EclectEcon

Legalized Prostitution and Unemployment Benefits

I am not opposed to exchanges made between two competent adults not under duress; i.e., I generally favour the freedom to make contracts (with exceptions for contract killings, etc., so clearly the freedom of contract should not be absolute).

But here is a problem posed by an article in the News.Telegraph. Germany has legalized prostitution. Because prostitution is legal, women can have their welfare/ unemployment benefits reduced or eliminated if they refuse to take jobs that are legal (including prostitution), and so

"There is now nothing in the law to stop women from being sent into the sex industry," said Merchthild Garweg, a lawyer from Hamburg who specialises in such cases. "The new regulations say that working in the sex industry is not immoral any more, and so jobs cannot be turned down without a risk to benefits."

I find this appalling.

The government had considered making brothels an exception on moral grounds, but decided that it would be too difficult to distinguish them from bars. As a result, job centres must treat employers looking for a prostitute in the same way as those looking for a dental nurse.

No wonder the German birth rate is dropping if their bureaucrats cannot distinguish between brothels and bars.

Pointer from LloydC

Man Urinates Way Out of Avalanche

A survival story from AlexK:

A Slovak man trapped in his car under an avalanche freed himself by drinking 60 bottles of beer and urinating on the snow to melt it.
Rescue teams found Richard Kral drunk and staggering along a mountain path four days after his Audi car was buried in the Slovak Tatra mountains.

... He said: "I was scooping the snow from above me and packing it down below the window, and then I peed on it to melt it.

My guess is that the calories in the beer helped him stay warm and heat up the fluid; otherwise it might have been just as effective (and quicker) to pour the beer directly on the snow.

Afterthought: Does this really seem plausible? How long would it take to drink 60 bottles of beer? And how much did he sleep? And how long did his flashlight last (assuming he had one)? The reason I ask is that I know I would pass out after 6 bottles of beer. One of my former colleagues, however, ....

Welfare, Incentives, and Family Formations

Rodney Hide, a Member of Parliament in New Zealand, quotes this in his blog:

A married couple, with the mother at home looking after a baby and the father earning $12.50 an hour, will have annual income of $23,254 after taking into account tax, family support and child tax credit. In contrast, if they had decided not to get married, with the woman on the DPB refusing to name the father of the baby and the man living in the same house as a "boarder", their household income would be $35,780, some 53 per cent higher.

Some of the commenters are outraged: "Don't they know that is illegal?" which misses the point. People respond to incentives, and sometimes they/we even do illegal things in response to those incentives. Laws and policies which fail to recognize this are sure to generate unexpected and unintended results.

Capital-Labour Substitution in Fast Foods

What happens when the minimum wage goes up? Employers have an incentive to use more capital and less low-wage, typically unskilled, labour.

But how do they do that in the fast food industry? How do you replace burger-flipping socionomology graduates with machines? You don't, necessarily, but you can replace order-taking socionomology graduates with cheaper labour and some capital:

The McDonald's restaurant in Hermiston, Oregon appears to be
"outsaucing" customers [sic] drive-thru meals.

The restaurant on Highway 395 has outsourced one of the most important jobs at the drive-through window -- order taking.

When a customer drives through, they'll be patched through to Grand Forks, North Dakota to place the order. Why? Because the minimum wage in North Dakota is $5.15, compared to Oregon's $7.25.

Thanks for the pointer to JC, who wonders, "And what is an hour call to North Dakota costing?"

My guess is that with satellite telecommunications, long-distance calls from Oregon to North Dakota can be sufficiently low-priced to make this arrangement profitable. But why Grand Forks? Why not Bangladesh?

So much for the studies claiming that increases in the minimum wage have no effect on employment in fast-food enterprises.

UPDATE: Phil Miller of Market Power has another example; this one is about four outlets in Missouri using a centralized call centre in Colorado. But in this case it is done to lower costs (presumably through economies of scale, specialization, and improved quality).

60% Turnout in Iraq

In an earlier posting, I speculated that the expected marginal benefits of voting in Iraq might very well be outweighed by the expected marginal costs, given the threats of violence. Privately, I was estimating more violence than was observed, and I did not expect this high turnout.

It looks as if the voter turnout in the Kurdish and Shia regions was very high, but was fairly low in Sunni regions. Overall, the turnout was likely over 60%. I'm impressed (and just a bit more hopeful, now).
I clearly underestimated the expected marginal benefits and/or overestimated the expected marginal costs of voting in the minds of many voters.

