BY Kevin

Huebert has several excellent (and really funny) posts about the economy and culture in San Cristobal de las Casas. Read about him watching live professional wrestling:

Unsurprisingly for Latin America, things did not get started on time. There were many false starts, when people thought that the wrestlers were entering, but it turned out to be no one special. Also, any women who came in late were greeted by whistles and cat calls from virtually the entire audience, which ranged in age from about 8 through the elderly.

Finally, the stars dashed in, to the cheers of the audience. And if you're wondering, many Indians do, in fact, cheer by making a high pitched noise as they tap their open mouths with the palm of their hands, thus substantiating my old theory: All ethnic stereotypes are true. But I digress.

The wrestlers were not quite what I expected of professional wrestlers. They seemed skinny. I guess they were somewhat muscular, but not spectacularly so. One must keep in mind that the indigenous folk probably have different standards when it comes to these things. After all, I, at about 5'10", was the tallest person in the room.

And don't miss his comments on bootleg DVD's of The Passion of the Christ:

But bootleg DVD's and VHS tapes -- filmed with video cameras from US theater screens, with Spanish subtitles superimposed -- can be found for sale everywhere, and were available even before the film hit Mexican cinemas.

I happened to see part of one such bootleg DVD this evening while dining in a Chinese restaurant. The image quality was surprisingly good. I certainly wouldn't count on a Mexican theater projectionist for better.

3/31/2004 12:41:34 PM
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BY Kevin

Alex Tabarrok notes an important paper by Thomas Dee, and concludes:

Using data from Tennessee's Project Star, a very important experiment in which K-3 students were randomly assigned to small and regular sized classes, Dee finds that black students improve when they have black teachers. So far so good. Dee also finds, however, that white students improve when they have white teachers. Uh, oh. There goes the diversity is good for everyone story.

These are serious results, but even the author is very cautious about making inferences beyond the domain of Tennessee and white/black racial dynamics. Will biracial children in New York perform better being taught by biracial teachers?

3/31/2004 11:03:35 AM
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BY Kevin

The Dallas Fed's latest Economic Insights examines the life and work of Knut Wicksell:

Wicksell’s work is linked directly to three major traditions in economic theory:

• the quantity theory of money and its implications for allowing an analysis of aggregate macro outcomes as well as their appropriate monetary policies;
• the Austrian theory of business cycles, which uses Wicksell’s concept of a natural rate of interest;
• and the modern Public Choice paradigm in public finance, which is based on Wicksell’s contentions regarding interest groups in democracies.

Robert Formaini crams in a lot of fun detail in a short space, and for those unfamiliar with Wicksell, it is a good read. However, it is more focused on Wicksell's Austrian connection than what I think is his more important James Buchanan--Public Choice connection. This is remedied in another good short review of Knut provided by the National Bank of Slovakia:

Wicksell also realized imperfections of the electoral systems used in democratic societies to decide about fiscal questions. He pointed to the fact that situations could arise, when the majority of voters could vote to force the minority to bear the cost of approved spending programmes, although the programmes would not be useful to the minority. Wicksell regarded the system of unanimous voting as the only way to prevent some individuals to transfer the cost of their decisions to other individuals. Wicksell demanded that the approval of important fiscal measures should require the agreement of all voters (the so-called Wicksell’s unanimity). However, he realized that the agreement of all voters, especially in case of a more numerous group of voters, would be associated with significant costs of negotiations and convincing of voters. The ability to veto decisions would also give every voter a significant position in the negotiation process. Therefore, Wicksell replaced the requirement for unanimous agreement with a notion that important fiscal decisions, such as the state budget, should be approved by a qualified majority.

3/30/2004 05:31:57 PM
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BY Kevin

The latest RAND publication which I have coauthored have just been released. My part of Aligning the Stars: Improvements to General and Flag Officer Management (avaiable in PDF for free) was to visualize the data, model how the system responds to changes in assignment length at particular points in a senior officer's career, and to explore how these changes can be integrated into longer careers.

I must admit that almost all of the writing was done by others, and I'm lucky to work with lead researchers who believe in sharing credit with the grunts.

A short version of this work can be found in the research brief Managing General and Flag Officers. It addresses Secretary Rumsfeld's concerns that in the military services, as compared to commercial business, turnover is "too high" at the level of senior management:

Private-sector careers resemble those of the military in that both organizations identify employees with high potential and carefully monitor and manage their careers, especially in the later stages of development. But the management of these employees differs. In the private sector, early jobs are developmental and help to build functional skills, organizational knowledge, and personal insights. Later jobs tend to have more complex and ambiguous responsibilities that draw on the knowledge and skills developed in earlier ones. Thus, the assignments have different purposes: Some develop skills, while others use skills previously developed. The “developing” assignments do not need to be as long as the “using” ones, and private-sector management reflects this practice.

The military also has developing and using jobs. Certain jobs appear repeatedly on the resumes of four-star officers — that is, those of the highest military rank. But unlike the private sector, assignment lengths do not vary between the two types of jobs. For example, the average assignment length for two- and three-star officers is about two years — too brief for either effectiveness or accountability. The upshot of these shorter job tenures is that the most-senior military officers hold their jobs for far less time than their private-sector peers (two to three years compared with eight) and retire much sooner. Almost 90 percent of four-star officers retire before reaching age 60, compared with only about a third of their private-sector counterparts.

I loved working on this project.

3/30/2004 10:22:28 AM
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BY Kevin

Walter Williams rips apart the economic logic behind the new anti-price gouging bill set to become law when the Virginia governor signs it. This law will prevent any price increase during times of disaster that is not due to a "cost" increase. Sounds kind and just, but remember that Adam Smith noted that we depend not on the benevolence of the butcher, but on his self-interest:

In Isabel's wake, private contractors from nearby states brought their heavy equipment to Virginia to clear fallen trees from people's houses. Producers and shippers of generators, plywood and other vital supplies worked overtime to increase the flow of these goods to Virginians. What was it that got these people and millions of others to help their fellow man in time of need? Was it admonitions from George Bush? Was it conscience or love for one's fellow man?

