Tuesday, August 30, 2011

Hurricane Economics

Today, I read two interesting perspectives on the clean up after a hurricane. First, Russ Roberts:
The hurricane increases the demand for glaziers and that is good for glaziers. But that is good for all glaziers, employed and unemployed. It pushes up the price of glass repair. That discourages some folks from having glass work done who otherwise would have done it. So there is some offset of the hurricane’s impact on glazier employment.
The important point is that the resources for clean up have to come from somewhere, and those diverted resources represent a cost to society.

Second, once disaster strikes, how do we pay for it: spending cuts of tax hikes (update: or debt)? Here's Paul Krugman:

What the government should do, in this case, is set all the marginals equal: the marginal benefit of an additional dollar spent on bombs, dental work, national parks, soup kitchens, etc, should all be equal, and this common marginal benefit should equal the marginal cost of raising an additional dollar of revenue.

Now suppose a disaster strikes. What this does is raise the marginal benefit of spending on disaster relief. The appropriate response is to move all the marginals to get them in line: spend less on everything else, and also raise more in taxes. So even there it shouldn’t be all offsetting spending cuts.

Both perspectives portray an important part of the picture when it comes to the economics of natural disasters. Roberts: Disasters are costly, even if it looks like "stimulus." Krugman: When faced with a disaster, we want to choose the least costly ways to clean up after them. This involves setting marginal benefit equal to marginal cost. There is something to be said for both of these perspectives.

Update: (HT: Mankiw) Steve Landsburg attacks the Krugman post. Here is the key excerpt, which I think is mostly right:
To get a little wonkier, there are actually two separate points here. First there’s the point that comes from public finance: Unless you believe that everything is perfect to begin with, the Ricardian argument fails, leaving you with no reason to believe that the cost of new spending should be spread widely. Instead, you should start by cutting back on your least wise activities. Cantor and Krugman probably have some legitimate disagreement about what those least wise activities are, but neither of them has any reason that I know of to believe that all activities are currently equally wise at the margin. I’m guessing that if Cantor had proposed paying for disaster relief entirely through an tax increase on the very rich, that Krugman would not have been so quick to dissent with an appeal to Ricardian public finance.
Basically, if we have a wasteful enough starting point, we could finance the disaster relief strictly by spending cuts to the most wasteful programs. But, this point begs the question. Why wait for disaster to cut this excess spending? If that spending is so bad, we want to cut it whether or not there was a disaster.

My interpretation of Krugman's initial post is that we should look for the lowest cost ways to finance emergency spending (indeed by equating MB and MC). Krugman argues that issuing more debt combined with moderate spending cuts to the most wasteful programs is lowest cost, but Landsburg makes a good point. If you believe that enough of our government spending is wasteful, you could finance disaster relief by merely cutting the waste. And, that might be the best plan of action going forward.

Update 2: Krugman responds and Landsburg responds back.

Sunday, August 28, 2011

Potato Chips: Analysis of Conflict

A random thought occurred to me today when we made our (infrequent, monthly) trip to the grocery store. Whenever I buy myself a bag of chips at the grocery store, I feel like I am making a purchase for someone else (my future self, FutureMe) and I am not sure that FutureMe will like my selection of chips.

On a larger scale than shopping for potato chips, Xan posted an interesting discussion on the preference conflict problem when a person has multiple selves:
But right now I just want to make a simple remark. As soon as there is any disagreement whatsoever between different instances of "your" preferences, what's to say which is the "true" or "right" set of preferences? Six years in advance you want to abstain from the beer and chips. In six years, you don't. What does it mean to say the advanced preferences are the "real" ones? In some sense there are simply many agents with different preferences in conflict with each other, doing what they can to get their way. Now perhaps most agents agree that You-2017 should not go for the chips, while You-2017 disagrees, in which case are we really making a comment about social optimality when we say You-2017 is in "error"? And if social optimality is on the table, by all means, please tell me: what weights are we using? How is it related to the discounting that's already taking place? It is so very nice if preferences start out consistent, because then everyone agrees on everything...but as soon as there's disagreement, there's a big discussion to be had. (More to say, another time).
Back at the potato chip aisle, CurrentMe doesn't know what mood FutureMe will be in when reaching for the bag of chips. A further complication to CurrentMe's shopping decision is that there are multiple FutureMes to appease. There's FutureMe who delights in eating the chips and there's FutureMe who has to go to the gym to work off the calories that previous FutureMe ingested.

