts share my perception.

It might be another example of a glitzy product that some people will rush out to buy but others will rationally avoid. If that happens, Apple can rename it the iEdsel. Or maybe iBetaMax.

Bad Road Conditions ---- THE WAVE SPOKE, 7:30!

I gather the road conditions that I would have to face on my commute home this evening look pretty horrible, so I'm staying in London. To all my students: an extra session at The Wave Spoke, starting at 7:30!

Economists Rap about Keynes and Hayek

The lyrics are here

"Let's shrink the economy more to hand out more compassion."

Casey Mulligan, blogging at Supply and Demand (in that order), points out that for myriad reasons, increasing unemployment insurance [UI] benefits will not stimulate the economy.

1. People not receiving increased UI benefits will tend to cut back on spending due to increased taxes, increased expected taxes, or increased saving (when the gubmnt borrows to make the increased UI payments).
2. Increased UI payments shift the labour supply curve.
3. Increased UI payments will lead to increased unemployment, and unemployed people spend less than employed people, ceteris paribus.
4. Maybe what we need now is more saving and investment, and less consumption.
5. Over the past year, consumption spending remained roughly constant while the unemployment rate jumped up... not what would be predicted by a model underlying the argument in favour of increasing UI to stimulate consumption spending.

His conclusion:

The bottom line is that UI shrinks the economy. Yes, UI may be compassionate and the "right" thing to do, but then the honest recommendation is "Let's shrink the economy more in order to hand out more compassion." Instead, CBO [Congressional Budget Office in the US] is selling snake oil. [emphasis added]

Some reflections:

• Increased UI might induce people to search (i.e. remain unemployed) longer, but there are some long term benefits from that result as they become more productive over the longer haul.
• The CBO defence of the policy of increasing UI benefits must be a sop to the econo-illiterate. I can't imagine they really believe it. If they do, the US is in serious fiscal trouble.

The Economics of Search, Love, and Marriage

Yesterday in my intro economics course, I introduced the economics of search, emphasizing that people continue to search for something so long as the expected incremental benefits of additional search outweigh the expected incremental costs. We then applied the concept to such things as searching for a shirt to buy, looking for references for a term paper, looking for someone to go home with from a party, and searching for a life partner.

After class, one of the students posted this Facebook update (presumably directed toward a member of the appropriate sex):

The marginal costs of additional search strongly outweigh the marginal benefits, therefore as a rational, maximizing individual, I love you ♥ .

BraveRocks? Brave Lochs? Curling and Congestion in Scotland

Last week it looked as if the Royal Caledonia Curling Club (RCCC) would be able to host a Grand Match of curling on Lake of Monteith near Aberfoyle, Scotland. The Grand Match is a gigantic curling competition in which as many as 2000 curlers compete, and the weather has co-operated so little that it has been held only 38 times since 1837; it was last held in 1979.

This year the temperatures had been below freezing for several weeks leading up to the planned event and the ice was forming nicely on Lake of Monteith, which has nice ice for curling when the weather conditions hold up. The last time the Grand Match was held, there were over 6000 people attending, and it was anticipated there would be as many as 10,000 in attendance this time.

And that caused a problem.

A week before the planned event, the RCCC called it off, citing safety issues. The safety concerns were not due to ice conditions. Rather, the RCCC was concerned about access and congestion. From The New Scotsman [h/t Brian Ferguson]:

Colin Grahamslaw, chief executive of the national governing body, defended the decision of the Grand Match Committee.

He said: "Since Monday, we have been working with the police and the emergency services and the local authorities to try and achieve this and make it work, but, in the timescale, it has just not proved possible.

"You are talking about trying to move 2,000 curlers and an unknown number of spectators on and off the site safely. There is only one road in and one road out, and the police and emergency services were really concerned that you could get one snarl-up and there would be gridlock."

Mr Grahamslaw stressed: "We weren't worried by the ice, because the ice would have been thick enough by next week, if it isn't thick enough already."

Mr Grahamslaw said it would have been "irresponsible" to ignore the advice of the emergency services and that the decision to call off the match was deeply disappointing.

I'm not persuaded by these arguments. When I look at the map, I see access from several different directions. I'll admit that access to the site is likely limited, but probably no more so than for other large events in rural areas.

But more importantly, this would have been a perfect time to institute temporary congestion charges. If the RCCC doesn't have the authority to charge for the use of the roads, then it could charge high admission fees for contestants and spectators.

