|Truck and Barter
Where Sympathy and Hedonism Collide
Roofs or Ceilings?
Sorting through some papers I acquired a while back, I found an original copy of Roofs or Ceilings? The Current Housing Problem by Milton Friedman and George Stigler, as originally published in 1946 by the Foundation for Economic Education. This classic essay argues against the use of rent control:
Although the essay is in the public domain, I couldn't find it on the net. So I've scanned it in, and put it on my university server.
5/31/2003 07:48:18 PM
Blogs do have Editors
Almost two weeks ago, I wrote an economic rationale for the apparent absence of a market for blog editors. I had planned to invert my assumption and assume blogs do have editors, by blurring the distinction between assistant, writer, and editor. However, it appears The New York Times quietly (and perhaps sensibly) obliterated the distinction a long time ago. In my mind, the article publishing process at the Times clearly demonstrates the benefits of the division of labor. In fact, the Times manufacturing process is not unlike the famous description of pin-making by Adam Smith in his Wealth of Nations:
[I]n the way in which this business is now carried on, not only the whole work is a peculiar trade, but it is divided into a number of branches, of which the greater part are likewise peculiar trades. One man draws out the wire, another straights it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving the head; to make the head requires two or three distinct operations; to put it on, is a peculiar business, to whiten the pins is another; it is even a trade by itself to put them into the paper; and the important business of making a pin is, in this manner, divided into about eighteen distinct operations, which, in some manufactories, are all performed by distinct hands, though in others the same man will sometimes perform two or three of them.The New York Times writers' use of stringers, assitants, interviewers, and other previously hidden joint producers of content leads me to view newspaper editors as just another economy of specialization. In pin-making as in journalism, one benefit of specializion is greater output:
I have seen a small manufactory of this kind where ten men only were employed, and where some of them consequently performed two or three distinct operations. But though they were very poor, and therefore but indifferently accommodated with the necessary machinery, they could, when they exerted themselves, make among them about twelve pounds of pins in a day. There are in a pound upwards of four thousand pins of a middling size. Those ten persons, therefore, could make among them upwards of forty-eight thousand pins in a day. Each person, therefore, making a tenth part of forty-eight thousand pins, might be considered as making four thousand eight hundred pins in a day. But if they had all wrought separately and independently, and without any of them having been educated to this peculiar business, they certainly could not each of them have made twenty, perhaps not one pin in a day; that is, certainly, not the two hundred and fortieth, perhaps not the four thousand eight hundredth part of what they are at present capable of performing, in consequence of a proper division and combination of their different operations.
Anyway, all I really want to say in this post is that the position of blogger encompasses a writer, all his assistants, and an editor into one generalist package. And that's not necessarily a bad thing.
5/30/2003 12:14:09 PM
More on the Ratio of Federal Taxes to GDP
After receiving an inquiry about my forecasts for 2003 tax receipts and GDP, I want to clarify that I assumed nothing in my chart below which compared the 2002 data to previous years. I do not know the latest private forecasts of federal taxes and GDP, and OMB procedure is a black box to me, so I do not know how much confidence to put into their estimates or CBO's.
Apparently, P. Krugman was relying on his own beliefs about 2003 tax and GDP forecasts. And I have no right to conclude that he's wrong or right until the revised and final data are in. Krugman's estimates lead him to the conclusion that federal taxes are at historical lows compared to GDP. He could be right, and I could be very wrong--I have little expertise or clairvoyance to predict federal taxes or GDP.
Anyway, I've decided to post a histogram of the annual data on the Ratio of Federal Taxes to GDP. Analysts are welcome to assume whatever they would like regarding the 2003 ratio-to-be, and see how it compares to the 1962-2002 timeframe.
Also, one question I have regarding the time series below is what the 1996-2001 "historically high" ratios imply about a potential 2003 "historically low" ratio? (see figure below).
UPDATE:Krugman lists his sources.
UPDATE 2:I've messed around with the assumptions of the analysis that Krugman relied on.
The below 17% ratio occurs with the lowest estimates of receipts, no matter the growth rate, however an unexpected surge in receipts will cause the ratio to increase.
5/28/2003 01:41:19 PM
Federal Taxes are NOT Historically Low as a Share of G.D.P.
The easiest way to anger T&B is to discuss issues of taxation in the United States without printing or linking to a sensible graph of all available data. This happens often on editorial pages that have limited space, most recently with Federal Tax Revenues as a Share of GDP, discussed by Paul Krugman.
