Monday, December 17, 2012

We are number 12

The Legatum Institute in England has a ranking of nations by prosperity. Prosperity is more in their index than simple per-capital income. It includes a variety of other factors such as health, safety, governance, and personal freedom. The U.S. has fallen out of the top ten for the first time that the index has been computed. We are now at 12.

Wednesday, December 5, 2012

McArdle on price discrimination

Megan McArdle has an interesting piece on Groupon and pricing discrimination:

Coupons basically serve two functions for businesses--advertising, and price discrimination.  Advertising means it brings in new customers by making them aware of your service, or giving them an incentive to try it.  Price discrimination, on the other hand, is what food processors do with grocery store coupons: it lets them sell their products to customers who are very price sensitive, without lowering the price paid by people who are too busy or embarassed to clip coupons.
As far as I can tell, small businesses viewed Groupons largely as the former....

The problem is that for consumers, it seems mostly to have been about price discrimination....

Sunday, November 18, 2012

Banking in 1947

I saw this video of banking in 1947 on another economics blog a few days ago. A lot has changed in the 65 years since it was made.

Monday, October 22, 2012

Student debt

From an article at
The average amount of debt for 2011 graduates at Indiana’s public, four-year colleges rose to $27,500.
 If that is the average, there must be some with very big numbers because there are certainly many with no debt at all. The article has no information about debt of graduates from private colleges.

The piece contains this idiotic statement:
“In these tough times, a college degree is still your best bet for getting a job and decent pay,” Asher said.
There is a difference between correlation an causation. Most highly motivated and highly intelligent students go to college, while most students with little motivation and little intellectual ability do not. The differences in outcomes between those with college certification and those without may mostly reflect these a-priori differences, not value added from college.

College is a very good decision for some people but it is a very bad decision for others. If those who will not benefit from college not only go to college but rack up huge debt in the process, college can be something that will ruin their lives. One of the unseemly aspects of college admissions is that in the quest to fill seats, many colleges make little or no effort to separate those who will benefit from those who should be pursuing other options. Rather they spout nonsense like the statement of Mr. Asher. Many faculty are aware of the problem, but because their livlihood depends on admissions, they try their best to ignore it.

One of the benefits of being a retired academic is that I am no longer part of this system.

Thursday, October 11, 2012

An effective political ad

Bank failure and the financial crisis

From a book review on the financial crisis:

•When the FDIC took over Washington Mutual, it paid uninsured depositors in full using money that would have gone to bondholders. Writes Mr. Allison: "This was in complete contradiction to past practice. The bondholders suddenly realized that there is no rule of law when government regulators are involved…The decision to treat WaMu bondholders this way closed the capital markets for banks."

Another review here.

Saturday, July 28, 2012

Thanks, Illinois

Illinois, with its high tax on cigarettes, is helping fund the government of Indiana. The Laffer curve in action.

Addendum: One has to wonder why the Illinois politicians hate poor people so much. The cigarette tax is one of the most regressive taxes we have. Smoking is primarily a vice of the poor.

Friday, June 29, 2012

Does fiscal policy work?

The military buildup or World War II is often cited as a successful prediction of Keynesian economics. Usually forgotten is what happened at the end of the war. David Henderson summarizes:
In a 2010 study for the Mercatus Center at George Mason University, I examined the four years from 1944, the peak of World War II spending, to 1948. Over those years, the U.S. government cut spending from a high of 44 percent of gross national product (GNP) in 1944 to only 8.9 percent in 1948, a drop of over 35 percentage points of GNP. The result was an astonishing boom. The unemployment rate, which was artificially low at the end of the war because many millions of workers had been drafted into the U.S. armed services, did increase. But between 1945 and 1948, it reached its peak at only 3.9 percent in 1946. From September 1945 to December 1948, the average unemployment rate was 3.5 percent.

There was a sharp decline in real GNP at the end of the war, but Henderson says that is an artifact of the ending of price controls. The price controls hid what the actual prices were, so the jump in the price index was not capturing a real rise in prices. But that illusion of a jump resulted in a decline in reported real GNP. (An implication of this is that real GNP was overstated during the war because the price index was not capturing the rise in prices.)

How does Henderson explain the boom?

But why did this postwar boom occur? The answer, in a nutshell, is that the U.S. economy went from being centrally planned, with price controls and government allocation in large sectors of the economy, to being much more free market. During the New Deal, Franklin Roosevelt had many advisors who were hostile to free markets. But during the war, Roosevelt, although he centrally planned the economy for the duration, kicked out most of his anti-market advisors, people like Ben Cohen, William O. Douglas, trust-buster Thurman Arnold, price controller Leon Henderson, and Felix Frankfurter. In 1945 and 1946, Harry Truman got rid of the remaining New Dealers, including two of the most prominent ones: former Vice President Henry Wallace and Harold Ickes.