But if it is too costly to monitor and exclude people from the event itself, then with some planning and co-operation, temporary congestion fees could easily be implemented by the local authorities, possibly in the form of temporary toll charges for non-residents. After all, according them, "There is only one road in and one road out..."

What I am saying is that fears of congestion are not necessarily a good reason for having called off the event. Good old Pigouvian taxes could easily have been implemented to reduce congestion. And with the examples of the congestion charges in the city of London, people would likely have a reasonable understanding of why and how they work.

Even though the RCCC declined to sanction the event, and against the advice of local authorities, many curlers still planned to show up for an unofficial version of the Grand Match:

Some told The Scotsman that many enthusiasts were already making plans to stage an unofficial match on the Lake of Menteith within the next few days in protest.

One Glasgow-based curler said: "There are an awful lot of angry curlers who want that match to go ahead with or without the RCCC. I am certain that some sort of Grand Match will go ahead.

But in the end, temperatures rose, the ice had lots of water on it, and very few people showed up.

Ian Fleming, owner of the Lake of Menteith Hotel, said he has been monitoring the situation over the last 24 hours.

"The ice is solid enough just now but the water on it just makes it treacherous to walk on. It's the first time I've ever seen a curling stone causing bow waves.

"There are a number of hardcore curlers out there now, around 28 to 32 players but it's hard to see the rinks under all the water.

Cross-posted at The Sports Economist and at Curling

US Biofuel Policy: "We need to set realistic targets...instead of just throwing taxpayer money out the window."

Smittie, a frequent commenter here at EclectEcon, came across this item last week and sent it on to me, noting that it says things pretty similar to what I have been arguing for several years on this blog. I note that its authors are primarily civil engineers, not economists, but it looks as if their economic intuitions are pretty decent. Some excerpts:

The United States needs to fundamentally rethink its policy of promoting ethanol to diversify its energy sources and increase energy security...

The paper, "Fundamentals of a Sustainable U.S. Biofuels Policy," questions the economic, environmental and logistical basis for the billions of dollars in federal subsidies and protectionist tariffs that go to domestic ethanol producers every year. "We need to set realistic targets for ethanol in the United States instead of just throwing taxpayer money out the window," said Amy Myers Jaffe, one of the report's authors.

...[T]he report notes that in 2008 "the U.S. government spent $4 billion in biofuels subsidies to replace roughly 2 percent of the U.S. gasoline supply. The average cost to the taxpayer of those 'substituted' barrels of gasoline was roughly $82 a barrel, or $1.95 per gallon on top of the retail gasoline price (i.e., what consumers pay at the pump)." The report questions whether mandated volumes for biofuels can be met and whether biofuels are improving the environment or energy security.

The full study is here, and it includes considerable use of fundamental economics. The monograph is lengthy and seems to consider nearly every issue that has ever been raised on the topic. It should be a go-to study for anyone interested in the details of biofuel production and effects.

But as regular readers of EclectEcon know, I see no reason for gubmnts to set targets for biofuel production. I truly doubt that bureaucrats or even very smart scholars, not risking their own money, can make better decisions in this area than can private investors.

If the gubmnt wants to dissuade people from using petroleum-based fuels for various reasons, my argument has long been that legislators should raise the taxes on those fuels. The result will be that individuals and firms will make efficient decisions, on their own, as to when and whether it is reasonable to switch to hybrid fuels or biofuels. Otherwise, as this study points out so well, the externality arguments simply are not strong enough to carry the day.

Spies, Search, and the Economics of Information

In the search for information, we tend to continue our search so long as the expected incremental benefits exceed the expected incremental costs of additional search. This basic premise applies to all sorts of things:

• When searching for a new household appliance we might want to purchase, we don't "shop 'til we drop." Instead, we acquire some information about price and quality, inter alia, and then we stop looking at some point. We implicitly say, "the expected incremental benefits of additional search are exceeded by the expected incremental costs." Ms. Eclectic hates it when I talk like that. But we all tend to behave as if we are making that assessment.
• When searching for something we have misplaced, we do the same thing: we search so long as the expected benefits of continued search outweigh the expected costs.

And the list of applications goes on and on.... cars, jobs, mates, one-night stands, etc.