Theoretically, the time series (Federal Revenues/GDP) goes all the way back to the founding of the United States. If we can dig up good estimates of Federal Tax Receipts since the Constitution was ratified, and a workable GDP series, we're set.
The budget data can be culled from historical sources. However, in practice, good National Product estimates did not come into existence until the interwar period (and were radically improved after World War II). Still, we can combine the rough estimates with the increasingly reliable estimates, just to see the general pattern over time, being careful to follow Oskar Morgenstern's advice regarding the accuracy of economic observations.
However, OMB already does this for us. We can find the ratio of Federal Receipts to GDP in Table 1.2 of the Historical Tables (2.25 MB) attached to the Federal Budet. Table 1.2 is entitled "Summary of Receipts, Outlays, and Surpluses or Deficits as Percentages of GDP: 1930-2008"
And the data look like:
In 2002 the ratio of Federal Receipts to GDP was 17.9%. In the 58 years from 1944 to 2001, 20 years had a smaller ratio of Federal Receipts to GDP, 27 had a larger ratio, and 1 (1975) had the same ratio as 2002. During that period, the mean ratio was 17.99, and the median was 17.8. So it is incorrect for Paul Krugman to write that "federal taxes are already historically low as a share of G.D.P.", since they are about average.
But perhaps Krugman was talking about a different period. In the 14 years from 1930 to 1943, the ratio never went higher than 13.3%, making the 2002 number look historically high. So let's start after the Eisenhower administration, say 1962. Of the 40 years from 1962 to 2001, 22 had a ratio higher than 17.9, 17 had a ratio lower than 17.9, and 1975's ratio was 17.9. The mean ratio is 18.2, and the median is 18--not very different from the "historically low" 17.9!
Frankly, it seems as if the current ratio of Federal Receipts to GDP is about average for the past 40 or 70 years, not historically low, as Krugman claims.
To check my calculations, and get the data I used, you can download a spreadsheet here.
UPDATE:Of course, I was hasty, and assumed I knew more than I actually do. Krugman is right on the data, if you believe his assumptions--which are plausible--and you ignore the forecasted uptick in the ratio back to the historical average.
5/27/2003 11:54:09 AM
DeLong on Value and Price
DeLong uses this in support of his (and my) preference for democratic governance. However, it is completely unclear that the production of government services (public utilities, roads, police, education, and national defense) under democratic rule is more efficient than under authoritarian rule. Free markets--sustained by rule of law, secure private property rights, open capital markets, and unrestricted labor markets--have little necessary relation to the election of representatives in a democratic process. Also, it is unclear which system will yield greater rent seeking and rent extraction by private parties.
(Cool example: in the infamous Star Trek episode, "The Trouble With Tribbles", Kirk notes that the centralized-authoritarian Klingons, because of their severe administration, are more "efficient" than the democratically disposed Federation in the development of a new planet).
But let's say that we accept DeLong's view that governments should be judged by the value of the services they provide to residents. Should not private business concerns be judged by the same standard? Are the goods and services provided by Microsoft, Johnson & Johnson, Hyundai Motor Co., Phillip Morris, and Kitchen Aid worth the amounts they charge the Brancato household?
Perhaps the Contra Costa government--a monopoly provider of police protection in DeLong's area--should be held to at least the same standards of efficiency and competition as private sector businesses?
5/26/2003 12:59:50 PM
Asik Radomysler on Welfare Economics
"Welfare Economics and Economic Policy,"Economica, Volume 13, Issue 51 (August, 1946) 190-204.
Question: Why is this brilliant article not on any reading list for economics graduate students? Googling "Radomysler and economics" returns a total of 6 references!
Hat tip to Richard E. Wagner for pointing out this gem.
5/23/2003 07:57:12 AM
For those outside of libertarian circles, the Foundation for Economic Education was the first radical free-market think tank in the United States. FEE does not enter into partisan or political debates, and as a result is not widely known today. However, when Leonard Read founded FEE, there were large--but ultimately fruitless--investigations into its political activities.
FEE has a lot of competition nowadays. The Institute for Humane Studies, and the Cato Institute are particularly fierce competitors for the privilege of
T&B hopes Dr. Ebeling can find a new niche for FEE, and wishes him the greatest success.