Gates and Buffett Short the U.S. Dollar

Alex Tabarrok of Marginal Revolution quotes from this Bloomberg article.

Gates's concern that widening U.S. budget and trade deficits are undermining the dollar was echoed in Davos by policymakers including European Central Bank President Jean-Claude Trichet and German Chancellor Gerhard Schroeder.

... Gates reflected the views of his friend Warren Buffett, the billionaire investor who has bet against the dollar since 2002. Buffett said last week that the U.S. trade gap will probably further weaken the currency.

As you probably know, I share these views.

Another Internet Ad for an Automobile

If you liked the internet ad for the VW Polo, you might like this one, too.

There are similar items at this site.

And be sure to check out what Snopes has to say about this ad and its evil twin.

Pinot Noir v. Plonk

Anne Kingston ($) reports the following interesting wine sales data [hat tip to Jack]:

In Ontario, sales of pinot noir rose 10.5% during November, December and the first two weeks of January versus the same period a year ago, according to Liquor Control Board of Ontario spokesman Chris Layton. Such an increase is “pretty significant,” he says, even though red wine sales have been trending up consistently over the past 15 years. Still, sales of cabernet sauvignon, for instance, only rose 3% in the same period.

Similar growth in sales has been reported elsewhere. She attributes the rapid growth in sales of pinot noir to the praise it receives in the acclaimed film, "Sideways":

[M]oviegoers’ enthusiasm for the film has resulted in what The New YorkTimes has coined “the Sideways effect.” On the basis of anecdotal evidence, the Times estimated thismonth that pinot noir sales in Manhattan have risen 20% since the film was released in October. Onestore in Union Square reported selling 100 cases over the holiday period, up from 50 the year before.

For the handful of you who’ve not yet seen it, Sideways is the tale of
two buddies on a tasting tour of California’s Santa Inez wine country. The main character, Miles, views himself as an oenophile, a word that can be, as it is in his case, synonymous with “bore.” He’s given to irritating wine-speak: He talks of getting a “soupçon of asparagus” from one wine and dismisses another as “quaffable but far from transcendent.” His grand passion, one he shares with many other oenophiles, is pinot noir. He dismisses other wines out of hand and is particularly disdainful of that crowd-pleaser, merlot. “If anyone orders merlot, I’m leaving,” he says at one point. “I’m not drinking any f---ing merlot.”

If I were traveling with someone who has this attitude, I might consider ordering merlot or some other plonk just to get the snob to leave. In the end, though, I don't really care all that much. The only thing that matters to me is, "Does the bottle have a screw-top cap [thanks, Cynthia]?"

Tigers and Strict Liability

A couple driving through the African Lion Safari was mauled by a tiger in 1996. They were just awarded compensation of over $2million. It is likely that this award did nothing to promote efficiency. [from the Globe & Mail (registration required)]

One of the issues disputed during the trial by the lawyer for the African Lion Safari, was whether the pair had their car windows rolled down as they toured the park.

Ms. Cowles testified that she couldn't recall whether the windows were up or down, but added that Mr. Balac must have accidentally hit the power window button with his foot when she "jumped" to his side of the car after being startled by the tiger as it jumped toward the car.

It looks as if this might have been an efficient accident, depending on what you believe about the evidence. What I mean is

• given that people want to see wild animals in unfenced, natural environments, and
• given that the park can and does instruct the visitors to keep their windows rolled up

then if someone slips and rolls the power window down and is unable to roll it back up before being mauled, then it is pretty hard to stop this from occurring. The only question is where to assign the loss. It doesn't matter who has to pay, the assignment of liability will not have any deterrent effect or cautionary effect. Making the park pay, contrary to the opinion of the plaintiff's insurance company lawyer, will not have any impact on their behaviour.

John Soule, who acted on behalf of Mr. Balac's insurance company, said he suspects the decision will force changes to such theme parks.

"I think the ruling will have an effect upon the way any animal farm now does business in the future," he said. "There are other similar farms in North America and Europe; I suspect that, if the decision stands, that type of business will have to reconsider how they deal with the public and their product."

Really? I wonder what changes the park could make that are sensible under the givens I listed above. If I am correct, the park will find it efficient to compensate people who can't control their power windows rather than take other action, and there will be no change in their behaviour. My suspicion is that the judge just doesn't like wild animal parks:

"There is no question . . . that tigers are dangerous, unpredictable, wild predators. Persons who display such animals in out-of-control settings should, in my view, be held strictly liable for any damage resulting from such display," the Superior Court judge said.