But now we learn that possibly the search for information by US spy agencies has gone beyond the optimal amount of search. At least that is the implication of this piece in the NYTimes:

As the military rushes to place more spy drones over Afghanistan, the remote-controlled planes are producing so much video intelligence that analysts are finding it more and more difficult to keep up.

It looks from the details in this article as if the spies are gathering more information than they can possibly use. At the same time, though, what would be the expected political costs of cutting back on spy-drone data collection?

• It may very well be that the data collection process has political benefits. 
• And the use of spy-drones may also have some deterrent effects on the enemy, making it less likely and/or more costly for them to engage in actions that spy drones could detect, even if not all spy-drone information is examined.

Information, Reputation, and the Impact of College Athletics: My story about TCU

Way back in the days before people ranked economics departments according publications or citations to publications by their faculty members, departments' reputations seemed to be based more on who knew whom, on who had written important papers, and (perhaps sadly) whether you had even vaguely heard of the school or any of the people who taught there.

When I was finishing my PhD at Iowa State University and beginning to look for a university job, like all good job seekers I went to economics conventions, did my best to meet people and find out who was hiring economists in my field, scoured job listings, and did my best to arrange as many job interviews as I could. But in my naivete and ignorance, I had little to go on. And my lack of information and my ignorance let me down several times.

One instance that I remember involved Texas Christian University [TCU]. Growing up, I had heard of TCU because of the prowess of their football team, even back then. So when I learned they had a position open, I thought, "Hey, I've heard of them. They might be an okay place." I don't remember thinking that, explicitly, but I certainly behaved as if I did. In fact the only reason I had heard of them was because of their football team, not because of their economics department.

It turned out they were looking for someone who was willing to teach 4 courses per term ("only" three preparations) and do so for less pay than was offered by other economics departments. I'm sure things have changed since then.

In the end, they weren't interested in me and I wasn't interested in them. But when I saw them playing in the "Impolitic" Bowl this past week, I realized that the reputation created by their football team had at least gotten them in the door with me (so to speak).

National television exposure due to a winning football team is undoubtedly worth something. The question is, how much? And is it worth the costs?

Andre Dawson and the Hall of Fame

Andre Dawson was just elected to Baseball's Hall of Fame. Those of us who watched him when he played with Montreal Expos enjoyed watching him. And there is no doubt he was a VERY good player.

And yet, as many sabremetricians will sure point out, Dawson's performances probably contributed less to his teams' winning percentages than did the performances of Bert Blyleven or Tim Raines or even possibly Jack Morris (I really am having hard time understanding why Robbie Alomar got so many votes).

Let's face it. There is one important reason that Dawson was elected to the MLB Hall of Fame, and it is the same reason he won the National League's Most Valuable Player Award in 1987 despite there being other likely more suitable candidates. Leading up to the 1987 season, Dawson made it clear that because of his ailing knees, he no longer wanted to play on astroturf but with his free agency would seek a contract with a team that had a natural grass outfield. He was especially interested in signing with the Chicago Cubs, but this was 1986-87, and no one would sign him to a contract. No one, despite his potential contributions to a team. 1987 was, it turned out, a year of collusion among MLB teams, and most free agents found no takers other than their original teams (at monopsonistic salaries).

To deal with this collusive situation in the 1987 MLB, Dawson essentially signed a blank contract, gave it to Dallas Green (then general manager of the Cubs) and told him to fill in the numbers. This gesture, plus his overall good performance that season, helped Dawson win the hearts of fans and sportswriters. And it was this gesture that put him over the top in the MVP balloting that year and in the Hall of Fame balloting this year.

Without that action, Andre Dawson would be another very good player just on the cusp of being elected into the Hall of Fame. With it, he became a hero to many who were disgusted by the collusive behaviour of the MLB owners.

Canadian Housing Market: It Ain't Broke But Let's Fix It Anyway

Aside from the spill-over effects from the US economy, Canada has not suffered nearly so much from the current recession and did not experience either the huge housing bubble or the big housing bust seen in the US. James MacGee has pointed out that Canada escaped the seriousness of the US financial crisis largely because of its more conservative mortgage insurance and regulations of financial institutions.

The Canadian market lacks a counterpart to Freddie Mac and Fannie Mae, both of which played a significant role in the growth of securitization in the U.S. In addition, bank capital regulation in Canada treats off-balance sheet vehicles more strictly than the U.S., and the stricter treatment reduces the incentive for Canadian banks to move mortgage loans to off-balance sheet vehicles.