5/21/2003 05:30:48 PM
On Gabarro's Dynamics of Taking Charge
For those who have not read John Gabarro's Dynamics of Taking Charge, I suggest a quick read of the first three chapters. Basically, Gabarro argues that to get the most out of executives, job lengths and career paths should be structured so that an appropriate amount of time is given for the executive to learn a job, impact a job, and receive critical feedback--before moving forward or being fired. Gabarro judges this amount of time (from a few very intensive case studies) to be at least three years.
This rule of thumb was found invariant to the type of company and the actual position. I think such generalizations could be profitably incorporated into a theory of enterprise, and that such a theory would be a far sounder foundation for making judgements about interventions into businesses.
For instance, after the Enron et al. scandals, a lot of energy went into discussing the existence and stability, and the efficiency and profitability of pure-research firms if research was required to be separated from the middleman operations of Wall Street firms. But did economists actually have a good grasp on what at pure-research firm actually looks like or would look like? What jobs need to be filled in such a firm? Who fills them? For how long? Why? What is the career path for a pure researcher? Will all this change if researchers can no longer easily flow to and from sales positions?
Just something else to think about...
5/21/2003 05:11:03 PM
On Journalists & Businessmen
Replace "journalist" with "blogger", and see what you think...
But though journalists are undoubtedly better placed for acquiring information than most people in the modern world, even journalists do not know everything, and even journalists appreciate anything you do to make life easier for them, and to make the obtaining of copy less costly in time and money. Consequently if you take the trouble to cultivate their acquaintance and to keep them supplied with information that comes up to their standard of readableness and interestingness, they will probably accept it in the form in which you give it to them, and they will not give themselves the trouble of hunting elsewhere for a different version of the same story. Furthermore, one good turn deserves another, and in return for your kindness to them you may find them ready to do a kindness to you, by holding back from publication matter which you would prefer not to see appearing just now or just in the form proposed. (p. 138)
Wilson, P.A. "Public Relations Departments." Some Modern Business Problems. Edited by Arnold Plant. Books for Libraries Press, Inc. Freeport, New York. 1967.
5/19/2003 09:11:03 AM
5/19/2003 09:11:03 AM
On the Economics of Blog Editors
Newspapers find it in their interests to hire teams of full-time editors to scour their content for glaring logical contradictions, irredeemable factual errors, plagiarism, and fraud. In other words editors are supposed to save face. Whether this is thought of in terms of journalistic ethics or economic self-interest, the result is the same: newspaper owners find it in their interest to hire editors who referee the content of the paper.
As has been amply noted, blogs do not have editors. But why not? The easy answer is that demand is lacking--bloggers will not pay to have checked what they are giving away for free.
However economists get paid to ignore easy answers. So I persist: why is there no market for blog editing? Is there no existing demand for blog editors? No existing supply? Does the lack of a blog editor market indicate some bizarre "market-failure"? Does this market-failure mean that government intervention is required to guarantee efficient allocation of blog editors (provided free to the poorest 20%!)?
I've read numerous references to articles weighing the "need" for blogs to have editors. For an economist, "need" is a dirty word--one that hides the all important willingness-to-pay. The economist points out that the economically efficient or optimal amount of editing for blogs is determined by finding the amount of editing for each blog that equates marginal costs and marginal benefits of blog editorship.
In order for a viable market to exist, we need suppliers, demanders, and a low cost means of connecting them. Demand is measured by the potential willingness of bloggers to pay for blog editing--no matter the (un)ethical reason for that demand. Supply is measured by the wages potential blog editors would be willing to accept. Is it possible that there is zero effective demand for blog editors? zero effective suppliers? Or perhaps the final asking prices for labour are higher than the final offer prices? Or are search and/or transactions costs so high that blog editing is infeasible?
We have little data on why no blog editor market exists, because such subjective information can only be learned in actual markets. But if we ask ourselves the following questions, we might get some good idea that bloggers would have in hiring blog editors:
To be continued...
5/18/2003 06:59:14 PM
Potatoes v. Rice et.al.
Taking a look at the not seasonally adjusted data inside the CPI database can be revealing--sometimes. What you see to the left is the U.S. City Average Index for Potatoes (SEFL01) and Rice, Pasta, and Cornmeal (SEFA03) compared over a time period covering virtually my entire lifetime.
I've contrasted these two indices, because each night I have one or the other as a portion of dinner. My wife is practical, and saves the receipts for actual potato and rice/pasta/cornmeal purchases, but I am impractical and idealistic--so I used the second-order data provided by the BLS.