Strictly liable. That means they pay even if they weren't negligent. Why?

My own view, to paraphrase the judge, is "There is no question that tigers are dangerous, unpredictable, wild predators. Persons who visit parks with such animals in out-of-control settings should, in my view, be held strictly liable for any damage resulting from visiting such a display." The visitors are in a position to increase their level of care efficiently; or they can stay home if they do not wish to assume the risks voluntarily.

Maybe Madam Justice Jean MacFarland need to see some cockboxing matches.

She Needs to Write More

Cynthia, of Cynthoughts, is a fascinating blogger - an engineer with a taste for wine and a zest for life.

When she read my earlier post on the marginal physical product of wine, she mathematized the relationship and graphed it. She also points out that wine with a screw-top cap is no longer a sign of plonk.

I realize she is a student with many time commitments, but I wish she would write more.

What Is Going to Happen to the U.S. Dollar?

Recently I posted about my concerns with the growing amount of U.S. debt that is being held by foreign central banks:

Perhaps I am missing something, but I cannot imagine why foreign central bankers are holding so much U.S. debt, but maybe they think there are no better options available. Should they ever decide that better options are available, watch out.

Steve Polos of Export Development Canada sees things differently. His take on the decline in the U.S. dollar is that it is returning to where it was a decade or so ago.

During the emerging market crises of 1997-2001 the U.S. dollar rose against almost all currencies, as investors sought a safe haven. From 1996, the last year of relative calm, the dollar rose by about 30% (on a trade-weighted basis) to its peak in early 2002. Global tensions have eased since then, investors have moved their funds back out into the world, and the dollar has returned to about its pre-crisis level.

Steve doesn't see the recent decline as reason for concern, but I wonder if there might be more going on. I would venture that central bank holdings of U.S. debt are much higher now than they were a decade ago. If, so, the observation that the U.S. dollar has "returned" to the value it had in 1996 should provide little comfort since it could go a lot farther.

Paul Krugman - What's a Measly Two Years?

Paul Krugman used to be a respected and respectable economist. Unfortunately his brain has turned to mush, and he has become the darling of the elitist interventionist semi-establishment. He no longer seems to care whether what he writes makes any sense.

His latest offering in a column in the NYTimes is a discussion of why the current U.S. Social Security system does not discriminate against blacks:

African-American men who make it to age 65 can expect to live, and collect benefits, for an additional 14.6 years - not that far short of the
16.6-year figure for white men.

A two-year difference is huge, and he minimizes it, simply to disagree with those who favour social security reform. With remarks like this, he seems like the epitome of white liberals who deep down don't really care about what happens to minorities.

For more on this and other Krugman idiocies, see Donald Luskin:

So, Paul, can we assume that since two years life is a negligible matter, you would be happy to give up two years of your life so that an African-American can live two years longer? Or are two years only negligible when they are somebody else's -- and especially when that somebody happens to be an African-American?

Cockfighting Revival?

Cockfighting is a gruesome sport. Roosters are outfitted with razor blades on their spurs, and they try to hack each other to death.

The Oklahoma legislature outlawed the blood sport in 2002 because of its cruelty to the roosters, which are slashed and pecked to death while human spectators bet on the outcome. But State Sen. Frank Shurden, a Democrat from Henryetta and a long-time defender of cockfighting, said the ban had wiped out a $100-million industry.

He is trying to re-legitimize the sport. His plan?

To try to revive it, he has proposed that roosters wear little boxing gloves attached to their spurs, as well as lightweight, chicken-sized vests configured with electronic sensors to record hits and help keep score.

"It's like the fencing that you see on the Olympics, you know, where they have little balls on the ends of the swords and the fencers wear vests," said Shurden. "That's the same application that would be applied to the roosters."

As this well-known blogger would say, "Indeed".

Thanks to BrianF and Erica Ritter for the pointers.
Note that Reuters calls it "cockboxing".

Afterthought: Brian just wrote to me that if the industry really is worth $100m, it should lobby the state to build an arena to host the boxing matches.

The Aging Population and Its Effect on Gubmnt Pensions

My friend, Brian Ferguson, sent me this link from the BBC News. It is a very important exploration of the effects of an aging population on the Japanese economy. Brian writes:

Remember when rapid population growth was bad and ZPG [Zero Population Growth] good? The problem, of course, was that we built our social security systems along the lines of overlapping generations models, on the assumption that rates of population growth would maintain constant.

