The Economic Way of Thinking

Best and Worst of the Decade

CNBC has a new report out that says Ukraine was the best performing stock market between 2000 and 2009; Brazil was the best over the past year:

Ukraine — in spite of the fractiousness of its political elite in recent years — that offered an unbeatable return of nearly 900 percent over the decade, data compiled by Reuters show.

The best performing stock market in 2009 was Brazil whose Bovespa Index surged a blistering 145 percent in dollar terms, fueled in part by the 29 percent rise in the value of its real currency versus the greenback.

According to the same story,

Shares in Bahrain and Slovakia were the worst- performing globally in both local-currency and dollar terms, with losses of some 20 percent.

While many factors influence stock market returns, I wondered about whether or not economic freedom changes may be the source of some of the variation. 

Since 1995, Ukraine's economic freedom ranking has gone from 3.4 to 5.6.  They have gone from being the least free country in the study to 121st of 141.  Bahrain's economic freedom score and relative ranking since 1995, meanwhile, has hardly moved.  Finally, Slovakia has become quite free since 1995, but they have had a miserable decade.

What do I make of this???  (Answer below the fold).

Green Stoplights

Our friend Steve Horwitz on the unintended consequences of Green Bay's green stoplights.

Assorted Links

(1) So this is Christmas?  When everyone has a right to something...

(2) A very good interview by Jan Helfeld about health care.  (HT: Sam Sholander)

(3) Why you should watch Fox News.  I'm sympathetic to Jim's point, but I find Fox, MSNBC, and most other news programs to be doing too much yelling.  I'll stick with Stewart, Colbert, and a newspaper for most of my news.  Though Stewart's biased as heck, he still get's a huge free pass from me because of this memorable CNN moment. 

(4) Speaking of Colbert: congrats to my friend and Red State blogger, Erick Erickson, for landing an interview on Colbert!   

(5) Alex Tabarrok and Bryan Caplan discussing the future of higher education.     

Assorted Links

(1) Here's a more literal interpretation of the fatal conceit.  Here's a link to the Australian study that found doctors had just a 9 percent hand-washing compliance rate, which is further discussed in Super Freakonomics.

(2) Speaking of Super Freakonomics, I finally finished reading it a couple weeks ago.  I'm a big fan; though, I must say that the controversial geoengineering chapter just doesn't fit with the rest of the content.  It's not really freaky (nor is it economics!), and it seems like it's included mainly to help sell copies.

(3) I've been listening to The Monster of Florence CDs in my car recently.  It's clear from the first couple of disks that Italy's history of botched crime scene investigations has a history that pre-dates Foxy Knoxy (slides describing some of the mistakes made in the Knox case here).  According to the book, serious mistakes and contamination of evidence occurred throughout Florence's string of creepy, unsolved serial murders. 

With Italy's legal system in the news (and on my mind), can someone point me to a good empirical paper on the effects of Italy's jury system vis-a-vis the U.S.?  The two judges on the jury structure of Italy's system, in particular, must be resulting in a lot of "professional" strong-arming.  And, surely, good empirical studies have been done on this difference, no? 

(4) Posner and Becker on Obama's jobs summit and increasing employment.

(5) An emergency physician who thinks about tradeoffs. 

The Economic Impact of Deer Hunting

Here are some slides from Chuck Nelson of Michigan State University that describe the economic impact of deer hunting in Michigan.  The data are neat to flip through.  For example, the average hunter spends $574 per year on "equipment" in Michigan, and this is declining from its 1996 level. 

Drawing inferences from these data should be done with a great deal of caution, however.  To talk of deer hunting as being stimulative, for example, seems to be making the classic mistake of confusing the seen (money spent on hunting) with the unseen (money that could have been spent elsewhere or saved). 

To talk about non-resident deer hunting in MI in "balance of trade" language, which Nelson does on the fifth slide above, seems dangerous and flawed as well.

Also, nearly every economic impact study discusses multiplier effects; Nelson's is no exception.  I don't know about Nelson would like the hunting multiplier to be, but more often than not studies about "The Economic Impact of X..." produce multipliers that are way too high.  In Warner Robins, GA, for example, we often hear people say the multiplier for military base spending is close to 4; reliable friends tell me it's more like 2 (or 1). 

In sum, here's about all I will go out on a limb and say about the economic impact of hunting: it's beneficial to the hunters and probably not so much fun for the hunted!

Leave It To Leviathan To...

...investigate the practice of charging user fees for airline travel (story here).  The introduction of user fees for baggage, meals, seating, etc. is one of the few things going right for the airline industry, but Congress appears unlikely to leave this new approach to pricing alone:

The reason for the Congressional interest is money. Fees, for the most part, are not taxed, so the government is concerned it is missing out on extra revenue that could help airports.

Penny-pinching travelers may gripe about the fees, but this new inquiry could raise the ultimate cost of tickets, if airlines decide to pass along to their customers the cost of the additional taxes.