I'll tell you what it was. It was rising prices and the opportunity for people to cash in on windfall profits...

3/29/2004 09:26:39 PM
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BY Kevin

In Parchment versus Guns, Richard E. Wagner discusses reaching collective goals while effectively limiting government:

The articulation on parchment of a declaration of limited government to protect and preserve is not by itself sufficient to generate protection and preservation as the core activity of government...

As Vincent Ostrom (1984) explains with particular cogency, government involves a Faustian bargain: instruments of evil--power over other people--are to be employed because of the good they might do, recognizing that evil will also result...

The other approach looks primarily to a kind of opposition of interests to limit government predation. Metaphorically speaking, this alternative approach looks to guns more than to parchment. The basic principle behind this approach is for governmental action to require some concurrence among different participants with opposed interests...

[S]elf-interest is predominant in all human activity, in government as well as in commerce. The justification for government resides in the need to control the darker side of self-interest. With self-interest being ineradicable, the problem of constitutional control becomes one of how to control the operation of self-interest within government while allowing government the ability to perform those governing tasks that its justification requires. Ultimately, the task would seem to require both parchment and guns, that is, both knowledge pertinent to the task and rightly aligned incentives to act consistently with that knowledge.

The desire to limit government is generally perceived as a desire to limit democratic control. While this is true, it masks a more fundamental desire to limit nondemocratic control and predatory uses of collective organization.

3/29/2004 11:28:24 AM
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BY Cardozo

(story) From the Wall Street Journal (subsription req'd; sorry)

When Congress set up the federal court system in 1789, it gave aliens the right to sue for "violation of the law of nations or a treaty of the United States."

Tomorrow, 215 years after the law was passed, the U.S. Supreme Court will consider what that sentence means. The ruling could have a major impact on how human-rights cases, and even lawsuits against terrorists, are pursued in the future.

The law, known as the Alien Tort Claims Act, was rarely cited and all but forgotten by the 19th century. But since 1980, human-rights groups and victims of atrocities have filed about 100 lawsuits under the statute, according to lawyer Eric Biel of Human Rights First, an advocacy group.

The rest of the article goes into the recent history of the law, which is of interest to me as a law student. However, from the economics perspective, we must consider the costs such a law will impose on the US legal system. To date a Mexican alien has used this law to sue the DEA and alien victims of torture and mismanagement have sued various defendants, including two former Presidents of the Phillipines. A quick LexisNexis search in New York State alone reveals 51 cases have involved the law. Many of them are for alien plaintiffs suing alien defendants, such as Ullonoa Flores v. S. Peru Copper Corp., 343 F.3d 140

Claims under this Act are few, but the act remained dormant for almost 200 years after it was enacted in the 18th Century, and only recently has it become popular. The Courts have so far have been conservative in its application and enforcement, but as claims rise, inevitably so will Courts costs.

What benefit does the USA receive in adjudicating a dispute between a Peruvian copper mining company and some of its native employees? Undoubtably the employees will receive a more fair hearing here in the United States, but is it in our best interest to offer them a forum? A Courts system is extremely expensive to maintain and operate, and the free rider affects of such a law, if widely applied, could be quite burdensome.

Critics of the law have so far concentrated on its diplomatic and political consequences. They seem to fear that it will allow CIA or Special Forces operatives to be sued by foriegn nationals if they damage property or unnescesarily detain someone in the pursuit of terrorists or other ememies of our nation. Personally, this does not worry me. Our Courts system has historically been very protective of our military's right and responsibility to defend our nation. What worries me is the costs. Courts aren't totally blind to the costs of carrying out the law, but it is a secondary consideration for them. For balancing the needs of law and order against the costs of providing it, Congressional action and discretion will be required.

The political talking-heads are very much interested in tort reform for the fields of medical malpractice and product liability (for obvious reasons). If claims under the Alien Tort Claims Act continue to mount, we better hope that this issue is addressed in any comprehensive legislation.

3/29/2004 10:30:05 AM
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BY Kevin

A local car dealer, Dulles Motorcars is advertising 6 months of free gasoline to all those who buy a new car. They don't have the ad online, which is probably a good thing for them, since this type of bundling has previously been suspect of foul play. But the incentive for the car dealer is to play on the fears created by the hype of "record high gas prices" noted by every single newspaper in the country.

3/28/2004 08:22:51 AM
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BY Dragos

Here is an interesting reading for the weekend about Shell's overestimating its oil stock with direct implications on their forecasted revenues and consequently the share prices. It was a bit of a scandal as such, especially that there is this temptation for making comparisons about corporate scandals from US and Europe (or Enron, Tyco, WorldCom vs. Parmalat). Nevertheless I cannot see Shell falling into this category. Firstly because this story looks more like one about poor management rather than about unethical behavior for financial fraud. Secondly, the money routing in case of a fraud would have been more difficult to be made, due to the European bureaucracy when reporting financial statements. On top of that Shell has an unique corporate structure coming from its more than a 100-year history. That means they donot even have a typical European governance structure label, it is more complicated. Of course anything may be posible in these circumstances but I just can't see it as a case. Yet.

3/27/2004 07:04:45 AM
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BY Ian

Seen on a sign for mortgages in a Citibank branch:

"Rates will continue to fall! Lock yours in now!!"

Should we worry that the message was written with true conviction, or respect a rather "hiding in plain sight" attempt to exploit people who have trouble with Bayesian updating?

