Truck and Barter

Private Roads in Northern VA

Well, I never thought I'd see this:

Construction of the first major expansion of the Capital Beltway in a generation could start as soon as next year, Virginia transportation officials said yesterday after signing a deal with two private firms to build toll lanes for a speedier ride on 14 miles of the chronically clogged highway.

The deal calls for adding two lanes in each direction of the Beltway, separated from other traffic... The high-occupancy toll -- or HOT -- lanes would be free for vehicles containing three or more people; other drivers would pay to use them. To keep the lanes from clogging, tolls would increase with the amount of traffic.

The state would not have to pay anything for the new lanes. The private companies would invest the entire $900 million cost of the project in exchange for all or part of the toll revenue....

Fluor Enterprises Inc. and Transurban Group will pay to build the lanes, which could open in 2010.

Not Enough Choice!

Too much choice getting you down? Not me. I don't know about you, but I frequently find that "the market" doesn't provide exactly what I am looking for, i.e. the stores don't carry a supplier's full line of products, i.e. there's not enough choice to make optimal decisions.

My most recent disappointment along these lines was looking for 20 lb. white 100% cotton paper, the least expensive and lowest quality I could use when handing in my dissertation to GMU:

Cotton papers come in a variety of weights. 20, 24, or 28-lb papers are most suitable. 32-lb paper is fine as well, though it will cost substantially more than the others.

This is my cost effective choice, yet this (in white), at about twice the price (and quality), is the only in-store option. Yet, that additional quality is worthless to me...

I should note that all paper options are available online, at about the same cost, so my paper choices are really limited in the short-run...

Have We Brought Kevin Down?

In more of the navel gazing that I like to engage in, I note here that T&B seems to have eluded the notice of this Baltimore Sun article (found via Cafe Hayek) that makes particular mention of George Mason University-associated weblogs.

George Mason tuition is $8,000 a year for out-of-state undergrads, but the considered thoughts of two of its most interesting professors - Tabarrok and co-blogger Tyler Cowen - arrive daily for free on Marginal Revolution. Fairfax, Va.-based Mason, in fact, has become a hub of libertarian economics blogging.

Of course, this might be due to the fact that this group blog isn't made up entirely of GMU-associated folks. So, despite possibly helping improve Kevin's marginal product, we may well be a drag on his inexorable process towards fame. Or at least what passes for it among the econo-blog crowd.

Well, I am taking a class there now, so maybe that will help some...

More of This? No, thanks.

Instapundit has a link to an "amazing" story about the IRS:

"In a program intended for employee development, administrative costs exceeded tuition paid by almost two to one," said Max Baucus (Mont.), the ranking Democrat on the Senate Finance Committee, which oversees the IRS. "As Congress considers the IRS budget for the upcoming year, we must be confident that the IRS is using its money responsibly."

(I say "amazing", since I don't find this kind of waste out of line with my expectations, but simply fascinating in the numerous and varied ways that the government can find to make a mess of even basic functions.)

An internal employee program of the IRS spent 60% of its funding on administering the program, turning away people seeking to use the benefit because of a lack of funds. Of course, these benefits are often considered part of an employees's overal compensation package -- something they consider having when weighing the value of a federal job versus, possibly, the private sector.

This should be a reminder for those who suggest that the key to fixing efficiency problems in the private sector is...more government.

The fact is that in health care, the private sector is often bloated and bureaucratic, while some government agencies - notably the Veterans Administration system - are lean and efficient.

I think it wouldn't be a stretch to believe that the efficiency of a governmental organization decreases as the number of people it is required to serve increases. In fact, I might suggest that this is one of the reasons that the VA can be considered "efficient' (relatively speaking). What I find more interesting, however, is that the VA is the third largest civilian consumer of energy in the federal government. They are behind the USPS, which delivers mail to everyone (ostensibly) in the US, and the DOE, which is the central agency for energy matters and thus concerns everyone again. The VA used 48.6 billion Btus compared with the USPS's 78.5 billion in 2002; this loosely compares the hospitals caring for those who fall under the VA's purview versus delivery vehicles to get mail across the 50 states . How would that ratio change if the VA suddenly had the role of administrating the health care for everyone in the US? Or even if their current number tripled?

The fact is that in health care, to avoid the loss of clients fed up with bad service, the private sector would have motivations to monitor its effciency, even if it wasn't perfect at it, while no government agency -- saddled with the potential care of every person in the US -- would have any reason to count "efficiency" among its primary concerns.

Choice in the PRC

Warren Brown not so calmly voices his opinion about mandating high MPG vehicles:

I just left a country that tends to do that sort of thing--the People's Republic of China. They mandate lots of things there. Very efficient. No one complains. No one votes. No one wastes valuable time on town-hall meetings or anything like that. The government says: "Do it [or else]." And the people do it.

You want that?

I don't.

Not here.

Not ever.

Not for any reason under any circumstance.