One reason this [link] is interesting (if only to historians of economic thought) is that, back in the late 40s and early 50s there was a line of thought called secular stagnation theory, which held that low post-WWII birth rates would cause a recession if not a depression, on the argument that much consumption expenditure was demographically driven. [note: I remember these "underconsumptionist" theories of Higgens et al. - I was raised on them]. It was an argument that vanished as the magnitude of the post war baby boom became clear. My bet is that the arguments from that period are going to be recycled, and treated as new.

This ties in with social security reform arguments in various countries - if the baby boom group's retirement is financed by saving which has been invested in productive capital, there's no serious problem and, in fact, declining labour supply, by driving up wages, means that the (declining) working age population will not find supporting a retired population that much of a burden. But if we keep putting social security funds into government bonds, we're essentially operating a consumption-loan system with negative impact on capital accumulation and growth, meaning that there will be a real burden on the coming generations. That's not necessarily an argument for individual social security accounts invested in the stock market, as seems to be the rage in the US debate, but it is an argument for shifting social security funds out of government bonds and into markets, as has been going on with CPP. I'm inclined to think that the people who argue that government bonds are the safest form of investment are neglecting the question of where the government will get the funds to redeem them when they come due.

In addition, I wonder where the economic growth for the future will come from if so many of us in the older generations will be engaged in dissaving.

An Exercise in Supply, Demand, and Tied Goods

Ontario's major movie theatre chain has just lowered its ticket prices from $13.95 to $9.95 due to a drop in demand.

Blame the almighty DVD, the splashy home theatre and the comfy armchair in your family room. All those factors were cited yesterday for a stealthy [sic] drop in attendance at movie theatres that prompted Famous Players Inc., the country's largest exhibitor, to chop $4 off its ticket prices in Ontario.

Right. If demand drops, then the profit-maximizing price drops, too, if the firm is anything but a price-taker. One might reasonably expect total revenues to decline, too.

But that is not what is going on here. Quoting Robb Chase, President of Famous Players,

"Box office is up, prices are up, but attendance is what drives the health of the theatre business"

This puzzled me for about 3 seconds. I'm guessing that by "box office" he means "revenue from ticket sales". And as every economics student ought to know, if total revenues increase when the price rises, ceteris paribus, then the firm is pricing its product in the inelastic portion of the demand curve, where marginal revenue is negative.

1. Does this make sense?
2. And if MR is negative, shouldn't a profit-maximizer raise its prices some more instead of lowering them?

1. Yes.

2. No.

Movie theatres earn very large mark-ups on concessions, and they cannot do that if they don't have many people there:

Since 2002, North American box-office revenues have been generally robust, thanks to ever-inflating ticket prices. But admissions have declined in the United States and Canada -- a disturbing trend for movie chains, since the majority of their butter comes from high-margin popcorn and pop sales.

Minor league sports franchises do the same thing -- set prices low, often giving away many tickets on various pretexts, and earn their money with concession sales.

For this pricing strategy to work, customers must be prohibited from engaging in arbitrage with the tied good (eco-speak for banning them from bringing their own snack with them), and it always amazes me that more people don't take their own Milk Duds to the theatre. It is easy enough for the management to stop people from bringing popcorn, and maybe soft drinks, to these events; but how do they police people who bring in their own packs of candy? And why do customers continue to pay these high prices for concessions?

I recall "smuggling" cans of pop into a theatre back when I was a grad student. I also recall deciding not to attend a given ball game when I was informed I wouldn't be able to take my pop and chips into the ballpark with me.

Wall Street Examiner

You might want to give this site a look: The Wall Street Examiner. It is in its preliminary stages right now, and so there is no charge for the articles. I expect it will become a pay site eventually, so go take a look now while you can if you are interested in day-to-day market analysis. One of the authors is the same person who writes as Dr. Stool (see the blog ad), but The Wall Street Examiner is straight analysis and discussion without all the amusing scatological double entendres.

Was September 11th Foreseeable?

In the 1970s a U.S gubmnt committee studied the potential for terrorism. One of its conclusions:

Committee members identified commercial jets as a particular
vulnerability, but raised concerns that airlines would not pay for security improvements such as tighter screening procedures and routine baggage inspections.

``The trouble with the plans is that airlines and airports will
have to absorb the costs and so they will scream bloody murder should this be required of them,'' according to a White House memo from 1972.

``Otherwise, it is a sound plan which will curtail the risk of hijacking substantially.''