3/27/2004 03:07:09 AM
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BY Kevin

AP, CNN, Bloomberg, Reuters and everybody else is reporting that consumer spending (personal consumption expenditures) increased by 0.2% in February compared to January.

Of course no margins of error are given along with the estimates; the reporters could not provide them even if they wanted to, since the BEA does not expend national resources on constructing sampling or nonsampling errors for their national product estimates. (No estimates are to be found in the monthly news release or in the methodology papers, although Allan Young did look at changes between revisions of quarterly estimates of GDP.). However, the godfather of national income statistics, Simon Kuznets, did begin to construct margins of error in his National Income and its Composition. I quote Oskar Morgenstern in his fabulous On the Accuracy of Economic Observations:

Kuznets distinguished three groups of industries according to the relative margins of error judged to be present in their estimates. First, with a margins of error well below 15%..., were the basic manufacturing industries and public utilities--electric light and power, steam railroads, street railways, telephone, telegraph; second with margins of error of about 15 percent but well below 30 percent, were agriculture, mining, manufactured gas, pipe lines trade, banking, insurance, and government--industries for which information was extensive but not complete; and third were industries with an error margin of about 30 percent and higher--construction, water transportation, real estate, direct service industries....

The weighted margin of error for the estimate of national income was found to be about 20 percent... However, Kuznets felt that this figure was exaggerated.... As a result, Kuznets infers that an average margin of error for national income estimates of about 10 percent would be reasonable. (pages 254-255)

With this in mind as an upper bound, note that both Bloomberg and Yahoo report that forecasters' median estimate of personal spending was a 0.4% increase. In their conventional stories, this estimate is built into market expectations, and a resulting official statistic 0.2% higher than the median forecast drives market participants to rant about "volatility" and other terrifying market outcomes.

However, a difference of 0.2% growth in personal spending between median forecast and official point estimate is absolutely and completely meaningless in the light of a 10% (or even a 1%) margin of error in the levels. To state that a median forecast was 0.2% higher than a point estimate is equivalent to saying that the forecast could be too high or too low--we don't know which with any degree of certainty.

So, should markets be affected at all? Or are these data utter nonsense?

UPDATE: Roy H. Webb, at the Richmond Fed, might diagree with me:

One should not conclude that GNP estimates are more unreliable than other economic figures. On the contrary, GNP and related statistics are probably our best single source of economic data. The point is simply that even the best data can be misleading, especially when considering changes over intervals as short as one quarter. Therefore one should not place too much emphasis on short-term movements of economic data without carefully searching for hidden anomalies.

Though national accounts are perhaps the most useful data, they certainly aren't the most accurate.

3/26/2004 11:11:59 AM
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BY Bob

Hello everyone, I would like to thank Kevin for offering the invitation to post here at Truck & Barter. My name is Bob Arne. Currently, I'm a student at Claremont Graduate University working on a Ph.D. in Economics. This is my first year here after working as a trader in Chicago, Europe and recently from home in SoCal. My interests primarily lie in finance, markets, trade and institutions. As you would likely find better and much more successful traders than myself, I will leave it to other places, such as Thestreet.com, to cover the subject, but I do find many of the issues surrounding the industry to be fascinating. Five years ago, people were fretting the development of a 24 hour global exchange. Didn't quite happen as some people predicted, it turns out that most people like to invest locally. This, like many things in economics, will turn out to be long process, but there are signs that such a marketplace is developing(it already exists in some markets).

In addition, I feel obliged to cover China and Asian developement. We have some strong profs in this area at the Claremont Colleges, plus, I know people doing business in the region who are either getting fat or like to complain about what a pain in the ass it is. Speaking of which, look for a few posts on private equity/LBO shops, an area not covered too often in the blogosphere except for some about venture capital. There's a Wal-Mart story in there somewhere.

Some people may be wondering about the recent events here at Claremont, frankly, others have covered it enough. However, there is a post on some of the underlying friction at Claremont McKenna. It will have to wait as I have stuff due tommorrow.

3/24/2004 08:08:18 PM
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BY Kevin

At Catallarchy, Micha Gertner touches on IE vs. Mozilla in the context of monopoly regulation. I'd like to add that although Microsoft bundles IE with every new PC running windows (about a 90% share of desktops), 21% of visitors to T&B use a non-IE product. The share is roughly the same at Catallarchy. Note that Macs come preloaded with multiple browsers (including Safari, IE, and Netscape), but only 5% of T&B visitors are Mac users.

Also note that Wal-Mart keeps banging heads with Microsoft, and will soon offer PCs with Sun Java OS, in addition to their current selection of PCs running Linux.

Why on earth is WM doing this? IMHO, this is standard WM strategy--go with suppliers willing and able to lower costs. Apparently, WM sees no difference in their product line strategy between a near-monopoly market like PC OS's and markets thick with competitors like, say, coffee pots. In both types of markets, WM fosters real competition and undercuts in price. WM thinks it can profit more by chipping away at Microsoft's dominance in the OS market, then by sitting aside, like so many others are doing:

For its part, Wal-Mart is trying to crack the white box market by selling cheap systems and offering kit with Linux or without an operating system. Large OEMs with strong relationships to Microsoft have appeared unwilling to make similar moves. Funny that.

3/24/2004 02:54:05 PM
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BY Kevin

Sorry for the lack of updates. I've been too distracted to think about economics very much. While I'm sill in of this funk, however, check out Ivan Janssens, who summarizes a paper by Andrei Schleifer and Daniel Treisman that claims Russia is just a normal middle-income country with a multi-party democracy.

I almost fell off my chair the first time I read this, and I don't have time to formulate a response, except that I disagree. Russia is NOT a democracy with real political competition.

UPDATE: Ivan has a strange setup that doesn't allow direct linking for first-time visitors, so just search for "Russia: a normal country?" when you get to his page.