Booze Sales

It shoudn't be amazing that the ability to advertise helps sell product. The hard liquor business had been in decline for years, but a few years back they ended a self-imposed ban on T.V. advertising. The recession also helped convince stations to start running them. It should come as no surprise that sales actually grew last year. The article doesn't seem to mention the effect that advertising has on the sales increase. Of course, part of it is that hard liquor has become fashionable among the young. From Barron's:

U.S. liquor consumption rose 4% last year, following a similar gain in 2003, a sharp contrast with the slowing beer business, in which volume was flat in 2004. Spirits-industry revenues increased an estimated 6% last year, as American consumers favored trendy premium brands like Grey Goose vodka, stalwarts like Jack Daniel's Tennessee whiskey and oddballs like Jägermeister, a licorice-flavored liqueur popular with college students, who often down it in straight shots. The developing world also is fertile ground for distillers, thanks to rising demand for Western spirits, notably scotch, in places like China.

Liquor's U.S. market share rose 2.6 percentage points, to 31.3% over the past three years, while beer fell by a similar amount, to 53.2%, and wine was about flat at 15.5%.

"Spirits are taking share from beer," says Bill Pecoriello, Morgan Stanley's beverage analyst. Pecoriello cites flavor innovations, increased liquor advertising, dieting concerns and the popularity of shows like Sex and the City, in which Carrie Bradshaw and her girlfriends made cocktails glamorous by drinking cosmopolitans and green-apple martinis in Manhattan clubs.

A recent consumer survey by Morgan Stanley found that liquor was the No. 1 alcoholic beverage among 21-to-27-year-olds, belying the notion that liquor skews toward the middle-aged drinkers. Spirits are particularly popular among young women, who tend to view cocktails as more fun and less fattening than beer. Liquor is prominent in hip-hop culture, which is influential among young and soon-to-be-legal drinkers. A top-selling rap song a few years ago was Busta Rhymes and P. Diddy's "Pass the Courvoisier."

The strength in the U.S. liquor business contrasts with its weakness in the 1980s and early 1990s, when Brown-Forman (ticker: BF-B), the maker of Jack Daniel's, felt the need to diversify by purchasing the Lenox china business. Now Brown-Forman wants to sell Lenox to focus on liquor.

Price Fixing

Matt Welch has an interesting article in Reason talking about the newspaper business. It's a great column that shows the newspaper business isn't in such bad shape. Of course, one reason the industry has so much dead baggage is because of governement regulation. Matt mentions Richard Nixon's attempt to save dying newspapers called the Newspaper Preservation Act. Here's an article in Slate calling for the anti-trust exemptiom to be to be removed. On a side note, it looks like the Tribune Company has had enough of the LA Times, I learned over beers recently that it has been shopped along with Newsday.

Here's an except of Matt's article:

Nancy Barrick sounded concerned. Her city's two daily newspapers the family-owned, market-leading Seattle Times and the Hearst Corporation's lagging Seattle Post-Intelligencer had announced in early February that they were both doubling newsstand prices to 50 cents. Given the intense financial pressure the papers were facing, the KOMO-AM news anchor asked me, what can be done?

I had to suppress a laugh. Daily news publishing is one of the most profitable businesses in the United States, with average operating margins last year of 20 percent among publicly traded newspaper companies (compared to about 5 percent for the dreaded Wal-Mart). Dominant dailies in even second-tier cities are swollen with enough ads, news pages, and editorial employees to make a European journalist collapse with envy. The Seattle Times, with a weekday circulation of 230,000, has a staff of 1,600; The Sun, England's largest-circulation daily at 3.5 million, has just over 500.

Seattle's jacked-up prices are a logical consequence of letting the federal government protect local newspaper markets. In 1970, in the middle of the industry's 50-year contraction, Richard Nixon signed the Newspaper Preservation Act, which allowed rivals in the same city to sidestep antitrust law by forming joint operating agreements, or JOAs, in which a single entity could set prices and handle the business operations for ostensibly competing newsrooms.

The law was supposed to save struggling newspapers and give multiple editorial voices to cities not named New York. In practice, it has done little to stanch newspaper closures of 15 of the original 28 JOAs have ended with just one paper left standing and much to prevent new voices from entering markets in the first place. Provided with a license to fix prices, JOAs have effectively scared off new entrants (who wouldn't be able to enjoy their antitrust exemption) and hiked ad rates and circulation fees for their captive audiences.

Meanwhile, the corporate parent companies of some lagging JOA partners have learned that the shortest path to their ideal situation, sole ownership of a newspaper monopoly is to underperform deliberately.

Realtors use Regulation to Kill Competition

This is an excellent example of what public choice economics teaches you about government regulation; concentrated benefits and disperse costs means those who benefit will have legislation and regulation written to enhance their "professionalism", market power, political influence, and profit.

In this particular case, federalism has clear benefits. National Realtors have less influence on the central government, and the Bush administration is trying to use the DoJ to prevent Realtor-dominated state government agencies from stifling competition:

The Department of Justice has two blunt warnings for the American home real estate establishment:

• Do not block efforts to save consumers money through rebates of real estate commissions.

• Do not stand in the way of discount "fee-for-service" firms that will list sellers' properties for a fixed-dollar amount but not perform all the traditional brokerage services, such as holding open houses or advising on buyers' offers.

On April 8, the department sent a highly unusual message to the Oklahoma legislature urging it not to pass a state Realtor association-supported bill that effectively would squeeze low-cost, fee-for-service real estate brokers out of the state by redefining the service requirements for holding a brokerage license....