There's an extensive form game in there somewhere, but for now, CurrentMe just bought both bags of chips. I think I'll leave it to my FutureMes to duke it out.

Thursday, August 25, 2011

Why I Read Comments on Blog Posts: Apple Edition

Today, I read an interesting post by Russ Roberts at Cafe Hayek about Steve Jobs and his work at Apple. Although the post is good, the discussion in the comments is especially good on this post. Case in point is this excerpt from a comment by Mark:
At that same time, Apple was written off for naught in the computer industry. Microsoft was declared the winner of the market. Aside from their personal computer business, Apple came up with the iPod. I remember walking through the student union building while in college at that time and seeing an ad for the iPod. I didnt get it. To me, one of the pleasures of buying a CD was being able to open up the insert, read it, and look at the artwork. I didnt understand the iPod because you cannot do that with digital music. But it was only two or three years after my initial rejection of this product when I first bought one and understood why it was revolutionary.
I agree. iDidn't get it either for a long while, but now I do. Don't just stop with Mark's comment. The whole comment thread is worth a read.

Sunday, August 21, 2011


If I were writing an exam for intro-to-intermediate microeconomics (or MBA microeconomics), this article from CNN Money would be a scenario on the final exam:
Total chicken production in the first half of 2011 rose 4% compared to the same period a year ago, while demand for chicken has cooled, according to the National Chicken Council.

Consequently, retail prices for chicken product have dipped.

The Department of Agriculture, keenly aware of these issues, announced Monday that it will make a special purchase of up to $40 million of chicken products, which the government will then donate to federal food assistance programs such as soup kitchens and its national Feeding America programs.
Even more interesting, this program seems to kick in whenever the price for chickens drops ... and prices have been low as of late:
The government made a similar move with a $30 million purchases of chicken products last year and a $42 million purchase of chicken products on 2008 with the intention of stabilizing retail prices.
If this is for your first economics class, the exam question would be a fairly difficult and open-ended one (though it could easily be narrowed down with more leading questions and some parts are easier than others):

What are the likely consequences of the USDA chicken-buying policy? Compared with no chicken-buying policy, how does this program affect private quantity demanded? Quantity supplied? Price? Will the government program stabilize prices as intended? Evaluate the efficiency consequences of this policy. Use a well-labeled graph and state any assumptions you need to make along the way.

Monday, August 15, 2011

Some Strings Attached

Here's an interesting article on the political trappings of financing economics education:

"If somebody says, 'We're willing to help support your students and faculty by giving you money, but we'd like you to read this book,' that doesn't strike me as a big sin," said Rasmussen of the BB&T arrangement, which the bank has with about 60 schools. "What is a big sin is saying that certain ideas cannot be discussed."

Nor does he fear that the agreements with Koch and BB&T will prompt future donors to demand control over hiring or curriculum.

Said Rasmussen, "I have no objections to people who want to help us fund excellence at our university. I'm happy to do it."

The article also has an interesting discussion of an agreement that allows the Koch foundation to sign off (or not) on new faculty in the Florida State University economics department (HT: Allison)

Friday, August 12, 2011

More on the Income Elasticity of Having Children

As a follow up to my post about whether children are normal or inferior goods, here is a paper on the topic that uses shocks to husband income to learn about the fertility choices of women.
Although many papers have attempted to reconcile economic theory with the commonly observed negative relationship between income and fertility, little is known about the causal nature of the relationship. This paper explores the causal link by analyzing women's fertility response to the large and permanent income shock generated by a husband's job displacement. I find that the shock reduces total fertility, suggesting that the causal e ffect of income on fertility is positive. A model that incorporates the time cost of children and assortative matching of spouses can simultaneously explain this result and the negative cross-sectional relationship. I also find that the income shock accelerates childbearing. This finding is consistent with life-cycle models of fertility in which a husband's earnings growth provides an incentive to delay having children.
Interesting abstract. I haven't yet read the paper, but the conclusions are just as I expected (possibly, confirmation bias?). As of 2010, the paper is published in the Journal of Human Resources.

Wednesday, August 10, 2011

Don't Do It With Models: A Model

So says Xan in an interesting post:
Empirically, we may find that relationship length is decreasing in attractiveness of the other party, over the range of time during which a lot of hidden characteristics are discovered. Hmm. (Perhaps economists shouldn't do it with models after all).
That probably depends on what kind of model you're talking about. After all, Xan's post is a really interesting exposition on matching models. If you're interested in the economics of matching, the entire post is worth a read -- though I admit that I am only through half of the "extensions" section.