3/24/2004 12:40:51 PM
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BY Kevin

While this Slate article notes that Broadband-over-Power-Lines (BPL) is being set up for everyone in Manassas, Virginia, it does not go into detail about what convinced local government to facilitate this process. Basically, the city gets a cut of the action:

Hewa explained that Prospect Street will supply equipment at no cost to the City and will handle customer account administration, help desk support, customer billing, network management, system monitoring and final network connection to the Internet.

Manassas Utilities will install and maintain the BPL equipment external to the house or business, and provide the supporting fiber optic backbone.

“Both the City and Prospect Street will share in BPL subscriber revenues,” he added.

This company also plans on adding VOIP telephone and digital video on demand. Even if they don't manage to pull off competition in those areas, it's important that people recognize the extent that the availability of BPL--and last mile competition in general--depends on a compliant and farsighted (but greedy) local government.

3/19/2004 07:59:28 AM
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BY Kevin

Continuing our series (2, 3, 4, 5, 6, 7) on Wal-Mart, we link to Reason's take on the anti-WM activism around Los Angeles, and the actual consequences of new big boxes:

Wal-Mart's presence, admittedly, does disrupt local retailing markets. Some 30 rival supermarkets in Oklahoma City were shuttered after Wal-Mart launched seven superstores in its market, according to trade publication Retail Forward, while other chains have been forced to deal with the competition. But much of this is simply the continuation of dynamics that come into play whenever new innovations appear in the market. The rise of department stores a century ago killed off one generation of so-called mom-and-pop stores while the emergence of supermarkets after the Great Depression did the same in the grocery segment.

As I noted earlier, the introduction of the A&P chain devastated general stores throughout this country. Was this a bad thing? Sure, for the general store owners. When WM eliminates an entire downtown (how often has it actually done this?), this is tremendous evidence that people value the WM experience more than the mom and pop experience. M&P's know they cannot compete with WM on price (and in an auto-focused suburban nation, convenience), although they can on service. Unfortunately, service is not what most M&P's specialize in, as many of them are local monopolists before WM enters.

Hat Tip: Businesspundit

3/19/2004 07:27:03 AM
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BY Kevin

The Energy Information Administration compiles statistics on the average retail price of gasoline. This USA Today report repeats the essential data:

After coming within a penny of the record, the average price of a gallon of regular gasoline nationwide was $1.72 Monday, down more than a penny from the prior week, according to the Energy Department's Energy Information Administration.

I am frankly astonished that gasoline statistics can be relied upon down to the penny. Like the method used to generate unemployment statistics (noted below), the retail gasoline price statistics are derived from a sample survey. With all surveys come error, and I'm not convinced that this survey can register a change in the mean gas price of 1 cent at a statistically significant level of 90% or 95%. Even if these data weren't derived from survey, the population of gas prices (whether or not weighted by sales) is distriubted around this mean in some fashion. However, that distribution is not necessarily normal or symmetric.

The historical data EIA provides to the average joe are average retail prices by region. These reveal substantial variability in interregional prices, but say nothing about the distribution of gas prices overall, or within regions, at any given time. So let's go to the sampling methodology and data collection procedures, to see what we can dig up:

The sample for the Motor Gasoline Price Survey was drawn from a frame of approximately 115,000 retail gasoline outlets.... To estimate average prices, sample weights were constructed based on the sampled outlet's number of pumps, a proxy for sales volume. These weights are applied each week to the reported outlet gasoline prices to obtain averages for the specific formulations, grades and geographic areas....

Every Monday, retail prices for all three grades of gasoline are collected by telephone from a sample of approximately 900 retail gasoline outlets.... The reported price includes all taxes and is the pump price paid by a consumer as of 8:00 A.M. Monday. This price represents the self-serve price except in areas having only full-serve. The price data are used to calculate weighted average price estimates at the city, state, regional and national levels using sales and delivery volume data from other EIA surveys and population estimates from the Bureau of Census.

Since no specific confidence levels are supplied, let's calculate our own using crude techniques. First, let's say that all prices are taken from the same population (which can be represented by a normal distribution) around the sample mean, and that population variance is equal to interregional variance, The interregional standard deviation (which I calculated for March 15, 2004) was 16.02 cents per gallon. Hence, the formula for a 95% confidence interval for the mean gas price is [mean +/- (t(.95,900)*s)/n^.5] where t is 1.963, n=900, and s 16.02. This yields 1.72 +/- 0.01 at 95% confidence, and +/- 0.014 at 99% confidence.

Conclusion: Using these crude estimates, I would expect that this survey reports accurately changes of the mean gas price of a little more than one cent. Changes smaller than that are not statistically significant. Although my calculations likely underestimate the variance of the sample, and the distribution of prices is certainly not normal or symmetric, I think I've learned to trust this data--far more than I trust other macroeconomic statistics. My weariness was not justified.

Now, if they could only do this for healthcare...

NOTE: I've put in a request to the EIA for their exact calculations of sampling error for this survey.

3/18/2004 02:00:28 PM
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BY Kevin

The McKinsey Quarterly summarizes their own report (registration required) that the coffee business has been earning negative returns for most growers in most countries, due to increased productivity.

Odds are that your morning cup of coffee started life as a net loss for the farmer who grew the beans. Coffee growers have long struggled with fluctuating prices, national politics, and capricious weather, but today's crisis stems from deeper structural change. Few countries today can boast that a majority of their growers make a profit, and the exceptions generally have the largest and most diversified coffee industries. Productivity improvements from big coffee producers in Brazil, as well as competition from efficient new entrants such as Vietnam, are erasing many growers' margins--especially, as the chart [in the summary] shows, in the Americas.