"The state association [of Realtors] came to us and said, 'We think you should do this,' " Thorburn said. Setting minimum standards for services -- including requiring brokers to assist clients with offers and negotiations -- would help ensure that home sellers would have competent representation during a sales transaction, Thorburn said. It would, for instance, eliminate the possibility that discount brokers could simply "charge $500 up front and tell [sellers] that 'I'll list your property, I'll put you on the MLS, I'll give you a sign for the front yard and then say, you're on your own, good luck.' " Some sellers might find themselves confronting a well-trained buyer's agent in negotiations, said Thorburn, and might not make smart decisions -- a result that would not be in the seller's best interest.

Real estate transactions costs are, in my opinion, extraordinarily and extravagantly high. Part of that is due to an unnecessary complexity in the transactions process; part of that is due to public ignorance of what is exactly entailed. In fact, I'd argue that "consumer" organizations should be on the front lines against these attacks on competition, and should be trying to minimize the costs in other ways.

For quite some time, government policy has been to increase the share of home ownership through the use of repurchasing secondary markets, interest deductions on income tax, and interest rate subsidies; policy has not been to increase understanding of complex transactions, or to reduce transactions cost.

Could it be that government homeownership policy has been effective because the government didn't try to lower the profits of Realtors?

Not Bad For A Blog "Almost" On Economics

Due in principle part I think to Kevin actually knowing...you know...economics, and the popularity of the Iraqi Dinar discussion hosted by T&B, it looks like this blog comes in at number 26 at Blogshares' rankings of the Top 100 Economics blogs. (Found via #33.)

Of course, I have questions about the categorization of #'s 1-3, but if they're willing to let a group blog with punters like me slide... Though, methodologically, there are certainly some issues -- The Mises Institute and the Mises.org Blog are listed as two separate entities.

(NB: For an explanation of the post title, see here.)

It's Not How Many Times You Get Knocked Down...

...it's how many times you get back up.

At least, that's what my Dad always told me. And he was right about a lot of things.

T&B's sometime contributor Vinayak has a bad news/good news kinda post over at his site. I admire the grace with which he accepts some bad news on acceptance to Econ PhD programs; which, to me, is the good news. With all the Sturm und Drang surrounding things like this, it's good to see someone have an honestly reflective moment, and not come out feeling like it's the edge of a cliff.

If it helps, Vinayak, I currently work with a guy whose current highest degree is from the same program you're soon to leave. There is no one here who can doubt his skills and talent. Congrats on making it this far.

Sony Backs More Efficient Allocation of Things That Don't Exist

After having been hammer-and-tong against people selling virtual goods, Sony has decided to do a 180.

Virtual goods exchange occurs when a player of an online game decides to sell off access to some sort of item that is valuable within the game in question. Everything from particular items to property to entire characters are being traded back and forth -- using real cash. Sony Online used to argue against this activity, and worked to block people who were suspected of having done this. No longer.

Starting in late June, SOE will begin offering a new service called Station Exchange. This secure service will allow EverQuest II players on specific servers to buy and sell the right to use items, coin and characters. To be clear, all we are doing is facilitating these transactions. We are NOT in the business of selling virtual goods ourselves.

According to the article such exchange has blossomed into a US$200 million a year market. For things that don't exist. I still say that people who are eager to spend close to $200 on a single character are going to respond in ways that reasonably approximate real life when faced with experimental conditions. The biggest hurdle to using these things as econ labs? Selection bias on the the test group; it's a specific crowd that takes that kind of time and effort. Hey, I could well be one of them, so no offense. I'm just saying, is all...

Nick Leeson Lands a Job

For those you who don't remember who Nick Leeson is, he's the bloke who brought down Barings Bank a decade ago. Apparently, Galway United Football Club has seen fit to have him overlook their books. The LA Times article:

When he interviewed for the job at Galway United Football Club, he said he offered no references — and began by discussing the scandal. "The first thing you must deal with is the collapse of the bank and you don't try to put any gloss on it," he said.

This is rather unremarkable, but I want to recommend his book Rogue Trader. His account is highly entertaining with some important lessons to keep in mind. It clears up some misconceptions as to what really brought down the bank. Many times when the incident is mentioned, derivatives trading is the culprit. This is true to the extent that the losses were cause by losses in these instruments. However, these were the result of fraudulent activity on Leeson's part. The only authorized trading his operation was doing was strict arbitrage with another Asian futures exhcange. Rather, the losses were the result of a large error by one of his staff that he attempted to cover up. The Kobe earthquake caused these to explode which he further exacerbated by trading more in the error account.

Most of you probably don't think about your money and securities in your brokerage account and you're safe to an extent. Professional traders actually worry about this a lot( note: I'm refering to certain subclass of traders, from daytraders at prop shops to exchange members/off floor traders. Obviously, a trader at Goldman Sachs has no discretion over stuff like this). Because of the structure of clearing firms, LLCs which are their clients and individual traders, it's entirely possible to wake up one morning and discover somebody at the firm had wiped it out. This could be the result of fraud or poor business practices. This is why most traders don't keep more cash than they have to at their firms. Nick Leeson drives this point home; you never know when his long lost brother might blow up your firm. Like I said, this happens probably more than people outside this certain segment of finance realize.