Quite clearly the committee was concerned about hijackings, not the use of fully fueled passenger jets as missiles. But equally clearly the committee understood there would be lobbying to deter the installation of increased air safety procedures.
[Thanks to BenS for link]

And now we face the same situation with the threat of shoulder-held rockets [registration required] and airliners:

Rand, a nonprofit research firm, studied military-based antimissile
technology and concluded that adapting it for commercial airlines would be prohibitively expensive and that the equipment would be too difficult to maintain.

...The report acknowledged that the loss of even one commercial jetliner to a shoulder-fired missile would be significant, estimating the cost of the aircraft and legal settlement of numerous deaths at $1 billion. The cost could grow to $15 billion over several months from a single attack, if travelers were then reluctant to fly...

There have to be a lot of conditional probabilities that go into this sort of cost-benefit analysis!

Also notice that questions like these, like it or not, require making a judgement about the value of a human life.

Let's Get Rid of Pennies and Nickels

Over fifteen years ago, I wrote a little piece called "Ban the Penny" in a newsletter called The Econoclast that we put out for working journalists. The piece was picked up by several branches of the MSM, and since then I've become a not-very-regular on talk shows, etc., discussing and sometimes debating this topic. On Wednesday, Jan. 25th, Roy MacGregor published a column in The Globe & Mail ($ubscription required) about his trip to the Royal Canadian Mint and his subsequent interview with me. Here are parts of his column:

"I'd get rid of the penny and the nickel," says John Palmer.

Palmer is the University of Western Ontario economist ... who began lobbying for an end to the penny when its cost was out of all proportion to its value. Now that those costs have been brought back into line, he still considers it worthless to the point where "it seems like a waste of someone's time to roll them."

Palmer wants Canada to follow the lead of Australia and New Zealand and simply dump the smallest coins. He would go that one step further and also eliminate the five-cent piece.

When Roy told me the mint had conducted focus groups on getting rid of the penny, and that many people, especially nostalgic seniors, favoured keeping it, I wrote back to him:

Focus-groups, schmocus groups -- it's time for courageous leadership. Furthermore, I don't believe the results -- Canuck seniors aren't all THAT different from Aussie or Kiwi seniors.

... I want the gubmnt to show real courage and get rid of the nickel, too. Let's round everything off to the nearest single decimal point. The simple fact is that prices and incomes are somewhere between 20 and 100 times what they were a century ago, and there is no reason to keep those meaningless little coins around -- they won't buy much, if anything, anyway.

A former director of the Mint once told me that they keep minting pennies because the banks keep ordering them. I understand his position; it isn't up to the mint to make this decision --- it's up to Parliament, and we won't likely see a decision on this topic so long as we have a minority gubmnt. How unfortunate.
Here is a link to one of the pieces I wrote on banning the penny.

Let me re-emphasize that even though this all started with a campaign to "ban the penny", the campaign should be expanded to get rid of the nickel, too. To quote MacGregor one more time:

"Moving down to one decimal point, the dime, seems to make sense everywhere but at the gas pump," Palmer says.

Gubmnt Soup and the Libertarian Diet

My friend, Ken E., talked with me at length last fall about the importance of eating natural meats and eggs and cutting down on the carbs. Sort of like the Atkins or South Beach diets, I guess, but not exactly.

And now, I see from Tom Luongo's blog, that maybe all the ruckus about diets has something to do with gubmnt intervention in agricultural markets. One of the books he mentions is There's a Government in Your Soup -- sort of a libertarian's guide to food.

Tom's review (and discussions of diet) are amusing and interesting -- well worth reading. And so are the Amazon reviews of this book. Here is a quote from Tom:

Basically, the Libertarian Food groups are:
1) Meat
2) Fat
3) Salt
4) Hot Peppers
5) Alcohol

Yeah, that pretty much sums up my diet, which is augmented only by
some good cheese and bowlfuls of whole nuts.

Well, I will have to ease into that hot pepper thing;

meanwhile, I'm working on building up my alcohol intake.

And, based on the polymeal, don't forget the chocolate.

More on the Summers Flap?Well, maybe...

How many ways are men and women different? Do you think they differ in their abilities to deal with climate change because a smaller percentage of women know how to swim? Well, here is someone who does....

groan.

[Thanks to Brian F for the tip.... I think]

and let me add that it would probably be a mistake to attribute anything to the fact that the person who said this is Canadian.