A recent study by McKinsey and TechnoServe1 highlighted two promising though painful responses. Some growers of traditional Arabica beans, which are known for their quality, should invest in production equipment to compete in the small but fast-growing specialty coffee segment. Those who can't keep up on cost or quality--perhaps as many as half of the world's growers--must consider diversifying not only into other food crops, such as organic fruits and vegetables, but also into flowers and hardwoods. Some growers will have to exit the business.

Of course, some--or many--try growing cocoa coca instead.

3/18/2004 11:44:54 AM
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BY Kevin

Economists use the term "menu costs" to refer to the expenditures necessary for sellers to change posted prices. This is a type of "nominal rigidity" (or "sticky price") that New Keynesians think is supposed to drive all sorts of problems and inefficiencies in a market economy. I tend to think that the whole topic is misaligned with actual business process; the internal variance of all the prices used by a firm dwarfs and makes irrelevant the whole subject of menu costs. Now I have some evidence.

In Russia, most ordinary folk get paid in roubles, and many conduct business in roubles (although payment in dollars is becoming common in major cities). However, the main store of liquid value is dollars, even though the euro is taking hold both as a medium of exchange and store of value. In this type of environment, I think menu costs are not a useful concept.

Here's why. Many companies post their prices in "Y.E." (pronounced "ooou yeah" without the h sound)--not in roubles, dollars, or euros. What's an Y.E? It is an acronym for "uslovnaya edinitza" (also for "uslovnye edinitsy"); a bad translation is "conditional currency."

According to the Moscow Times (Michele A. Berdy, July 5, 2002), Y.E. developed out of a legal requirement that business prices not be posted in dollars, and in a chaotic fiscal environment of loan default and a rapid devaluation of the rouble. In response, many businesses switched to posting prices in an imaginary unit of currency (Y.E.), and posting an imaginary exchange rate of Y.E. (then dollars) into roubles. This permitted the transfer of exchange rate risk to the customer, and meant having to change only one posted price--the exchange rate. With the addition of the euro to the money mix, and its rise in value compared to the dollar, Russians have come to accept that Y.E. can now mean the dollar or the euro, whatever the business determines on that day. (The exchange rate given to consumers is generally the central bank exchange rate, and businesses choose to be paid whichever gives better terms). This has complicated matters somewhat, but also made life much more the good old Soviet times.

So we know that Y.E. is a unit of currency--either dollars or euros--that can change from day to day, depending on the central bank (or infrequently black market) exchange rate. How does this work in practice? Take one example, the Russian airline Aeroflot. Aeroflot will quote a Russian a price of, say 500 Y.E., which they tell him is currently in dollars, and an exchange rate of 30 roubles to the dollar. (They expect to be paid in roubles). He reserves a seat over the phone, but doesn't pay for a few days, because that means traveling across town to pay cash. (This is normal in Russia).

However, by the time he shows up to pay, Aeroflot says that Y.E. are now euros, and will take the official exchange rate of 32 roubles for the euro. In this way, the nominal price of the seat can rise from 15,000 roubles to 16,000 roubles--even with a constant nominal Y.E. price, What Aeroflot does is to thrust the short term exchange rate risk onto its retail customers,

I think that Americans would not want to deal with the hassle this brings, but Russians are so used to an environment full of confusion, that the marginal value of one less hassle is almost zero to any of them. Who would notice one less hassle? But American consumers, who are used to getting what they want, are willing to pay a marginal premium to have business swallow the exchange rate risk.

Here and here are some other Y.E. links.

Hat Tip: Mrs. Brancato, who also noticed this hilarious Y.E. spoof of the U.S. Dollar.

3/17/2004 03:17:04 PM
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BY Kevin

I think economists should note more often the uncertainty in macroeconomic statistics. For instance, the number of "unemployed" calculated from the much maligned household survey has a 90% confidence interval of +/-230,000! For all you non statisticians out there, the BLS clarifies what this means:

A sample is not a total count and the survey may not produce the same results that would be obtained from interviewing the entire population. But the chances are 90 out of 100 that the monthly estimate of unemployment from the sample is within about 230,000 of the figure obtainable from a total census. Since monthly unemployment totals have ranged between about 5 and 8 million in recent years, the possible error resulting from sampling is not large enough to distort the total unemployment picture.

(This implies that 1 out of 10 unemployment estimates--at least one per year--are off by at least 230,000). These estimates are for levels, and not changes in levels. For confidence intervals of changes, we should read the Employment Situation:

For example, the confidence interval for the monthly change in total employment from the household survey is on the order of plus or minus 290,000. Suppose the estimate of total employment increases by 100,000 from one month to the next. The 90-percent confidence interval on the monthly change would range from -190,000 to 390,000 (100,000 +/- 290,000). These figures do not mean that the sample results are off by these magnitudes, but rather that there is about a 90-percent chance that the "true" over-the-month change lies within this interval. Since this range includes values of less than zero, we could not say with confidence that employment had, in fact, increased. If, however, the reported employment rise was half a million, then all of the values within the 90-percent confidence interval would be greater than zero. In this case, it is likely (at least a 90-percent chance) that an employment rise had, in fact, occurred. At an unemployment rate of around 4 percent, the 90-percent confidence interval for the monthly change in unemployment is about +/- 270,000, and for the monthly change in the unemployment rate it is about +/- .19 percentage point.

So when you see a movement up or down by a hundred thousand or even two hundred thousand jobs in one month, it is not statistically distinguishable from no movement in unemployment at all. At 95% confidence, a movement of 300K is not statistically significant. At 99% confidence, a 450K movement is not statistically significant. In fact a movement in the unemployment rate of about 0.2% is just significant at the 90% level, but not so the 95% level.

3/17/2004 03:04:45 PM
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BY Kevin

Julie Appleby reports in USA TODAY that health "insurance" is getting so expensive that the middle class are feeling squeezed.