Utility Functions and Limited Rationality

Brian Caplan writes "I agree that we do not 'need to examine' whether people optimize. Treat it as a tautology, I won't demur." Well, I mostly disagree; it might be a tautology in the limit of arbitrarily brilliant rational actors, but in the world of limited computational resources, it seems to depend on design tradeoffs.

There's no particular reason that it there needs to be a utility function behind people's decision patterns. Mathematically there's no reason that a directed field must correspond to the gradient of a potential field, and a utility function seems to be entirely analogous to a potential. I don't think this is entirely a mathematical curiosity, either; in real systems that are simple enough for us to understand (not people, but simple-minded agents working toward some goal) sometimes there isn't. Thinking of the actions that people take in any situation as a potential gradient in some space...the potential may not exist. Particular odd consequences like Dutch books may seem uncommon, but many milder odd behaviors could be common.

Moreover, although I will grant that a supremely rational idealized being would tend to have decision patterns consistent with a potential function, real actors in the real world have limited brainpower. Given the limitations on how expensive it is to compute things, even for brains, just because a behavior would be optimal if computation were perfect and free doesn't mean that we can deduce that it must be present in successful organisms.

One example that I know more than my share about is in the construction of software to play games, especially the game of Go. In some games, like Chess, the most successful programs often embrace the idea of a utility-like function wholeheartedly, and deviations from utility-function-driven behavior are relatively subtle. But in Go, many successful programs deviate fairly strongly from actions which can be described by a gradient of a potential. I can illustrate this with a very simple example that David Fotland (the author of a strong Go-playing program) has used to illustrate an unrelated point. (Fotland's point is that tactics are overwhelmingly important in the game, in a way that people, including him, usually take a while to realize, as they begin by puttering around with grand strategy. His example is a trivially simple program which can tear a clever program to shreds, even if the programmer put many man-months into the usual big-picture stuff like "influence functions" that programmers are usually drawn to initially, if the clever program doesn't pay some serious attention to tactics.)

    1) If you have a single stone, one liberty 
       group, add a stone to it.
    2) Among opponent blocks without two eyes, 
       find the one with the least number of 
       liberties, and fill the liberty with the 
       most second order liberties.  If there is 
       a tie, pick one at random.
    3) Make a random move that doesn't fill one 
       of your own eyes.
    4) Pass.

Note that in this algorithm no potential appears; it's a set of simple rules like "if the hand is painfully hot, yank it back" rather some sophisticated combination of a utility function "I don't like being burned" combined with a world model where the probability of burningly hot things diminishes strongly as one retreats toward the body. In fact, not only does no potential appear explicitly, I believe that it is impossible to construct a potential such that this algorithm's behavior follows from the gradient of the potential.

(Why do I believe that no potential exists? Well, everything involving "eyes" is a mess to try to prove things about, so I could be in error because of that. But if we consider a simplified algorithm "if you have a single stone one-liberty group, add a stone to it; otherwise, make a random move" then it seems easy to show that no potential exists, and intuitively, I'd expect that the difficulty would continue in the full algorithm. In the simplified algorithm, on a one-dimensional board with stones represented as "1" in binary numbers, from 10000 we could choose moves to give 11000, 10100, 10010, or 10001, but we prefer 11000, so a 11000 outcome would need to have higher utility than 10100. From 01000 we can choose moves to give 11000, 01100, 01010, or 01001, and we choose randomly, so they must all have equal utility. From 00100 we can choose moves to give 10100, 01100, 00110, or 00101, and again we choose randomly, so they must have equal utility. But then 11000 would need higher utility than 10100, 11000 would need equal utility to 01100, and 01100 would need equal utility to 10100, which is impossible.)

A serious program to play a good game of Go is much more complicated than that, of course, and only a few of them have revealed much about how they work. But the successful programs that I know of are not particularly well described by utility functions. Their success can be interpreted as something like rationality, so I think the lack of utility functions is an interesting datapoint.

Outside the field of computer Go, to what extent a model of the world, and/or a utility function on it, is necessarily involved in "rational" behavior (in real robots and organisms, as opposed to philosopher kings) seems to be something of an open question in general. I have seen bits and pieces of the debate elsewhere, although choosing good moves in games is the only bit that I know very much about.

And, to move away from my narrow computer geekery back to broad, renaissance economics geekery, I wonder whether in markets something else might kick in, a sort of central limit theorem. That is, even when rationality and utility functions are a fairly poor approximation, if you lump a bunch of actors together "properly" in a market, the market might tend to act like a collection of considerably more rational actors. This would be a central limit theorem analogous to the usual theorem of statistics, where a collection of not-too-skewed random variables combined properly acts very much like a collection of unskewed Gaussian variables. For the real central limit theorem, the meaning of "properly" is well-understood. For this hypothetical conjectured limit, I'm not sure quite how to state the analogous conditions. "Not-too-irrational actors?" And "independent actors?" Are actors still usefully independent if they do the typical human thing of watching the price and adjusting their behavior based on guessed trends? But it seems as though there should be something there -- quite possibly something in the economics literature that I just haven't heard of.:-| I'm also not sure how to capture the time dependence in markets where actors are allowed to get richer by being rational, so that presently the really-irrational actors can be marginalized by the now-wealthy very-rational actors.