Finally, as noted above, the fact that the government-mandated mortgage insurance for high LTV loans issued by Canadian banks effectively made it impossible for banks to offer certain subprime products. This likely slowed the growth of the subprime market in Canada, as nonbank intermediaries had to organically grow origination networks. [also, see this video of MacGee commenting on the rising house prices in some Canadian markets (h/t Glendon)]

With these differences, I have to wonder whether the Canadian housing market really needs more regulation or control to head off future housing bubbles and busts. And yet Canada's finance minister, Jim Flaherty seems to think Canadians need even more protection from themselves. From the Globe and Mail,

Policy makers are concerned homeowners will take on more debt than they'll be able to afford when interest rates rise again, possibly leading to a painful correction later.

The Bank of Canada has vowed to keep lending rates low into the middle of next year, limiting its options for taking the pressure off a hot market.

But since the federal government dictates rules around down payments and amortization periods, it can effectively dampen the housing market without increasing borrowing costs for businesses.

I.e., the gubmnt would increase credit rationing rather than adjust lending rates. But the premise here is that gubmnt officials can

1. recognize a bubble 
2. do something about a bubble
3. that won't be worse than the effects of the bubble
4. and do so in a timely fashion

The thought that politicians think they can fix something that isn't broken by tinkering with it is downright scary.

The Book of Eli (and my tangential relationship to it)

The other day I saw an ad on television for the movie The Book of Eli, an apocalyptic/adventure/fantasy movie starring Denzel Washington. I don't pay much attention to movies, and so I tend to ignore movie ads. But something about this sounded familiar.

And then I remembered: about 7 years ago, when I was doing some professional acting, I auditioned for a role in this film. It was so long ago, I can't remember what the role was --- a prophet of some sort as I recall. But I remember waiting in a room with about 50 guys, most of them with big-time professional training and experience, nearly all of them dressed in their perceptions of how Hasidic Jews might dress.

The audition was in Toronto back in the days when many major production companies were shooting films and commercials in Canada to take advantage of the low US price of the Canadian dollar (well below purchasing-power parity in the film industry) and to exploit some of us poor Canadians*. I see from IMdb that in the end, the locations were all in Alcatraz and in the southwestern US -- none in Canada.

I don't see that role in the film, now. I wonder what happened to that role and I really wonder what caused the lengthy delay in getting that film made and into the theatres.

*No, I didn't get the role. Their loss. And believe me, I wouldn't have felt exploited if I had been given the role.

More "creeping gradualism" in the US Economy

It has become official: Fannie Mae and Freddie Mac can now give away mortgage insurance according to political criteria and ignore credit-worthiness or default risk. From the Washington Post,

The Obama administration pledged Thursday to provide unlimited financial assistance to mortgage giants Fannie Mae and Freddie Mac, an eleventh-hour move that allows the government to exceed the current $400 billion cap on emergency aid without seeking permission from a bailout-weary Congress.

The Christmas Eve announcement by the Treasury Department means that it can continue to run the companies, which were seized last year, as arms of the government for the rest of President Obama's current term....

The administration is set to release broad principles in February for reforming the companies. Many experts predict that the government will have no choice but to hold on indefinitely to many of the companies' most troubled assets -- mortgage investments made during the housing bubble to less-than-worthy borrowers.

But an administration official said it could take several years to resolve the future of the companies, especially if Congress isn't keen to take up the politically charged issue during the 2010 midterm election year, and if the government wants to preserve the ability to influence the housing market. The companies together own or insure the majority of home loans, and no viable private system exists that could replace them.

My guess is that these agencies will become bloated agencies of rent-seekers throughout the US. It would take another Reagan-type sweep to de-politicize the mortgage insurance business.

Teaching the Economics of Trade Restrictions

Over the past couple of years, I have strongly resisted the trend toward teaching international trade early in an introductory micro economics course, where it appears in many introductory textbooks. Those who want to teach it early, point out that understanding division of labour and comparative advantage lie at the heart of understanding any exchange.

I don't deny this.

The problem is that so many of the incorrect oppositions to free trade involve the misuse of macro economics, as is so aptly pointed out by the author of the textbook I use in his comment about a posting by Scott Sumner.