One More Hoop For Tenure

Inside Higher Ed has a story this morning about a new tenure policy introduced by the University of Toledo's president, Lloyd Jacobs:  Candidates up for tenure must meet with the president for a 30-minute chat.  While faculty are upset about the policy, the article makes it sound like the presidential visits are, for the most part, a formality. 

Let's think about some of the consequences of this policy.  On the one hand, the president has a bit more that he can stuff in his CYA file.  On the other hand, it opens the door for comments that could be used in a lawsuit. 

The policy can be thought to be introducing one last fail-safe before the university either cuts ties with a candidate denied or commits to an insanely long labor agreement with a candidate granted tenure. 

My biggest problem with the policy involves opportunity cost.  Presidential time seems like a tremendously scarce resource.  Time with tenure candidates is time not spent shaking hands, raising money, managing the university budget, etc.

Finally, if presidential chats ever become more than formalities and actually result in decisions being overturned, you can expect successful candidates to be, at the margin, tilted a bit more towards being more polished and able to explain their research and teaching interests succinctly. 

How Many Jobs Have Been Saved?

Ed Lazear on our jobless recovery.  Excerpt:

This type of gains-only reporting is precisely what the government is doing with respect to the figures on stimulus-induced new hires. When the government reports this figure, it wants us to believe that the new hires came from the pool of the unemployed and that they are net additions to the stock of employed workers. But the data do not speak to the number of workers who left their current jobs to fill government-sponsored jobs.

If the vacancies that are created as these workers move from their old firms to government-sponsored projects go unfilled, then these job-to-job transitions are negatives that must be subtracted from the positives. And in an economy that is growing on the basis of productivity improvements rather than more workers employed, firms may wait to fill vacated jobs.

Because these data do not tell us where the workers come from and what happens to the slots they leave, the numbers cannot answer the ultimate question: How many net jobs were created? A similar point holds for those who are reported as retained, only in this case the issue is that some of those retained would have moved to different jobs rather than to the pool of unemployed had they been let go. The government is reporting the gross positive figures, not the relevant net figures.

$250,000 Per Job Saved?

The White House has an entertaining site called Recovery.gov.  The site has a "Jobs Saved/Created" counter to the left, which makes it seem like counting jobs saved/created is about as easy as counting hits to the EWOT blog!  According to the Washington Post, the web site will soon announce that 650,000 jobs have been saved. 

These numbers, of course, are all make believe; here's Douglas Holtz-Eakin in a very short clip explaining why.  Listen closely to the very end for his guesstimate of the cost per job saved.

Miscellaneous Replies To E-mail

One byproduct of blogging that I generally enjoy is the occasional personal e-mail in response to a post.  People have sent notes to me about posts that stink, posts they enjoyed, posts where mistakes were made, and news stories that I should think about blogging about in the future.  For example, here are some of the things I've received e-mails about lately:

(1) My post about the NABE from a couple weeks ago led a reader to ask me about "Dr. Doom" (a.k.a., Noriel Roubini) and Mark Zandi.  He asked whether or not I thought these guys are better forecasters than the rest.

I don't know.  From what I've seen of him, Zandi is all over the place.  I saw him on ABC News a couple of nights ago saying stimulus "saved" us from a prolonged recession.  Of course, he failed to mention that, to date, just 15-20% of stimulus money has been spent.  CNBC's great bulldog, Rick Santelli, has called Zandi out a number of times. 

Dr. Doom strikes me more as a case of a broken clock getting the time right twice per day. 

(2) Have I seen the story about three people dying in the Detroit Marathon? 

Of course.  It's sad and tragic.  But, it's worth noting that these were the first deaths in the Detroit half/full marathon in 15 years.  That's a lot of runners crossing the finish line in between deaths.

The odds of dying in a marathon remain somewhere between 1 in 60,000 and 1 in 125,000.  The far greater risk to runners is not race day, but, rather training days.  Sad exhibits here and here. 

(3) Human-created "financial terrorism" is supposed to hit markets on Wednesday, November 4th.  Of course, the whack job who sent me that e-mail recommended I call him before taking any action with my portfolio!

The Moral Hazard Of Yuppie 911

Suppose an individual enjoys something that reduces the downside costs of his risky decisions.  For example, I have a 70 year old friend who, with a good health insurance program and very low copayments, plays basketball and injures himself a couple times a month.  The health insurance serves as a kind of reduced-cost safety net.  Problem is, he has an incentive to expose himself to greater risks (basketball injuries that require treatment) than he would without the insurance.  He does so all the time.

Economists call this moral hazard. Personal locator beacons provide another example:

"The question is, would they have decided to go on the trip knowing the weather was going bad if they had not been able to take the beacons," asks Rocky Henderson of Portland Mountain Rescue. "We are now entering the Twilight Zone of someone else's intentions."

More here.