Also I will veer back into computer and math geekery for a final remark. This central-limit-ish behavior, where ensembles of many idiosyncratic individuals acting much like ensembles of less-interesting individuals, also arises in combinatorial game theory. In CGT, the analysis of games gives a "mean" score somewhat analogous to a mean of a random variable, and then an arbitrarily messy description of all the other hairiness around that. When you combine many games into one game, the means add up, and the other messiness tends to get washed out, because it adds up much less simply constructively than the means do. (Furthermore, the way to combine games to get this behavior is a bit reminiscent of an open market: in effect you set all the subgames side-by-side on a long table, then on any turn in the combined supergame you get to make only one move in only one subgame, and you choose the subgame which is most attractive to you.)

Make War, Not DVDs

The Blu-Ray vs. HD-DVD fight has a chance to take a more...collaborative turn.

I still don't think a new DVD format is going to be terribly popular for a while, since the benefits of switching formats yet again seem to be quite small. Not that many people have a home entertainment system that can do justice to the leap from DVDs to even higher precision. Unless you can offer some serious changes from current DVDs (much as CDs did over tape), I'm betting it stays in the realm of HD-TV and lingers on as a toy for the early adopters and true afficianodos.

But that's just my guess. I'm often wrong.

Here's a funny quote from the story:

"The most important thing to understand here is no one really wants a format war," said the source who asked not to be named.

No, not "ha-ha" funny. Funny in that way that makes me scratch my head. Truth be told, I wouldn't mind a format war at all. SInce I have absolutely no plans to invest in yet another player and yet another copy of a movie I really did think I'd watch enough times to warrant buying on disc, I'd be more than happy to see the two sides slug it out. Make them better, cheaper, faster, whatever. I'm not paying. And if I finally do cave in and buy the new format, I'll be far more likely to believe I've gotten the better technology. Betamax might have been better for images, but it wasn't a better system.

No, the companies don't want the format war, since there's a chance one of them might lose. Me, I say the ability to have winner and a loser is better incentive for a company to try harder. So, ladies and gentlemen, have at it.

Choosing to Live-Aboard

High housing prices in the DC area have shifted, at-most, a few hundred people into living on boats:

"People think that we're outside of normal life, like a step above homeless, a step beyond trailer trash," she said. "The land people just don't seem to understand it."

Apparently many potential live-aboards want all the creature comforts, but fail to realize how much space that requires.

The most common source of difficulty is in failing to adopt a simple enough lifestyle, and the size and complexity of the boat itself is often a major aspect of the problem.... Nearly everyone understands that the move will involve a simpler lifestyle, but few understand what this really means. We often hear something like this: "We really want to have a simpler lifestyle. As long as I can take a hot shower every day, have plenty of ice for drinks, and can run my home computer on board, I'll be fine. All we need for accommodations are a master stateroom with a double berth, four guest berths in two cabins so we can bring our friends, two heads, and standing headroom throughout." All of the items on this list are obtainable even in a condition of poverty, ashore. However the average person may be completely unaware that this reasonable-sounding list is only obtainable at great cost afloat, in an exceedingly large boat for most people.

Bono Yet to End Poverty, Still Wears Sunglasses Indoors

Despite credentials clearly polished enough to have been considered for the World Bank's top post, not everyone agrees that his view of free trade economics and countries like, say, Ghana, are the best for all involved. Including someone from Ghana:

Rock stars and charities can be powerful advocates for good causes, and they generally have good intentions - but in many cases their lyrics do not genuinely rhyme with the silent hum of the very poor they seek to protect. Their economics are just plain wrong. They ignore history, peddling the misguided belief that poverty, famine and corruption can be solved with foreign aid, debt relief and other policies that have already failed Africa.

One pillar of their current campaign is to eliminate farm subsidies in western countries, a noble goal which indeed would help to achieve a level playing field for agricultural producers around the world. Yet this view is rife with hypocrisy: the same organisations promote subsidies (what they call "fair trade") for farmers and businesses in poor countries to shield them from the effects of competition.

Coldplay frontman Chris Martin has said that Ghana's rice, tomato and poultry farmers need to be protected from cheap imports. Yet the problems of Ghana's farmers lie elsewhere: they and other entrepreneurs are stifled by punitive tax regimes and the high cost of capital, not to mention our disarrayed land tenure systems which lead to low crop production.

Here's a particularly interesting bit:

Protection for local producers also means that African countries trade very little with each other, as illustrated by the World Trade Organisation's 2001 statistics. Africa's share of intra- and inter-regional trade flows to western Europe alone was 51.8pc, while it was a paltry 7.8pc within Africa.

The author's suggestions for change?

The solution to all that ails us is not aid, debt relief or "fair trade". It is to adopt institutions to harness the entrepreneurial spirit that exists in every African country, to enable Africans to trade with each other and anyone else in the world.

Establishing property rights would be an important first step; an effective, transparent and accountable legal system is another. Combined with respect for private property and the rule of law, these broad reforms would encourage entrepreneurship, trade, innovation and even environmental protection because they empower people - rather than the politicians.

Starbucks Messes With Traffic Models

Another attempt to predict a complex system -- foiled by Starbucks and Dunkin Donuts:

In addition to its effect on mileage, the boom in on-the-go breakfasts has confounded attempts to forecast travel patterns, which are based on computer models that rely heavily on the predictability of the morning commute. Those models assume that people take the shortest, fastest routes to work, not the ones that necessarily lead past a doughnut shop.