Monday, August 8, 2011

A Random Smattering of Shifting Baselines

Here is Russ Roberts on a Keynesian Theory of Aging:
Of course he is right. So the puzzle is why do I look older than when I first arrived at GMU? And the answer is that if it weren’t working at GMU, I’d look even older than I do.
Roberts refers to this idea of a shifting baseline as a "Keynesian" theory of aging. This is somewhat unfair to the logical construct as Keynesians are not the only ones who resort to the shifting baseline argument. It crops up everywhere in economics (and outside of economics). In fact, a quick search of Wikipedia results in another common shifting baseline in economics: inflation.
A conceptual metaphor for a shifting baseline is the price of coffee. A cup of coffee may have only cost a $0.05 in the 1950's, but in the 1980's the cost shifted to $1.00 (ignoring inflation). The current (21st century) coffee prices are based on the 1980s model, rather than the 1950s model. The point of reference moved.
That's not usually the way we describe inflation (and the language is a little odd: "1980s model"), but the logic is right. When comparing grandpa's 5 cent candy bar to my $1 candy bar (note: I shifted from coffee to candy bars), the baseline -- or the level of the prices -- is different.

Another topic where shifting baselines comes up is discounting future costs and benefits. As I have discussed on this blog before, not every cost-benefit analysis does this even though discounting should be common practice.
Suppose we also know the following facts with certainty:
  • In 2059, there will certainly be an environmental catastrophe that costs one billion dollars (in today's dollars) to clean up after the fact.
  • A savings account gets three percent real return per year for every year between now and 2059.
If we set aside $228 million dollars today [$1 billion / (1.03^50)] , the account will mature in 2059 with one billion dollars -- enough to cover the expense of the catastrophe. This means that $228 million is the real cost of a billion dollar expense 50 years into the future.
If you want to be really conservative (and report a large estimate of future costs), let's use a smaller interest rate: the 2011 interest rate (Electric Orange checking from ING Direct yields 1.10 percent APY on deposits greater than $50,000). Using a 1 percent rate, $608,038,825 deposited today leads to $1 billion in 2061, but that $400 million difference ($1 billion - $600 million) is still nothing to sneeze at.

All this discussion reminds me of a wonderful series of Greg Mankiw updates on unemployment and the stimulus. Here was the first post:
What does this mean? One interpretation is that the fiscal stimulus has failed to achieve what Team Obama thought it would. Another interpretation is that the baseline was worse than they believed at the time. I am confident the report authors would adopt the second interpretation. If so, that fact is consistent with what I said in a previous post: In light of the shifting baseline, it is impossible to hold the administration accountable for whether its policies are achieving their intended effects.
He updated it for a long time after the original post. Here is the graph from February 2010 (produced by innocentbystanders.net):

A final point: Mankiw is a Keynesian (technically, New Keynesian).

Thursday, August 4, 2011

Pigheadedness and Science

An interesting piece in the NYTimes:
In a classic psychology experiment, people for and against the death penalty were asked to evaluate the different research designs of two studies of its deterrent effect on crime. One study showed that the death penalty was an effective deterrent; the other showed that it was not. Which of the two research designs the participants deemed the most scientifically valid depended mostly on whether the study supported their views on the death penalty.

In the laboratory, this is labeled confirmation bias; observed in the real world, it’s known as pigheadedness.

In the spirit of the article, this confirms my perspective on the role of pigheadedness in science (HT: Dana Chandler, via Google+).

Monday, August 1, 2011

Ely on Econometrics

Here is an excerpt from a fantastic post on applied statistics by Jeff Ely:

A big part of the explanation is that statistics is a rhetorical practice. The goal is not just to convey information but rather to change minds. In an imaginary perfect world there is no distinction between these goals. If I have data that proves H is false I can just distribute that data, everyone will analyze it in their own favorite way, everyone will come to the same conclusion, and that will be enough.

But in the real world that is not enough. I want to state in clear, plain language terms “H is false, read all about it” and have that statement be the one that everyone focuses on. I want to shape the debate around that statement. I don’t want nuances to distract attention away from my conclusion. In the real world, with limited attention spans, imperfect reasoning, imperfect common-knowledge, and just plain old laziness, I can’t get that kind of focus unless I push the data into the background and my preferred intepretation into the foreground.

The whole post is worth a read. This perspective reminds me of Dierdre McCloskey's Rhetoric of Economics. There's more to that perspective, but it is also worth a read.