Scott then goes on to propose an explanation of these events that can be viewed as consistent with the textbook Keynesian model. In particular, I interpret Scott as saying that the retreat from free trade reduced business confidence, shifted the investment function I(r) to the left, and thereby reduced aggregate demand.

One general lesson from his discussion is that it is often hard to distinguish shocks to aggregate supply and shocks to aggregate demand.  Policies and events that adversely affect aggregate supply (e.g., trade restrictions) will often reduce the marginal productivity of capital, decrease investment spending for given interest rates, and depress aggregate demand as well.  In the short run, the indirect demand-side effects of "supply shocks" could potentially be larger than the direct supply-side effects.

Maybe the pure theories of international trade are also pure micro, but dealing with the criticisms of the basic theories requires an understanding of macro as well. 

h/t Kip

Paul Samuelson

I discovered during the Newsweek debates (really alternating week editorials) of the late 1960s that Milton Friedman was a whole lot better economist than Paul Samuelson, even though I had been trained otherwise by a bunch of elitist east coast interventionists. As Kip Esquire said on Facebook:

Paul Samuelson, the man who almost single-handedly turned economics into worthless alchemy, is dead.

Foundations? nice mathematical exercises. Anything else? How about his accusation that, "Chicago is not just a place but a state of mind"? Turnpike theorems? Again, nice mathematical exercises that had zero relevance for economic growth policy.

Brilliant man? probably. But one whose work will not have much lasting value. Especially not for policy.

What Is the Price Elasticity of Demand for the H1N1 Vaccine?

Ms. Eclectic and I lined up with hundreds of other local residents last Monday when the county health authority came to town to provide swine flu shots for us. It was windy, cold, and there was mix of rain and snow blowing as we stood outside the Legion Hall, waiting to join the queue inside the hall.

Overall, people were in good spirits, and the organization was pretty slick. Nevertheless, the wait (especially when we were in the portion of the queue that was outside the building) was uncomfortable. From the time we arrived until the time we left, the total elapsed time was about an hour and a quarter, in contrast with about twenty minutes earlier in the fall when we received our seasonal flu shots. [note: both times included about a ten-minute waiting period following the shot].

As I proceeded from health bureaucrat to health bureaucrat at the H1N1 vaccination site, I asked each of them how long they thought the line would be if people were charged $5 each for the vaccine. Everyone I spoke with volunteered that they thought the line would be much shorter. The implication from this non-scientific survey is that the price elasticity of demand for the H1N1 vaccine is certainly greater than zero. Using arc elasticity calculations and rough guesstimates of the sizes, and supposing that charging $5 for the vaccine would reduce the quantity demanded from 2000 to 1500, then the price elasticity of demand would be approximately .143.

That's still a pretty small number, indicating that the quantity demanded would not be very responsive, in percentage terms, to a change in the price in this region. Nevertheless if 500 people (I know, it's a very rough guess) would give the vaccination a miss just because of a $5 charge, it is difficult to see how the vaccination can be thought of as a dire necessity.

Two additional notes:

1. Most of the health bureaucrats I spoke with didn't twig to the fact that I was asking about how much the quantity demanded would decline with the charge. They just thought that people receiving the vaccine ought to contribute to the costs of producing and providing the vaccinations. I don't have the numbers, but judging from the numbers of computers and health professionals involved, I suspect the cost of delivering the vaccinations was greater than the cost of producing the vaccine itself.
2. While receiving my vaccination, I overhear Ms. Eclectic say, "That's my husband. He turns everything into an economics question."

Price Discrimination or Anti-Canadianisms (or Neither)?Microsoft's pricing for Student Versions Windows 7

Some of my students have pointed out that in the US, students may purchase Windows 7 for $29.95 (US), whereas the price for Canadian students is $39.95 (Cdn), even though the currencies have recently been trading for about $1C = $.95US.

Is the price elasticity of demand so much lower in Canada that Canadian students are charged the higher price?

Or does Microsoft just have an innate dislike for Canadian students?

Or is there an intermediary in Canada who has raised the relative price here? If the latter, why don't US intermediaries charge more?

If the lower US price is viewed as promotional pricing, why wouldn't the promotional price be just as effective in Canada?

Why is there this difference in the profit-maximizing prices in the two markets? Or is one or both of the prices not the P* that we draw on all our graphs?