Rising costs are lamented, and reform is implicitly advocated. The relationship between the rising cost of coverage and the cost and rising amount of care is not discussed. How employers must either shift coverage responsibility to their employees or lower their wages, is not discussed. How a "national policy" will lower costs is not discussed.

Good scare quote from David Cutler, "We're setting ourselves up for a big implosion of the health care system."

3/17/2004 01:15:34 PM
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BY Kevin

Kevin Hassett notes the federal government scheme which permits consolidation of student loans at fixed interest rates that are averages of variable rates. While he focuses on the enormous sums that the government might have to pay other creditors, he fails to note the beautiful game of pseudo-arbitrage that I'm playing.

I borrowed from the government to help pay for undergraduate studies, and now have a 15 year loan at 3.5%. I can pay off that loan today, but I don't. Instead I fork over only the interest--which is deductible from my income taxes. These interest payments are funded by my active investment in various inflation-linked bond and real estate funds, which have been earning double digit returns for some time.

And I do this all at the expense of you taxpayers! Thanks Congress! Bastards!

3/17/2004 12:59:42 PM
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BY Kevin

The AP: Higher Energy Costs Lift Consumer Prices

Consumer prices rose by a modest 0.3 percent in February as high energy costs continued to hit the pocketbooks of drivers filling up at the pump and people heating their homes.

Reuters: CPI Slows to 0.3 Pct; Energy Surge Fades

U.S. consumer price rises slowed in February as energy costs moderated, the government said in a report on Wednesday that reinforced views U.S. interest rates will not rise for some period to come.

3/17/2004 10:16:22 AM
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BY Kevin

In TCS, Laurence Kotlikoff takes down George Gilder. But there are some oddities in his essay I want to focus on:

The local phone system is not only a public good, as defined by economists, it's also a public good as in who paid for it -- the definition understood by everyday folk. Whether the regional Bell companies and their lobbyists want to hear this or not, the local phone system is not their property. It belongs to the public, having been built over the last century at enormous public expense. True, the federal government never directly paid for the phone system. Instead, it licensed a single company -- the Bell Telephone System -- to construct this network by charging the public phone rates far above the actual marginal costs of transmitting calls and guaranteeing the Bells an essentially risk-free return.

Now, Mr. Kotlikoff doesn't mean to imply that telecom companies should charge marginal costs. As any serious economist would tell you, firms that produce goods and services with a process that requires substantial fixed cost will go bankrupt by charging marginal cost. And Mr. Kotlikoff doesn't want telecom companies to go bankrupt.

The Bell system (and thousands of competitors) were stringing telephone lines across this country at their own expense way before the government tipped their hat to the Bell interests in 1913 and granted an effective monopoly in 1934. I agree that regulators gave the Bells a risk free return; but this should not be news--it was the entire point of the old regulatory framework which utilized rate-of-return regulation. The nexus of state/federal regulators and companies colluded to bring out a quality telephone service while limiting the risk-free return to AT&T.

For years economists were trained to believe that telephony was a public good, because it was a natural monopoly (meaning competition is wasteful, when possible at all). They passed their beliefs on to the public. Now that the technological landscape has made it possible for both long distance and local competition to exist, economists are taught that forcing incumbents to lease unbundled network elements is a policy that yields competitive-like outcomes. In most ways, it is a better framework than ROR, but I'm not at all convinced it yields competitive outcomes.

In my mind, economists should admit that there is no "solution" to last mile competition except many roads along that mile (such as a better wireless or telephony through cable or power lines). You can reorganize property rights so that more markets (or parts of markets) are competitive--requiring interconnection between local and long distance companies is one such policy. But if all competiton means is that newcomers are leasing lines provided by the incumbent, how are real costs of telephone provision being lowered? They aren't. All that is happening is that the profits that used to go to the monopolists are going to other producers and some consumers (and not to others).

It seems to me that instead of specifying a specific rate of return for local monopoly telephone providers, the current scheme dictates wholesale rates at which local telecoms must sell their unfinished wares. This effectively limits the rate of return on their investment, but seems to do so in a complicated and costly manner. So why not just eliminate the farcial competition and use regulatory power to set retail prices under the monopoly? Am I missing something here?

3/16/2004 10:34:07 AM
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BY Kevin

Jamie Spelman has decided to withdraw from T&B to focus on self-education. Jamie made only three posts at T&B (an intro, some comments on free trade, and noting a public choice), but they were all very interesting. Unfortunately, blogging turned out not provide the type of inspiration, interaction, and audience hoped for.

Hence, T&B has an opening for anybody who wants to econoblog. Just send me an email, and you'll be signed up, no questions asked. This means YOU, Adolfo, or anybody else.

3/15/2004 04:41:33 PM
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BY Kevin

A while back, Tyler Cowen told his readers not to cite him museum visitorship statistics, as they didn't refute the point he was making. This stuck in my head as I read about a new poll by the Swiss National Science Foundation that queried 2000 Swiss about attending museums. Their findings:

The Swiss are four times as likely as the French to attend a museum.

"Half the Swiss population visits a museum at least once a month."

"A quarter of those polled said they had attended an exhibition at least ten times in the past six months."

Also note that the number of museums in Switzerland has increased from 200 in the early 1900's to 600 in 1989 to 905 in 2002.

The attendance numbers are substantially higher than the 30%+ annual museum attendance in Canada or the 20%+ in Australia.

I don't have comparable statistics in the US, where attendance at Science and Technology museums is reported at 60%+ per year.

3/15/2004 12:49:57 PM
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BY Dragos

Rajesh Jain points to a Fast Company article written by Thomas Davenport - "the most influential business guru you've never heard of." Davenport talks about how big business ideas come up and play an important role in the value creation process, and proposes an eight-point game plan for winning with ideas:

1. Companies compete with their brains as well as their brawn -- "Organizations today must not only outgun and outhustle competitors, they must also outthink them. Companies win with ideas."