HT:  Tyler Cowen

The Peak Oil Fallacy

Take a good look at this graph:

Projections like this have been around for decades.  Take a look at the "peak oil" discussions at World Without Oil and Scenario Thinking, for example. To expose the fallacy, we provide a similar one in the appendix to chapter 6 of our EWOT textbook.  Notice that the graph predicts a shortage of oil over the next twenty five years.  It uses supply and demand curves -- the language of the economist -- but those cannot possibly make sense.  Supply and demand represent the plans of sellers and buyers at differing prices a scarce good on the market.

But where are oil prices in this graph?  There aren't any.  Price, and its role in adjusting quantities supplied and demanded, is nowhere to be found.  Should demand grow and/or supply fall over time, the price would rise to capture the greater scarcity of oil, and oil would therefore be conserved or economized in response.  All that is absent in this type of model.  In short, the model is economic nonsense.

It seems like this type of model undergirds the new "biophysical economics:"

The new field shares features with ecological economics, a much more established discipline with conferences boasting hundreds of attendees, but the relatively smaller number of practitioners of biophysical economics believe theirs is a much more fundamental and truer form of economic reasoning.

These physicists, ecologists and a few weak economists focus only on the projected quantities of oil, and energy, that are expected to exist in the world, and have no understanding or appreciation of the use of market prices to coordinate the plans of its producers and users.  I call their approach the Peak Oil Fallacy, and I've discussed it for years in my EC 101 course.  While "biophysical economics" seems to examine quantities alone in its so-called supply-demand model, economics is about choices and decisions in a world of ever-present scarcity.  When will they learn?  Have the economists among this group ever learned the coordinating role of markets and prices?

Intervention Begets Intervention: Corporate Salary Caps After TARP

Here's one of the main insights of the economic way of thinking:  a particular intervention into the market creates unintended consequences, and those consequences often lead to further interventions.  That's one of our clearest conjectures about a complex world.

You are already aware that the corporate bailout package (i.e., taxpayer supported corporate welfare) has created new calls for executive salary caps.  And this will create even more unintended consequences.  From today's Wall Street Journal:

The most profound mistake in these rules is the terrible precedent they set for wage controls across the economy. The Obama Administration will say that banks are a special case, and that is true. But once politicians feel free to regulate executive pay for one industry, it is no great leap to do it for everyone. Our guess is that these pay rules will prove to be both ineffectual and destructive—a perfect Washington combination.

We Made Another Top 10 List!

Earlier this week, a local reporter tried to catch up with me for an interview regarding Macon being in the Top 10 for "Most Impoverished Cities in America" according to Forbes.com.  Most of the cities on the list are Southern cities and/or manufacturing cities in decline. 

I turned down the interview for three main reasons: (1) I was given 20 minutes notice from the time I was made aware of the Forbes story (!); (2) there are issues related to Macon's poverty that I don't know enough about to comment on off the cuff; and (3) race invariably comes up in these discussions, and I'm one for avoiding that topic altogether when being recorded.

Now that I've had a few days to think about the issue and look at the study, here are a few points I would have made:

(1) I'd much rather be poor in America than anywhere else;

(2) I'd much rather be poor and in a metropolitan area in America than be poor in rural America;

(3) The poverty line is a misleading benchmark to be using when talking about poverty.  In addition, the per capita income levels used in the study look low to me, and it'd be nice to see household income alongside the per capita figures;

(4) Demand curves slope downward and supply curves slope upward!  Clearly, this has something to do with 25% of people in Macon, under the age of 65, being on public health care.  Same story for our high food stamp dependence. 

(5) Our poverty problem cannot be separated from bad city-level policies.  The never-ending solution to every revenue challenge of raising taxes has left the downtown dilapidated and has resulted in further cuts in city services. 

As I look at the above points, what I'm saying about Macon's poverty problem can probably be said for most of the cities on the list. 

(For earlier posts on poverty, here are some answers I gave to our student newspaper about poverty many months ago.  Here's one of my earliest EWOT posts, which offers up my silver bullet recommendation for poverty alleviation in the US: privatize public housing).   

Consumer Choices And Corporate Conspiracies

My son and I attended a packed NMU vs. Hillsdale football game this past weekend.  (Suffice it to say not only is their economics department stronger than ours, so, too, is their football team.)  When many people started to leave a few minutes before the game's end, my son asked why.  I explained that they are trying to beat the traffic.  "That will cause traffic," he replied.

Now, we all know that this is rational.  Some are willing to bear a higher cost now to avoid even higher costs later.  The unintended consequence is clear, and desirable: the flow of traffic slowly builds up in an orderly way in advance.  People act on their expectations.  Nobody in their right mind would argue that somehow the suppliers of parking services engage in a conspiracy to increase the costs of the drivers before and after the end of the game.  The drivers chose to do so themselves. 

Even an eleven year old boy knows this. But, when a similar process occurs in a market -- a rise in price expectations that lead people to buy more now -- and voluntarily pay more now -- suddenly the story becomes one of greed and conspiracy among the suppliers.  My boy is now beginning to see the fallacy in this.  When will millions of able-minded adults?