The Not-Quite-So-Absolute Priority Rule in Bankruptcy

According to the Absolute Priority Rule in Bankruptcy (roughly -- the details are daunting), secured creditors must be paid in full before senior unsecured creditors can receive anything, and they in turn must be paid in full before the junior creditors can receive anything, etc.

Eliot Spitzer, along with many members of the current US administration, appears to argue that the rules of bankruptcy should instead be "share-and-share alike". From Slate, Spitzer writes the following in his criticism of Geithner's role in the AIG bailout:

Geithner suggested he could not use the threat of AIG's default in the absence of a federal bailout to get concessions from AIG's creditors.

Why not? That is exactly what the government did with the auto industry, and rightly so. The entity providing financing to a near-bankrupt institution must always seek contributions from everyone else at risk.

Everyone?? and why not just those at the bottom of the priority list? Perhaps, it can be argued, that is what Spitzer meant by saying "everyone else at risk". And I could be persuaded that is what he meant if he hadn't referred to the auto industry, where the absolute priority rule seemed to be honoured more in exceptions than in law.

If senior creditors cannot be assured of being senior to junior creditors (or pension funds that essentially are common-stock holders), then they must anticipate that in the future their loans will become riskier, which will raise the borrowing costs for firms.

If that is what the politicians want, I would say, "Okay, go for it," except it isn't certain. The continuing fluidity of the "rule" reduces its value as a rule and creates uncertainty about the risks that lenders face with their loans. And the increased uncertainty unnecessarily raises the cost of capital.

Global-Warming Skepticism

As most regular readers of EclectEcon know, I have tried to maintain an open mind about global warming, but I have been concerned about the infusion of political agendae into the debate. Whenever I read work by colleagues Ross McKitrick and Chris Essex, I become more skeptical about:

1. Whether there has actually been any global warming in the past two or three decades overall; and if there has,
2. Whether global warming has been caused by humans and not long cycles or sunspot activity; and even if it has been caused by humans,
3. What the best strategy is for dealing with it. I have at times favoured Pigouvian taxes on CO2 emissions; at other times I have suggested it might be more efficient to wait and then, if necessary, build dikes and levees.

When I see photos of the Athabasca Glacier and how much it has receded over the past two decades, I become concerned about global warming. At the same time, I realize that warming in one part of the earth does not imply overall global warming. And the growing evidence that there has been no global warming for at least the past decade makes one cautious about any assertions that global warming is "settled science".

The recent disclosures of the academic shenanigans of the global-warming in group certainly add to my skepticism. Of course this type of skulduggery goes on all the time in academia. Fortunately, it is often exposed for what it is, too.

For some excellent pieces and links about the latest twists in the global warming saga, see this by Craig Newmark, where he quotes the following. It is a bit strong in its rhetoric, but it also raises some very important points for consideration:

In fact, when scientists become politicians but continue to pretend to be doing science, that is the real crime. The theory being promoted by these men was being used to justify government actions that would result in greatly diminished future economic growth of the most powerful economy on earth (and the rest of the world as well). It would make it more difficult and less affordable to address any real problems that might be caused in the future by a change in climate, whether due to human activity or other causes. It could impoverish millions in the future, with little actual change in adverse climate effects. And when such a theory has the potential to do so much unjustified harm, and it has a fraudulent basis, who are the real criminals against humanity?

The US Gubmnt is on Teaser Rates

That's a paraphrase from Robert Bixby, quoted in today's NYTimes, noting that interest rates and interest charges on the debt are very low by historical standards, especially relative to the size of the debt and the size of the expected continuing deficit. I love the phrase and the concept.

Here is more:

Treasury officials now face a trifecta of headaches: a mountain of new debt, a balloon of short-term borrowings that come due in the months ahead, and interest rates that are sure to climb back to normal as soon as the Federal Reserve decides that the emergency has passed.

Even as Treasury officials are racing to lock in today’s low rates by exchanging short-term borrowings for long-term bonds, the government faces a payment shock similar to those that sent legions of overstretched homeowners into default on their mortgages.

With the national debt now topping $12 trillion, the White House estimates that the government’s tab for servicing the debt will exceed $700 billion a year in 2019, up from $202 billion this year, even if annual budget deficits shrink drastically. Other forecasters say the figure could be much higher.