The Optimal Diet

If you try to adjust your diet to take into account all the recent news about the health effects of various foods, what would you end up eating? Here's a list, called the Polymeal, from the British Medical Journal (subscription required but the list below is from this summary):

Eating 4 oz. of fish four times a week cuts the risk of cardiovascular
disease by 14 percent, while 14 oz. of fruits and vegetables per day lowers risk another 21 percent. Add 2.4 oz. of almonds and 1/10 oz. fresh garlic for proven cholesterol lowering, and enjoy an average 5.1mm Hg drop in systolic blood pressure when you top it off with 100g of dark chocolate. Of course no Polymeal would be complete without a daily 5 oz. glass of wine (any variety), shown to cut overall cardiovascular disease risk by 32 percent.

[Thanks to BenS for the pointer] I'll post about the libertarian diet tomorrow.

UPDATE: It turns out the original piece in the British Medical Jl was probably intended as satire. It hooked numerous members of the media. [Thanks to Craig Newmark for the tip] See here and here, for more information. All the more reason to consider the libertarian diet I'll be posting about tomorrow.

I Am a Closet Austrian

I am concerned about the growing U.S. federal gubmnt fiscal deficit. Much of this debt is being held by foreign central banks.

Perhaps I am missing something, but I cannot imagine why foreign central bankers are holding so much U.S. debt, but maybe they think there are no better options available. Should they ever decide that better options are available, watch out.

According to Tyler Cowen, these concerns might qualify me for membership in the Austrian School of Economics:

If I believed in Austrian business cycle theory,

1. I would think that Asian central banks, by buying U.S. dollars, have been driving a massive distortion of real exchange and interest rates....

4. I would think these trends cannot possibly continue. Asian central banks may come to their senses. Furthermore the U.S. would be like an addict who needs an ever-increasing dose of the monetary fix. This, of course, would eventually prove impossible.

5. I would think that the U.S. economy is due for a dollar plunge, and a massive sectoral shift toward exports. Furthermore I would think it will not handle such an unexpected shock very well....

So far so good, but read the whole thing for some interesting implications. Also, see this article in the NYTimes.

...should the dollar continue to fall - if, for example, global
investors determined that Mr. Bush did not have the will to hold spending down - it would not only add to tensions, analysts said.

At the same time,

Administration officials, along with a number of like-minded
economists, contend that the nation's record trade and current account deficits are not particularly worrisome, a reflection more of strong foreign interest in investing in the American economy than any sign of global weakness.

Judging from this different piece in the NYTimes, I wonder if the U.S. Fed is becoming Austrian as well....

Snopes Again

I have sung the praises of snopes.com before because of the diligence with which the site debunks internet hoaxes. Here are two really weird internet ads I found through snopes (thanks to AlexK for the pointer).

This first one takes a LOOOOnnnnnggg time to load. As Alex says, wait for it to load, watch it, and then read the text. [warning: not everyone will think it is in good taste -- it reminds me of the VW bug ad that said, "If Ted Kennedy had been driving one of these he'd be president today"].

The second one appears to be a real Burger King ad, called "the subservient chicken".

Numb3rs: Not as Good as the Reviews

All three of the teams I was cheering for on Sunday lost: the Falcons, the Steelers, and Numb3rs. I was really looking forward to the premier of Numb3rs, a crime show in which the hero is a mathematician who used probability and location theory to solve a set of serial rapes. Unlike the reviews (see here and here and here), I was disappointed.

The pace was uneven, with some sections moving far too rapidly and others dragging. Also, the mathematics used was extremely vague (in fact I wonder if such mathematical algorithms already exist, and if they do I expect they are related to location theory and mathematical urban economics). I was really hoping for a clearer explanation of what the hero was doing, rather than the magical hand-waving that took place.

But worst of all, the theme was this: a math geek tries to solve a crime but foolishly leaves out the human element; once he takes that into account, he helps solve the crime in the end.

I give it a 6 out of 10. I hope it gets better.

Privatizing a Gubmnt Monopoly

For several years, the Province of Ontario has been making noises about privatizing its monopoly over the retail sales of liquor and wine [The Liquor Control Board of Ontario (LCBO)]. The LCBO is a monopoly that returns profits to the province of nearly $1billion per year. How much do you think the province could receive if it were to sell off the LCBO monopoly to a private investor?

As all good economists would say, "That all depends."

If the gubmnt sells the right to continue to extract monopoly rents (and impose higher transportation costs on consumers by having too few outlets), then it will receive only the net present value of the expected future profits of the purchasing firm. Consumers will not be any better off, and given that a monopoly purchaser would probably face more risk and a higher cost of capital than the province, there is a very good chance that the monopoly is worth more to the provincial gubmnt than it would be to anyone else.