2. Great ideas have three key elements -- "All big ideas share at least one of three business objectives: improved efficiency, greater effectiveness, or innovations in products or processes. In a way, it's an exhaustive set of possibilities. You do things right, you do the right thing, or you do something new."

3. There are no truly new ideas out there -- "Every big idea owes a considerable debt to related ideas that came before it."

4. Innovation comes from the front lines, but the top sets the tone.

5. Every new initiative needs a champion -- "All ideas must have passionate advocates behind them--people who understand that business-improvement initiatives are vital to a company's success. These idea practitioners are the critical links between ideas and action."

6. Sell no idea before its time.

7. The story sells the idea.

8. All ideas have a life cycle -- "History shows that hot ideas soon cool and fade from the scene."

If you're interested in reading more about new ways of wealth creation within revolutionary companies I recommend Gary Hamel. One of his books - "Leading the Revolution" - is really energizing for entrepreneur wannabes, innovators wanting to make their voice heard or people thinking the company they work for can be more profitable than it is now.

3/9/2004 12:53:25 PM
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BY Kevin

While trying to formulate a rational response to Mr. MacLean's superb comments to the post below, I investigated the recent history of health insurance. Specifically, I needed to empirically justify his first assertion, "There is no question that the number of uninsured or underinsured in the USA is rising," while keeping in mind another assertion, "consumers are 'leaving the market in droves' because prices are unaffordable."

This post will tackle directly the first assertion only. What I found is that the share of the population with health insurance coverage is relatively constant within ethnic groups, and that although there is a real shift towards a higher rate of uninsured in the U.S. (from 12.8% in 1987 to 15.2% in 2002), this can be "explained" by a shift in ethnic composition of the U.S. As can be seen in the chart below, about 10% of white people have no health insurance, about 18% of Asians, 20% of blacks, and 32% of Hispanics. The time series has many of the expected wobbles, but none of the four groups show signs of an imminent threat.

But if that's so, how can we explain the sustained increase in the overall rate? The overall rate has more to do with the ethnic composition of the U.S. than a change in the fundamentals of health insurance. The increase in the percent of the population without health insurance doesn't show that the U.S. has a healthcare crisis; instead it shows that U.S. Hispanics have made dramatic gains as a share of the U.S. population--from 8% in 1987 to 14% in 2002--while Hispanics as a collective group show little or no change in their admittedly low rates of health insurance coverage. It also shows that the Black and Asian populations, which have lower rates of participation in health insurance markets, are also increasing relative to higher-covered Whites.

Hence, while I've previously concluded that the number of insured is rising, the data above show that the number and the percent uninsured are also rising. However, the ability to explain this through changes is the ethnic composition of the population surprised me. Sliced another way, as the Hispanic share of the population has risen from 8% to 14%, the Hispanic share of the uninsured has risen from 19% to 30%. Roughly 40% of Hispanics are first-generation immigrants, and 29% of Hispanics are U.S. born children of immigrants. So, I would conclude that much of the increase in the uninsured are these immigrants, many who find that there are more valuable things for them to spend their money on.

(In that vein, check out the neat paper, "What Do People Buy When They Don’t Buy Health Insurance And What Does that Say about Why They Are Uninsured?" that Ian referenced a while ago).

Note that in the charts above I've used the Census source data (provided here, with a hat tip to here), but there are alternate measures. I don't know which ones are best.

3/9/2004 10:54:08 AM
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BY Kevin

I was taken to task by a reader in the comments to this post on fat taxes in Switzerland:

*cough*, It's hardly evidence of hysteria that Americans are alarmed about soaring healthcare costs. Au contraire, the mystery is that it hasn't displaced other matters.

No wonder the field of economics is in disrepute.

I respectfully disagree with Mr. MacLean's position. While I agree that any large swing in the price of goods will be widely noticed and discussed, I don’t think the current alarmist discussion of health care has even bothered to inquire into the most important linkages between 1) the finance and 2) the provision of healthcare.

Surely, people are right to be upset when they pay more for the same amount and quality of care, just as they are when the price of any item rises. However, this is not what has happened in health care in the last 50 or 100 years, but no politician dares tell people that high insurance costs are, inevitably, the price that people must pay for getting what they want.

Let me state it clearly: people--through insurance premia and taxes--are paying "high insurance costs" for 1) more care at any given time, 2) better care at all times, 3) living longer.

These changes have such drastic effects on cost because health insurance covers everything--and most people want it that way. Most people do not insure their health solely against drastic or severe problems, as they do with automobile or home insurance. Instead the *ideal* health insurance covers everything for everybody--for a small monthly fee, with little or no co-pay.

This hysterical ideal has not been scuttled by corporate greed or by political incompetence. Instead it is the culmination of a dangerous misunderstanding of the choices available to anybody, under any system of funding or procurement.

In reality there is no avoiding the costs of care, except to stop using so much health care, or to revert to a more primitive level of care. I for one, would not prefer a 1950’s level of expenditure on health care, if all I could receive was a 1950’s level of care.

The hysterical discussion emphasizes that overall spending is skyrocketing--and I agree that it is. However, there is absolutely no evidence that the long-term cost of any drug or medical procedure--if the quality were kept the same--has actually increased. What has happened is 1) we demand a far greater amount of more advanced care, 2) we pay for this care through an insurance system--which means we spread the cost around, and have little incentive to economize on care.

Health insurance is expensive not because of exorbitant profits by medical companies, but because health care is expensive to procure. And those who receive a lot of care, get other people to pay for it.

I must emphasize that there is little or nothing the government can do to lower the cost of health care--if it wants to keep the pace of medical advance at least at its current level, and it does not want to limit the amount of care an individual can purchase. The latter is the model that many European countries are taking.