Understandably, I am concerned for my children and grandchildren who live in the US. And if the US politicians are unwilling to cut back on outflows, they face two serious possible problems:

1. Slipping to the down side of the Laffer Curve (named for Professor Curve), where tax increases can actually lead to reduced tax receipts and an even worse fiscal situation. cf. Sweden in the previous century. Tax hikes will not necessarily get the profligate spenders out of this bind.
2. Increased inflation rates as no one other than the Fed is willing to buy the debt -- i.e. massive monetizing of the US debt.

Three Shots a Day Keeps the Doctor Away

Ms. Eclectic says that now I have a justification for drinking scotch. As if I needed one. From the BBC (among many sources):

Drinking alcohol every day cuts the risk of heart disease in men by more than a third, a major study suggests.

The Spanish research involving more than 15,500 men and 26,000 women found large quantities of alcohol could be even more beneficial for men. 

... For those drinking little - less than a shot of vodka a day for instance - the risk was reduced by 35%. And for those who drank anything from three shots to more than 11 shots each day, the risk worked out an average of 50% less.

My preference: single malt Islay scotches, e.g. LaPhroaig, Lagavulin, and Caol Ila.

The Price of Gold in Three Years

My friend, Maarten, has stated to me that the price of gold will reach $10,000/ounce in three years. In response, I offered to bet him $50 that it wouldn't get that high. He then asked if I'd say he won if he was within 20% of that price. I immediately accepted the adjusted bet.

If Maarten really believes the price of gold is going to sky-rocket over the next three years, he shouldn't be betting with me; he should be buying gold. Or maybe buying futures in gold (see here  or the chart below for the price of gold, delivered in December 2012.

Or he should be buying call options on gold for December 2012. 

I think I understand Maarten's argument. The US deficit, combined with the non-negligible possibility of war in the mideast, could easily lead to both inflation of gold prices and considerable unease in major economies. In these instances, gold might be viewed as a safe haven. But I just don't see how those changes can possibly lead to a more than 7-fold increase in the price of gold over the next three years.

And apparently, judging from the futures prices of gold, most speculators seem to think the price of gold will rise a bit, but not much:

Month Click for chart	Session									Pr.Day			Options
	Open	High	Low	Last	Time	Sett	Chg	Vol		Sett	OpInt
Nov 09	-	-	-	1106.0 *	Nov 16, 17:41	-	-	21		1138.6	147		Call Put
Dec 09	1131.5	1133.5	1131.0	1133.5	Nov 17, 10:17	-	-5.7	73462		1139.2	269945		Call Put
Jan 10	-	-	-	1107.3 *	Nov 16, 17:41	-	-	110		1140.0	107		Call Put
Feb 10	-	-	-	1140.7 *	Nov 16, 17:41	-	-	5901		1140.7	118940		Call Put
Apr 10	-	-	-	1109.1 *	Nov 16, 17:41	-	-	647		1141.8	37725		Call Put
Jun 10	-	-	-	1110.2 *	Nov 16, 17:41	-	-	229		1143.0	16593		Call Put
Aug 10	-	-	-	1111.6 *	Nov 16, 17:41	-	-	3		1144.5	9438		Call Put
Oct 10	-	-	-	1113.3 *	Nov 16, 17:41	-	-	-		1146.1	4558		Call Put
Dec 10	-	-	-	1115.3 *	Nov 16, 17:41	-	-	621		1148.1	22716		Call Put
Feb 11	-	-	-	1117.8 *	Nov 16, 17:41	-	-	-		1150.6	2533		Call Put
Apr 11	-	-	-	1120.6 *	Nov 17, 07:38	-	-	-		1153.4	1716		Call Put
Jun 11	-	-	-	1123.8 *	Nov 16, 17:41	-	-	-		1156.6	10709		Call Put
Aug 11	-	-	-	1127.6 *	Nov 16, 17:41	-	-	-		1160.4	250		Call Put
Dec 11	-	-	-	1136.3 *	Nov 16, 17:41	-	-	-		1169.0	11670		Call Put
Jun 12	-	-	-	1151.8 *	Nov 16, 17:41	-	-	-		1184.5	3643		Call Put
Dec 12	-	-	-	1170.2 *	Nov 16, 17:41	-	-	1		1202.9	8011		Call Pu

"I'm about to go out of business because I'm in a declining industry, so you have to give me some money."

That is what local over-the-air television station owners are telling the cable companies in Canada. Sounds silly doesn't it. Well, unfortunately that is exactly what is happening in hearings before the CRTC. Alan has been blogging up a storm about this at Silly Little Country.