This is the nub of the argument made in a series of television ads over the past several years from the employees of the LCBO. But it misses the point. If the gubmnt isn't going to get rid of the monopoly, there probably isn't much point in privatizing the LCBO!

The main goal of privatization should be to increase overall welfare [however that is determined is always a puzzle]. But if the goal is to make people better off in general, there is a tonne of compelling theory and evidence that competitive markets work best. And so if the gubmnt of Ontario decides to privatize the LCBO, it should also guarantee free entry into liquor and wine retailing. Of course, no private entrepreneur would pay much for the existing monopoly if they knew there would be free entry into the market, a point made really well by Terence Corcoran
[National Post; Date: Jan 22, 2005; Section: FP Comment; Page: 49, pd. subscription required] in his piece "LCBO Not Fit for Sale" [Thanks to Jack for the reference]:

Replacements for the LCBO’s stranded assets would be productive,
profitable and efficient operations run by supermarkets and specialist retailers — all of which would be much better for the Ontario economy than the dead-weight drain of the LCBO.

There are two issues here. First, even if pricing isn't deregulated, consumers will be made better off if they can shop more conveniently for wine and liquor, say in corner variety stores, grocery stores, or Wal-Mart. Second, consumers will be made even better off if various retail outlets compete on the basis of price, too.

The point is, it should not be about who gets the right to extract monopoly rents from consumers. It should be about increasing consumer surplus and reducing the costs of providing the services to consumers.

There is only one reason the LCBO employees spent so much money on their ads: they are getting a healthy chunk of the monopoly rents being extracted from consumers, and making the market more competitive would return these benefits to consumers.

The Real Tragedy was Summers' Apology

I was quite disappointed to read that Harvard's economist president, Larry Summers, apologized so profusely for his remarks about why there is a paucity of women in mathematics and the physical sciences at Harvard and elsewhere. He made an empirical statement, and if anything he should have been called to task on that statement, nothing else.

Steven Pinker agrees (see here for the link to Pinker and more).

"People who storm out of a meeting at the mention of a hypothesis, or declare it taboo or offensive without providing arguments or evidence, don't get the concept of a university or free inquiry."

Also check out the posts by Phil Miller [co-blogger at The Sports Economist] and Sparky at SCSU Scholars.

Now, in addition to the two op-ed pieces run yesterday, the NYTimes has an article (registration required) that highlights two important observations/ facts/ hypotheses/ phenomena: (1) there are differences between men and women, (2) these differences notwithstanding, there is a tendency to discriminate against women in math and science.

Yet despite the desire for tidy and definitive answers to complex questions, researchers warn that the mere finding of a difference in form does not mean a difference in function or output inevitably follows.
"We can't get anywhere denying that there are neurological and hormonal differences between males and females, because there clearly are," said Virginia Valian, a psychology professor at Hunter College who wrote the 1998 book "Why So Slow? The Advancement of Women." "The trouble we have as scientists is in assessing their significance to real-life performance."

I think it is silly to deny there are differences between men and women. I think it is objectionable to question the appropriateness of examining the effects of these differences.

At the same time, I think there is little doubt that women in particular and society in general have suffered from discrimination against women in the sciences (see here and here for some pieces I wrote on this topic).

As for the NBER incident, I find it really objectionable that Summers apologized.

UPDATE: Anne Kingston of the National Post agrees, in no uncertain terms [$subscription required, thanks to Jack for the pointer]:

Lawrence Summers should be fired. Not for his musings on the
scarcity of female scientists at elite universities, comments that have been taken wildly out of context by the media. He should be axed as Harvard University president for his reflexive, cowardly bowing to political correctness. He issued three -- three! -- grovelling apologies for remarks he says he didn't even make. And then he tried to sweep the brouhaha away by throwing money at it -- US$25-million to promote hiring women and minorities and thus prove what an enlightened guy he is. Fabulous. So now women given tenure at his fancy school will live under the shadow that they're there not because of merit but PC affirmative pity.

Substitution Effects and Racial Profiling

Regardless of whether you think racial profiling is a form of evil discrimination or a necessary part of security, be sure to read Posner's latest entry on this topic. His main point is that racial profiling will cause substitution effects, which he expects to be quite large: if one race is targeted, then criminals and terrorists of other races will emerge as successful groups. If this empirical assumption is correct, then racial profiling will have little effect on crime rates or national security. My own priors are that the substitution effects are smaller than he assumes.