As I've written elsewhere about a related issue:

Politicians will never admit that their hands are tied, and that there is almost nothing they can do to lower the cost of drugs.

For starters, it's simply laughable to suggest that greater political control over the health industry will lower cost without reducing the quantity and quality of care delivered to end users.

The only ways to reduce drug prices to the end consumer, without lowering R&D, are 1) lowering the cost of FDA regulation, and 2) taxing the general public more than today, and using that extra revenue to cover part of the cost.

The first method would actually lower the real cost of development and price to the end user, while the second would, to the consumer, subsidize drugs through higher prices of everything else.

3/7/2004 04:16:30 PM
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BY Kevin

The quality of our child's formal education is a critical factor in choosing where we will eventually settle down. My wife and I bought our first home recognizing that the much lower mortgage, tax and other costs of living in our condo will more than fund tuition for a private alternative to the poor quality of education at the local public elementary school (Patrick Henry), should we find ourselves unable to move before the boy reaches school age.

By two of the standard metrics I should want to send my son to PH. Following the link above tells you that PH has tremendous racial diversity and a very low student to teacher ratio. However, it's test scores are dismal in practically all areas. And I've seen firsthand the terrible behavior of many children who go to the school.

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I'm willing to admit that I and my wife are part of the problem for the school's dismal performance. We will not send our child to a school which is a demonstrated poor performer, thereby making it easier for other parents with similar educational concerns to avoid sending their children to the school. How is the school to improve if many of the parents who are most interested in their children's education avoid it entirely?

One step is to make sure students are fed, and with 60% of PH students being bought lunch by the taxpayers, that's taken care of. Another step is to make sure students are warm in the winter, and as might be expected, some well off people have responded spontaneously to this perceived lack of coats.

As I noted on T&B some time ago, I live in a diverse building in an even more diverse neighborhood, but diversity of race is, for the most part, irrelevant to me. And for all of you unwilling to admit it, real diversity is much deeper, and it requires poor people (mostly brand new immigrants), some of whom try to escape the DC winter without buying new coats for their children. (I note, in passing, Mr. Edwards infamous line, and A. Tabarrok's response).

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The people who started and still run the private coat drive for students at Patrick Henry and elsewhere were apparently clueless that they lived in a sea of poor immigrants, despite--trust me on this--being unable to go to any service or retail location in the area without running into a recent immigrant of one sort or another . But it took statistics, not a visit to CVS or the lowbrow strip malls nearby to make them see reality:

For the Darbys, the experience has taught them about more than just coats. They were stunned to learn that the Alexandria school system has one of Virginia's largest populations of poor students -- as measured by those receiving free and reduced-price lunches.

Cheryl Darby, 56, who grew up poor, said she didn't know the depth of poverty in the city until she began working with her husband on their mission.

"Everyone's perception is that Alexandria is extremely wealthy," she said. "But you look at the statistics, and it's also a very poor community in terms of the student population."

Again, where do these people shop? How is the plight of so many people so physically close to them hidden from their view? From what I gather, this couple lives in a brand new townhouse, in an insulated neighborhood of brand new homes carved out of a former Army base, right across the park from my very diverse and much less well-off neighborhood.

How am interpret their view of Alexandria? That even the poor people think they're extremely wealthy? That can't be. What she means to say is that she doesn't know poor people personally. In fact, it sounds like the couple does not care about diversity--or school performance; they didn't even know they lived in a financially diverse area--but they still have done a fine service for the community. That's OK in my book.

3/7/2004 03:27:49 PM
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BY Dragos

The most common software business model is the one where the vendor charges a high upfront fee for a licence and then smaller, ongoing payments for maintenance and upgrades. It is called perpetual licence model and nowadays it is used by the big producers who dictate the terms of sale, especially because of their high negotiating power.

It seems like software companies increasingly understood that this is not a sustainable model since it is not customer-centric, it is rather product-centric. Consequently they switched to software-as-a-service that seems to be more appropriate to the customers' need, creating a sustainable relationship with the customer. This business model may include subscription-based licensing in which customers make repeat payments to renew their right periodically, linking payments terms to certain project milestones (i.e. programs delivery, results evaluation, etc) or simply paying for pilot projects.

3/4/2004 07:07:07 AM
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BY Kevin

Swissinfo has a fine story on a tax bill to be presented by one Heiner Studer to the Swiss parliament, that would raise the after-tax price of high-fat foods (except chocolate). While the article notes that "little enthusiasm" for the bill has been expressed by industry advocates and government health experts, it doesn't mention whether or not a critically large swath of the Swiss population actually wants the federal government to enact a fat tax.

"Will such a tax be accepted by the population?" is asked, but the question means, will the people follow the law if the elite pass the tax, or will they evade the elite's wishes. In fact, government experts, who are ambivalent about the law, have pragmatic objections--i.e. they don't believe that people will change their behavior dramatically.

And they think that such behavior needs changing because Swiss health costs are rising ever higher, and adults and children are becoming increasingly obese.

Also, as opposed to the hysterical cry over ever higher healthcare spending in the U.S. and everywhere else, someone at the Swiss Federal Statistics Office understands that increasing costs in healthcare mean increasing benefits. The article's blurb, "Health spending in Switzerland has continued to rise over the past 40 years, driven by demand for better care, according to a new report," tells it like it is.

The full report (warning: in German), states that Swiss healthcare cost increases have been roughly constant over the past 40 years. The primary cost drivers are patient demand for better care, and the specialization and privatization of care that has met that demand.

In response to increasing spending, there are several proposals to lower the number of hospitals in Switzerland from 260 to 40. Now, what kind of effect will that have on all those Swiss who are paying out of pocket for premium healthcare?

3/2/2004 01:40:45 PM
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