Imagine what the viewership of local television would be if cable companies did NOT carry the local over-the-air stations. And as Alan and I agreed yesterday, we might even be willing to pay the cable companies NOT to carry some of the drek that passes as local over-the-air television.

On Buying Lottery Tickets and Insurance at the Same Time

Last month I posted about the book You Are What You Choose by Scott de Marchi & James T. Hamilton. In that posting I invited the authors to respond to this puzzle:

I know that many, many people buy lottery tickets (or gamble in other ways) and also buy insurance; i.e., people are risk averse and gamblers at the same time. I am hoping that the authors will explain this in their book (or possibly with a guest posting here).

Here is the reply sent me this morning by Jay Hamilton:

As social scientists, we respect the power of prices, budget constraints, and framing effects to predict the choices that people make. In You Are What You Choose, we argue that more attention should be paid to the systematic variations in how people make decisions across domains of choice. We call people’s decision-making approaches their TRAITS, which stands for Time, Risk, Altruism, Information, meToo (looking to the decisions of others), and Stickiness.

Using 30,000 respondents to Knowledge Networks internet surveys, we develop measures of people’s TRAITS based on how their roles as consumers, neighbors, and friends. To develop an index of a person’s willingness to engage in risky actions, we draw on questions about smoking, gambling, risky sports played, number of moving violations in a car, and attitude questions such as ‘does a yellow light mean speed up or slow down.’ 

In your post, you raise the interesting question posed by Friedman and Savage about why some people buy both lottery tickets and insurance.  Our model does not provide much additional insight beyond the traditional explanation of different shapes in utility curves. Instead, we explore whether we can isolate a general taste for risk that can be used to predict risky behavior across many dimensions of choice.

Our measure of Risk does allow us to predict who’s willing to take on gambles in many areas of life. The higher the Risk index that we measure, the more likely a person (controlling for age, gender, income, and education) is to :

• Say they follow an aggressive investment strategy
• Decide not to get the flu shot
• Be a political independent

We also find that people who are high on Risk and low on Information gathering end up not getting what they say they’re after in product markets. While they may say they want a safe car, for example, people with a taste for Risk and a general lack of interest in information appear to simply roll the dice when buying a car. They end up having a larger gap between the level of safety they say they want in a car and the level they actually end up with.

To see the types of questions we use to measure decision-making styles, and to see how you rate on the TRAITS, you can take our test at www.youchoosebook.com

Scott de Marchi and James T. Hamilton are professors at Duke University.

The Effects of Mass Immigration into Canada

Last week I received a copy of the Fraser Institute's latest book, The Effects of Mass Immigration. I took the book with me recently  when visiting a demographer friend, and he was quite impressed with it. His comments:

Finished it today.

Most impressed with all the chapters, including Salim's [EE: Salim Mansur, a mutual friend]. Most shocking statistics:

- only 20% of our immigrants come through the regular channels - the others are 'sponsored' or so-called 'refugees'

- Bill C-50 dropped, at the last moment, a provision to deny refugee status to those claiming from 'safe' countries already

- Despite Bill C-50, all those on the waiting list - now about 1 million, are guaranteed eventual admission (last minute cave-in by the government because .....?)

- Immigrants now cost us more than they contribute economically, mainly because of their 'inferior' quality of late.

The sad part of it all is that none of the authors seem to think any government in Canada will dare alter anything because of the votes.

Many thanks for lending me this one.

With that kind of praise, I guess I'll have to read it myself! Here is the link if you want to order a copy.

Fama on the Efficient Markets Hypothesis and the Financial Crisis

These points are worth keeping in mind (h/t Newmark's Door):

Most investing is done by active managers who don't believe markets are efficient. For example, despite my taunts of the last 45 years about the poor performance of active managers, about 80% of mutual fund wealth is actively managed. Hedge funds, private equity, and other alternative asset classes, which have attracted big fund inflows in recent years, are built on the proposition that markets are inefficient. The recent problems of commercial and investment banks trace mostly to their trading desks and their proprietary portfolios, and these are always built on the assumption that markets are inefficient. Indeed, if banks and investment banks took market efficiency more seriously, they might have avoided lots of their recent problems. Finally, MBA students who aspire to high paying positions in the financial industry have a tough time finding a job if they accept the EMH.