Grade Inflation

For over thirty years, the Economics Department at The University of Western Ontario has had the same grade guidelines for its introductory course. Slight variations are tolerated, and any prof who turns in marks that are too low will usually have them accepted. I.e., the guidelines serve more as an upper limit than a lower bound.

Why do we do it? to maintain horizontal equity across the sections (even though some profs probably teach better and some sections may have brighter students) and longitudinal equity from year-to-year. Needless to say, grade inflation is not a problem in our introductory economics courses. If only everyone else had had the courage to do the same thing.

It seems that grade inflation has gotten way out of hand in many schools. See this chart for example. Now Princeton is so concerned, they are doing something about it. [thanks to Jack and JC for the links; the story is also available here]. Harvard, Northwestern, and Duke are also mentioned as universities trying to do something to curb grade inflation.

And to the extent that students respond to incentives, the heightened competition for grades will almost surely lead to more studying and harder work by many students.

If the reaction of Princeton students is any indication, limiting honors
may mean sharper elbows. Princeton students — never exactly slackers — have been studying even harder this semester, said Tom Brown, executive secretary of the student government.

The problem with imposing tough grading standards is that if one school or one department crack down on grade inflation, it is difficult to convince students they won't be harmed. Unless students believe that grades are adjusted according to where they are earned, they will switch out of the tougher majors and tougher schools. This response makes it very difficult for each department or university to maintain grading standards so long as others are inflating their grades to make it easier for students to be admitted to professional or graduate schools.

Tsunami Relief: Income and Substitution Effects

There has been considerable debate/discussion of the question "Will all the outpouring of donations for tsunami relief reduce the amount of donations to other charities this year?" I raised this question in an earlier post, but the topic has come under heavy discussion by Daniel Gross in Slate and Virginia Postrel at the dynamist blog, both linked to by Daniel Drezner [thanks to Ben Muse for the pointer].

What if there has been an income effect from gubmnt donations? This effect would be analogous to "Ricardian Equivalence":

In simple terms, the theory can be described as follows. Governments may either finance their spending by taxing current taxpayers, or they may borrow money. However, they must eventually repay this borrowing by raising taxes above what they would otherwise have been in future. The choice is therefore between "tax now" and "tax later".

The analogy would be that if the gubmnt is going to donate money to tsunami relief, it will eventually have to figure out some way to pay for those donations. Ricardian Equivalence (coupled with rational expectations) would imply that potential donors will anticipate that taxes will increase either today or in the future to pay for these increased gubmnt donations. This anticipated reduction in wealth will tend to induce potential donors to reduce their own giving today.

Condi Rice, Adam Smith, and the Invisible Hand

Back in November, The Times Online (UK, not NY) published a very interesting biolography of Condoleezza Rice [Thanks to BrianF for the pointer]. In case you missed it, here are some excerpts:

The family lived in Titusville, one of Birmingham’s black
middle-class neighbourhoods, a close-knit community in which the Rices sheltered their daughter from the harsh realities of segregation....

[Condi's mother], Angelena Rice devoted herself to her daughter’s
intellectual and artistic development. With piano lessons and a full schedule of training in other subjects, Condi gained self-discipline long before she started school. “It was a very controlled environment with little kids’ clubs and ballet lessons and youth group and church every Sunday,” she recalled later.
...

Rice’s mother refused to play by the Jim Crow rules. She stood her
ground. One confrontation took place at a department store, where Angelena and Condi were browsing through dresses. Condi picked one she wanted to try on, and they walked towards a “whites only” dressing room. A saleswoman blocked their path and took the dress out of Condi’s hand. “She’ll have to try it on in there,” she said, pointing to a storage room.

Coolly, Angelena replied that her daughter would be allowed to
try on her dress in a real dressing room or she would spend her money elsewhere. Angelena was composed, firm and resolved. Aware that this elegantly dressed black woman would not back down, the shop assistant decided that her commission was worth more than a public incident and ushered them into a dressing room as far from view as possible.

So the shopkeeper was led, as if by an invisible hand, to participate in racial integration because doing so would make her better off. Why? because people respond to incentives.

A survey of right-of-centre bloggers indicated Condoleeza Rice ranks number one as their most desired nominee to be the Republican presidential candidate in 2008. It would interesting, to say the least, to go experience a campaign between Rice and Hillary Clinton. [survey link from Tom Hanna]