This brings to my mind several notables:
5/16/2003 03:45:12 PM
People talk about economic inequality because 1) they want to equalize, or 2) want to stop others from equalizing. This presents me with a problem: I like equality (E), but I dislike the socialization (S) required to achieve it. If the universe were to magically follow my demands, standard price theory would instruct me to balance E and S such that my personal benefit of the last unit of E is equal to my personal cost of the last unit of S. Under appropriate conditions, like not giving a damn how anybody else thinks about E and S, this would yield an optimal amount of E (E*) and an optimal amount of S (S*). According to economists, there is nothing I could do to be happier--ever.
But I know myself better than that--I still would be discontented that I could not get E>=E* and S<=S*. As real human beings, we will be discontented that we cannot reach our ideals. But such disappointment is not usually modeled in economic theory. Somehow Homo Economicus makes it through his days without such yearning.
5/14/2003 05:06:56 PM
Deflation is not a "Threat"
I've become mildly disgusted with the fear-mongering over potential "deflation" in the United States--i.e. a decrease in the "general price level" as measured by the Consumer Price Index.
This has caused the Treasury Department's John W. Snow to comment, "I don't think the U.S. has any risk of being in any significant deflationary period." Frankly, I don't think being in a significant deflationary period presents any increased risk.
My comments are not just a cute rewording; I'm serious--although I might be considered ignorant by Martin Wolk. In his article subtitled Deflation's destructive force, Wolk writes progressively ignorant answers to questions asked with modern monetary economics in mind. Here, I will focus on the two answers I found most lacking:
1) What causes deflation?
Alternatively, deflation is caused by productivity outstripping increases in the money supply. More goods for the same amount of dollars means prices must decrease--causing deflation. Why is the productivity theory not put forward, given its simplicity, and ease of comprehension?
2) Why is deflation a problem?
I'll respond in short--a) why didn't the deflation of the late 19th century have the destructive effect that occurred in the Great Depression and is predicted for the early 21st century? b) if borrowers have a tough time in deflationary period, how come lenders have an easy time in an inflationary period?
5/10/2003 03:57:49 PM
Bush calls for Free-Trade with Mid-East
The NYTimes reports a Bush call for a Middle East free trade zone:
Administration officials acknowledged that the idea of creating a free-trade zone that would stretch across North Africa and Asia from the Atlantic faced enormous hurdles. "This is not something that's going to occur tomorrow," a senior administration official said. Officials noted that the 23-nation region had more trade barriers than any other part of the world and that many of the countries had highly restricted economies. Some of the nations — Libya, Syria and Iran — are operating under United States economic sanctions.Now, I'm no expert on American government or international economic treaties, but I know that the U.S. can eliminate its own tariffs on every export from these countries. This type of unilateral action--for those countries not run by terrorist networks and sponsors--would demonstrate committment to the well-being of foreign citizens instead of the interests of foreign government leadership.
To assess political feasibilty, the article quotes one Edward Gresser, of the Democratic Progressive Policy Institute, who thinks lifting tarriffs in the Arab world is a good idea--"That's where you could really get a lot of benefit and people to work." Notice the proletarian fix on putting people to work, as opposed to the Bush vision of a liberal, free-market order: "We will work with our partners to ensure that small and midsized businesses have access to capital, and support efforts in the region to develop central laws on property rights and good business practices," Mr. Bush said. "By replacing corruption and self-dealing with free markets and fair laws, the people of the Middle East will grow in prosperity and freedom."
I can hear it now--we invaded Iraq for the free-trade zone!
Regardless of whether Bush and Gresser really mean what they say, I think it's fantastic to hear vocal support for free trade with the rest of the world.
5/10/2003 08:10:30 AM
Bennett's Chances are Better than DeLong Says
In his tirade agaist Bill Bennett, Brad DeLong does some quick and dirty modelling to calculate the probability that Bennett at least broke even. Using $500 slot machines that return 90% to the player, it would take on average 160,000 pulls to lose $8,000,000. So let's say he pulls 160,000 times (which I found possible if he played 7 hours straight 10 times a year for 10 years). And let's use DeLong's estimate of the standard deviation of 1350, then we get a really really small probability of breaking even, like DeLong estimates.