Tuesday, June 19, 2012

Facts matter

Dierdre McCloskey argues that many assumed facts that underlie the thinking of progressive intellectuals is false. A small sample:

Unions raised wages for plumbers and auto workers but reduced wages for the non-unionized.  Minimum wages protected union jobs but made the poor unemployable.  Building codes sometimes kept buildings from falling or burning down but always gave steady work to well-connected carpenters and electricians and made housing more expensive for the poor.  Zoning and planning permission has protected rich landlords rather than helping the poor.  Rent control makes the poor and the mentally ill unhousable, because no one will build inexpensive housing when it is forced by law to be expensive.  The sane and the already-rich get the rent-controlled apartments and the fancy townhouses in once-poor neighborhoods.
 He also has a very Schumpeterian line: "Efficiency is not the chief merit of a market economy: innovation is."

Read the whole thing.

Thursday, May 24, 2012

Common problems in government

An excerpt from a longer post by Jonathan Adler.

One thing that Hardin overlooked is that the political process often replicates the same economic dynamic that encourages the tragedy of the commons -- a dynamic fostered by the ability to capture concentrated benefits while dispersing the costs. Like the herder who has an incentive to put out yet one more animal to graze, each interest group has every incentive to seek special benefits through the political process, while dispersing the costs of providing those benefits to the public at large. Just as no herder has adequate incentive to withhold from grazing one more animal, no interest group has adequate incentive to forego its turn to obtain concentrated benefits at public expense. No interest group has adequate incentive to put the interests of the whole ahead of the interests of the few. The logic of collective action discourages investments in sound public policy just as it discourages investments in sound ecological stewardship. This, in addition to the pervasiveness of special-interest rent seeking, explains many of the failings of centralized regulation.

Wednesday, April 18, 2012

Incentives can destroy solidarity

The importance of incentives, in a New Altlantis article discussing the gruesome Chinese population policy:

Facing this reality, in 1988 the government in some provinces compromised just a little and agreed that couples who had a daughter as their first child would be allowed one more try to have a son — provided that there were no unauthorized births or other violations of the population policy by anyone in the couple’s village during that year. While giving a bit on the population front, this “reform” had the salutary effect — from the totalitarian point of view — of destroying peasant solidarity, which previously had acted to shield local women giving birth in hiding. Instead, hysterical group pressure was mobilized against such rebels, with everyone in the village transformed into government snoops to police their neighbors against possible infractions.

Saturday, April 14, 2012

Time for Word to die?

Not only is it bloated, but it was designed for printing, not for publishing on the web, a task that perform very poorly.

Thursday, March 22, 2012

Why Nations Fail

From the New York Times Magazine, a piece on a book by two economists, Daron Acemoglu and James Robinson
According to Acemoglu’s thesis, when a nation’s institutions prevent the poor from profiting from their work, no amount of disease eradication, good economic advice or foreign aid seems to help. I observed this firsthand when I visited a group of Haitian mango farmers a few years ago. Each farmer had no more than one or two mango trees, even though their land lay along a river that could irrigate their fields and support hundreds of trees. So why didn’t they install irrigation pipes? …. But these farmers also knew that nobody in their village had clear title to the land they farmed. If they suddenly grew a few hundred mango trees, it was likely that a well-connected member of the elite would show up and claim their land and its spoils. What was the point?

If national institutions give even their poorest and least educated citizens some shot at improving their own lives — through property rights, a reliable judicial system or access to markets — those citizens will do what it takes to make themselves and their country richer.
Read the whole thing--it is worth the time.

The book that prompted the article is Why Nations Fail: The Origins of Power, Prosperity, and Poverty.

The book seems to agree with Hernando de Soto, who made a similar argument about economic development in The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else. I suspect that their arguments about economic decline share a lot with Mancur Olson's The Rise and Decline of Nations: Economic Growth, Stagflation, and Social Rigidities.

(Also on the topic of property rights, I see a lot of buzz for the movie The Lorax. I doubt if more than one person in a thousand who reads the original book or watches the movie will think, "The problems here is poorly defined property-rights. If someone owned the trees, that person would speak for the trees." To understand the problem, one must know a bit about economics, a type of knowledge that is rare.)

Update: William Easterly reviews the book for the Wall Street Journal here.

 Update 2: Francis Fukuyama eviews it here He likes it, but has reservations. A couple quotes:
If growth is a byproduct not just of good policies like trade liberalization, which can in theory be turned on like a light switch, but rather of basic institutions, then the prospects of foreign aid look dim. ... Bad institutions exist because it is in the interests of powerful political forces within the poor country itself to keep things this way.