"How do we predict future travel when commercial and social interactions like this can surprise us?" McGuckin asked.

Foreign Affairs on Broadband

Much like my reaction to the odd little piece from Lawrence Lessig, I find this article in FA magazine a bit...slippery.

The article strikes me as little more than a long-winded whinge about how the US' broadband network isn't the crown jewel of the world anymore, and it's all the government's fault for not doing enough.

The Japanese government played a critical part in these developments. It made well-considered and timely decisions to allot cost-free spectrum for each new mobile-phone generation. In so doing, it gave up badly needed revenue, but it retained full control over the terms of licensing and the flexibility to reassign spectrum according to future technological developments. In 2007, the government is expected to announce new spectrum allocations for the fourth-generation broadband mobile phones planned for 2010. Meanwhile, to protect consumers, the government has set important conditions before granting a service license, insisting that a carrier's network cover a certain area of the country and guarantee a certain level of service (with minimal dropped calls or interference, for example).

By contrast, U.S. mobile-phone policy was born of a colossal blunder from which the industry has yet to recover fully. In the early 1980s, after the management consultancy McKinsey estimated that there would be little demand for mobile phones and a small prospect of profitability, the FCC carved the United States into 734 tiny mobile-phone districts. It handed out two provider licenses in each district: one automatically went to the regional telephone company, and the other was drawn by lottery. The resulting infrastructure was cripplingly fragmented. It could not support nationwide calls, and inefficiencies and expensive connection rates translated into sky-high charges for customers.

By the use of juxtaposition, the implication is that the higher costs of mobile phone usage in the US is somehow a lack of the government imposing "important conditions". Rather than letting a number of standards compete, it's simply better for the government to subsidize one network language and have everyone's money pay for it, so that those who use it (the early adopters) don't face too high a price for entry. This leaves the government in the position of having to continually monitor the system to see what's necessary for the next generation of phones. The future of companies is tied up intimately with the decisions of the government. Why doesn't this bother people who fear the imposition of biases from massive corporations? NTT DoCoMo has far more money to spend on R&D and lobbying efforts -- is it a surprise that their standard is the one to be picked by the government? Let me propose a straw-man, just for the fun of it: what would be the reaction to the US government suggesting, every time the policy is reviewed, that Verizon just happens to have the best standard, and since it already covers the entire nation as a result of the government deciding that it had the best system last time, to go ahead and subsidize Verizon to roll out the new kind of service?

Why is innovation, and the cost thereof, something to avoid?

My "favorite" part of the entire article:

Sadly, U.S. mobile-phone competition is still based on price and the extent of a company's coverage rather than the kind of advanced data services available in Japan and elsewhere.

Ah, yes. It's just too bad that the US consumer has to make decisions based on such archaic things as prices. Don't we all realize that subsidized cell-phone coverage (as the Japanese government and Euro-nations have done in abundance) would make it possible for us to buy soda with our phones!!! A life steeped in the grand mosiac of simple push-button interactions is being denied us by a government that refuses to get more involved.

In addition, the article uses a metric that I find as problematic here as when it's used to argue for greater government participation in health care: "access". The question, as framed by the FA article, is about how many people could potentially use the network -- not how many people actually do. Greater access is not synonymous with greater use, as any health policy researcher is likely to tell you.

Here's another slipshod bit of reasoning:

In 2001, Robert Crandall, an economist at the Brookings Institution, and Charles Jackson, a telecommunications consultant, estimated that "widespread" adoption of basic broadband in the United States could add $500 billion to the U.S. economy and produce 1.2 million new jobs. But Washington never promoted such a policy. Last year, another Brookings economist, Charles Ferguson, argued that perhaps as much as $1 trillion might be lost over the next decade due to present constraints on broadband development. These losses, moreover, are only the economic costs of the United States' indirection. They do not take into account the work that could have been done through telecommuting, the medical care or interactive long-distance education that might have been provided in remote areas, and unexploited entertainment possibilities.

The economic study isn't the issue -- the expansion of the idea is. "Long distance eduation in remote areas"? Well, noting that Japan is smaller in size than California (roughly 150,000 sq. mi. vs 163,000 sq. mi.), this distance is considerably different when we have to think of vast swaths of the country as "remote". And it is at those places the author simply leaps from access to uptake that are more likely to face larger hurdles: namely the costs of a computer that could take advantage of long-distance learning. Undoubtedly some people would be thrilled to have it, but is the serious suggestion here that the poor, remote areas of Texas, Wyoming, North Dakota, Colorado, Kansas, Mississippi, and the rest simply the cost of a cable modem away from an economic boom? Can you really do manufacturing, farming, or welding through telecommuting? Or could it be, rather, that information-economy based jobs are located in population centers that are already well covered by cell phone and broadband access? And might it be that Japan, with considerably less physical size, has a far larger share of its population engaged in "knowledge" work (finance, consulting, programming, and so on and so forth)? The density of population centers, as well as the incidence of the kinds of users (people simply surfing the net vs. those running small businesses out of their homes) makes a large difference that the FA article seems to simply ignore. For comparison's sake, Tokyo is on par with Poughkeepsie.