But there are BIG problems with these estimates--particularly of the return rate and the standard deviation. Eugene Volokh noted that slot machines don't meet DeLong's estimates. I found alternatives and posted them to DeLong's comments thread:
What if the standard deviation of the slot payouts is really much higher than 1350? I found a page (http://krigman.casinocitytimes.com/articles/5374.html) that reports sample payout schedules, and I calculated the standard deviation of a 90% payback machine (Machine D in the bottom right) as 7100. Everything else the same, this yields a Z of 2.8, and a miniscule probability of Bennett breaking even of 0.24%. However, if Bennett used machines of 95% payback, then we get a different answer. And that answer all depends on the variance of the payoffs. If I modify the highest payoff in the table from 0.003% to 0.005%, Machine D become a 95% payback machine, and the standard deviation rises to 9036. This gives a Z of 2.2 and a much better ,though still very small, chance of breaking even of 1.4%.It turns out I was wrong. My estimates of break-even were too low. The mean of the 160,000 pulls to a 95% machine is actually be 4 million. And the Z would be 4,000,000/160,000^.5*9036 = 1.106. This gives a 13.5% chance of at least breaking even. However, let's say that Bennett pulled 320,000 times, for an average loss of 8,000,000. This yields a Z of 8,000,000/320,000^.5*9036= 1.57. This gives a 5.8% chance of at least breaking even. On the last modified machine, it is a virtual certainty that 5.8 out of 100 people will at least break even after 320,000 pulls.
Frankly, I am still waiting for DeLong to come up with more reasonable and honest estimates, instead of the crude and lousy guesses he so proudly hawked the first time around. I think he highly overestimated the likelihood that his crude modelling represented anything close to actual $500 slot gambling. DeLong should admit that it is not statistically proven that Bennett has either lost big or has lied. Also, I think DeLong had little justification for his venemous attack on E. Volokh, who assumed neither that the statistics supported Bennett nor that they opposed him.
PS: I came close to DeLong's 1350 standard deviation by taking the variance of 10 payoffs--(-500 nine times , and 4000 once)--which yields a s.d. 1423, and a mean of -50, like it should.
5/8/2003 06:57:23 AM
Steven Den Beste uses an enterprise model of cost, value, and price to describe network effects. I want to point out that the cost Den Beste describes as "the total amount of money that must be spent to create it and deliver it to the potential customer" is accounting cost. A different concept if economic cost, which can be defined as the value of that "total amount of money" in what the enterprise owner regards as its next best use. To say that "cost" is the dollar value (face value) spent on production and distribution ignores the ability of the owner of those dollars to put his money to a use he regards as more valuable than the face value.
In particular, the owner could have produced something else, and recieved a price higher than the accounting cost for that unit. Or the owner could have spent his money in the market, buying with it goods and services that are more valuable to him than the face value of his money.
5/3/2003 11:54:33 AM
Though unrelated to T&B's usual content, I must comment on G. W. Bush copiloting an S-3B fighter jet onto the Abraham Lincoln. Although boyish and humorous to many, this scene brought to my mind the image of Vladimir Putin copiloting an AN-140 fighter jet to Chechnya in March of 2000.
In Russia, Putin's flight was carried on all the major networks; this type of propaganda is a common abuse by the Russian government. (Putin as acting-President was running for election at the time). Granted Bush has no such control over TV news agencies, but just kicking off a re-election cycle with a such Putin-style stunt leaves a bad taste in my mouth.
5/2/2003 12:16:18 PM
The Capital Spectator (on May 2) write that now (or soon) is the time for monetary and/or fiscal stimulus. While monetary stimulus means that the Federal Reserve lowers its overnight lending rates & etc., fiscal stimulus is much more expansive.
Fiscal stimulus doesn't just mean that the federal government makes GDP higher by spending more than it takes in. It means the federal government decides that it will purchase specific goods and services from either private companies or public enterprises, and distribute them to individuals/groups/organizations or use them itself. This is paid for by getting loans (treasury notes) from the private sector, increased taxation, or increased printing of currency. An alternate scheme of fiscal stimulus involves the federal government allocating nothing, but through increasing (decreasing) confiscatory taxation, decreasing (increasing) private ownership and control of resources.
The question I would like answered is which specific patterns of fiscal stimulus will adequately (?!?) increase short-term economic growth and not harm long-term prospects of economic freedom, job creation, real wage growth, low inflation, and economic development and stability.
Fiscal stimulus is commonly described with the adage "priming the pump." Perhaps it should be replaced with "feeding at the trough."
5/2/2003 10:08:34 AM