As a final note (yes, I know, you're relieved to hear that), I would suggest a refresher course in political economy for Thomas Bleha, as this section is woefully problematic:

By 2010, the [President's Information Technology Advisory Council] should also aim to make available high-speed broadband access to two-thirds of all U.S. households for $30 to $35 per month. The key to reaching this goal is the government's taking the lead in creating a strongly competitive environment for DSL, cable, power line, and newer wireless broadband technologies. The more these technologies compete among themselves, the sooner Americans will have access to faster, cheaper broadband service. And with enough competition, there should be no need for government financial incentives.

His suggestion seems to be that these incentives would simply...fade away. How often does a privileged group allow the source of its privilege to simply wither away? Because the benefits of the policy accrue to such a small group, and the costs to such a large group (everyone else), we can expect to see whomever it is that has been given a cheap ride to fight for continuing the policy, with little coherent effort against them.

Despite how much it costs the US, and impacts farmers around the world how is Bush doing on simply reducing those farm subsidies?

Dance Hall Girls

Is this the way it always is here in Mumbai?

Maharashtra, India, is working to close down the widespread dance-bar business. Apart from the direct effect of flooding local job markets with women and former business-owners, more traditional businesses that rely on an informal financing institution are likely to suffer badly:

Hoteliers say that if a few restaurants going out of business could have this impact, the fallout of 750 bars closing down would be significantly higher. Most bar and restaurants are funded through the unofficial Chit Fund (BC) route.

It's fascinating how a BC operates: a fund organiser invites around 19 businessmen to create a monthly fund pool, for say Rs 20 lakh, with each member contributing an equal amount. The organiser is the pivot of the BC, and has the last word.

The pool of money created every month is auctioned to the highest bidder. So, if a borrower (who is also a member and contributor to the pool) bids Rs 5 lakh for the Rs 20-lakh pool, the bid amount will be reduced from the pool and he will get Rs 15 lakh.

Each member, therefore, contributes only Rs 75,000, instead of Rs 1 lakh. The amount the borrower repays would depend on the demand and supply of funds.

In the next month, the pool is created afresh by new contributions from the members. The per-member contribution will depend on the demand. The higher the demand, the steeper the discount. The member who has already borrowed cannot bid again.

A new bidder (from the remaining members) steps in. If he quotes a higher discount, the contribution required will be less. It is through the monthly contribution that the first borrower repays the money. If the discount is high, it benefits the persons who have already borrowed in the previous months, and those who would borrow subsequently. The process is repeated every month, with fewer members bidding, but everybody contributing.

Clearly, the formal financial markets are lacking some depth that the informal ones have long been providing. Perhaps the dance bar scene is a front for prostitution or worse, human trafficking -- I don't know enough to have a view on the policy. But, to go along with my theme from the previous post, such things can't be view in a static setting. Without the funding from the dance bars, numerous other small businesses may crumble, and new ones may have no funding to rise in the place of those that closed.

The Corporate Erin Brockovich?

Pardon the echo-chamber post, but this one really deserves an airing, I think. Via Asymmetrical Information, this post from Matt Yglesias.

The key point?

Speaking of which, fuck the small businessman.

Just a reminder, from the government Matt apparently so apparently and fervently believes has original claims on our money: over 99% of the employers in the US are classified as "Small".

Which makes Matt's suggestion rediculously narrow in vision, not to mention sounding really quite tiring.

Honestly, this sounds similar to the argument about drug company profits being "too large", and believing that simply scaling them back through capping prices won't have any effect on the number of new drugs that might (or might not) get developed. That is to say, this can't be viewed as a static action that simply lowers the coffers of the government. With the repeal of the estate tax comes a reduction in the contortionist practices people go through in order to avoid those same taxes. Add to this the possibility of increasing activity once the money that is currently taxed is back in the hands of the business owner.

To head one thing off now: no, I don't generally believe that tax cuts pay for themselves because of increased economic activity alone. In this case, however, businesses changing hands and retaining more capital create owners far more likely to reinvest in that business than possibly non-owners are to go out and spend their tax cut (of course, while people worry that tax cuts are spent on reducing debt or are simply being socked away, much heavy weather is made of the US savings rate being "irresponsibly low"). One of the major benefits, to me, of simplifying/eliminating taxes is avoiding the productive efforts spent in trying to avoid those taxes. In Matt's laughably naive formulation of "inheriting X" and having to "pay Y", and thus getting a net increase of "X-Y" -- the "very good problem to have" -- there is no mention of liquidity. That is, the business is worth a sum total of X, but possibly only because of its assets. The payment Y can, and in fact often does, surpass the liquid capital within the sum X. To pay Y, X has to be sold.

How many small businesses can you name are able to pay employees and produce goods...with no assets?

Interesting Resource

Stumbled across this the other day doing some research: The Directory of Open Access Journals. It lists and links to those journals that offer -- surprise, surprise -- open access to their content.

I'm not convinced this is the best business model for academic journals, but that may be largely beside the point. Of specific interest to this audience, here's the link to Econ journals.

NYC Rent Control

This is what is still rent-controlled in NYC:

Rent control applies to rental units in buildings constructed before 1947 that have been continuously occupied by the same tenant or a legal successor tenant since before July 1, 1971. Rent stabilization generally applies to apartments in buildings with six or more units built between 1947 and 1974, to some loft buildings, and to some buildings whose landlords participate in tax-abatement or other government programs.

"We don't look at this process as a mechanism to move out of rent stabilization," said Neil L. Rubler, an executive vice president at the Olnick Organization. "We spend exactly as much on an apartment renovation as we need to deliver a first-class product in keeping with the property's tradition. If we do get the legal rent over $2,000 we, of course, will deregulate the apartment."

The new market-beating strategy is to offer subsidies and tax abatements for agreeing that 20% of new apartments will be rent stabilized for 20 years. That this necessarily increases short-term market rents and taxes is not ususually recognized. But most proponents would probably argue that the costs to some are worth the benefits to others.

Of course, one can debate about who are really getting the benefits. In March, the NYTimes pointed out that under the old system, the rich were getting richer!:

It is far more difficult, however, to get a good deal in the affordable rental buildings of Manhattan, where vacancies tend to come in just a trickle. Part of the scarcity problem, Dr. McCarthy at the Ford Foundation points out, is that "many lower-priced units are occupied by more affluent people."

"I'm not against rent control," he said, "but there's a tendency of people to sit on desirable affordable properties. And it's not unusual to see some people paying less than 10 percent of their income for rent while some others pay more than 50 percent."

I bring this up again and again because it comes up again and again. For me, the most potent anecdote about the political motives behind rent control came from Stiglitz' Principles book. It was about former NYC mayor Ed Koch's rent controlled 6-room apartment in Greenwich Village going for $441 a month, when valued at $1200 a month.

I think later editions of Stiglitz dropped the reference to Koch. I cannot find a major news source for the Koch accusation, which is one of those anecdotes that seems to have spread without authentication.

UPDATE: Another excellent example of the type of person who actually benefits from rent control - people who own investment properties:

Josephine Hemsing is a lifelong renter who bought her first piece of real estate last August.

Along with her husband, Dan Cameron, she runs Hemsing Associates, a public relations firm that works with classical musicians. They live in a rent-stabilized apartment on the Upper East Side and also rent another apartment for an office.

Content for the time to live and work as renters, they still felt the time might be right to buy a condo that they could rent to someone else. They reasoned that would allow them to build up equity in a property that, in the future, they might want to occupy themselves.

The couple looked at several apartments before finding a one-bedroom condo at the Concorde, a luxury building at 220 East 65th Street, which they bought for $590,000 last August. Their broker, Lynne Roberts of Bellmarc, helped them find a tenant who pays $3,000 a month. Regularly scheduled mortgage payments, taxes and common charges total about $3,500 a month, Ms. Hemsing said, and the couple have also decided to make additional payments on the loan principal.

"I realize there's a frenzy going on but that's not why I was involved," Ms. Hemsing said. "I felt that I had come to a point in my life where I had to take some money and invest it."

Thanks Kevin

You know, I was just coming to announce it and Kevin beat me. Oh well, so as Kevin posted immediately below, I started a new blog to post my options trades and reasons behind them. I've done trading journals on Elitetrader.com before and found it to be a very usefull excercise. A public airing places some contraints on trading, in other words, maybe I won't do some things that I might be tempted to normally. Besides, I just need a place to write my thoughts down each day. I could write it up on a yellow pad or in Word, but why not show worts and all.

As Kevin noted, another reason to start it is I'm getting in on the ground floor of options/derivatives blogging. There aren't any option blogs out there except the sole one I ran across, the lonely Galatime. If you know of any others let me know. I'll be a part of two blogs in the process of the specialization of the econosphere, Hedging Options and the possibly soon to be former Always low Prices. Hopefully, I won't get any legal letters or a phone call from the SEC.

Edit: And to be honest, I debated at the beginning of the semester whether to take two or three class'. The cancelling of one of them made the choice easy.

Hedging Options - Bob's New Blog

Although he hasn't asked me to advertise it, I must point out Hedging Options, Robert Arne's new trading blog. Bob is a man who has his priorities straight:

This actually my first trade in a while as I basically took the last six months off from trading. In addition to being a trader, I'm also a Phd econ student. No, they don't mix very well, so I cut back to two classes a semester to focus more on trading.

One reason I wanted to start this blog is that theren't hardly any options blog out there.

I took a Master's level mathematical finance course a while back, but the whole topic wasn't really exciting to me. But Bob makes it sound like loads of fun!

Here's to econ blog specialization!

Krugman, Darwin, Keynes, Popper, Kolmogorov, and Buchanan

Recently I saw Paul Krugman's analogy between disrespecting Keynes and disrespecting Darwin -- quoted with no registration required here. Is Keynes really comparable to Darwin? Instead of, perhaps, someone with fuzzier and more controversial ideas (punctuated equilibrium, sociobiology...) laid over Darwin?

Is there a good layman's summary somewhere of nice sharp phenomena that Keynes' ideas cleanly and reliably predict that rival ideas didn't? For Darwin, off the top of my head, I think of (1) sex (of course!:-), (2) the way that molecular biological genetic relatedness so closely matches relatedness worked out by other methods before 1950, and (3) the way that so many of the most common human genetic illnesses (most famously sickle cell anemia) are simple mutations away from wild type which provide crude protection against some important threat in some historical environment. As far as I have heard (as a layman but probably more informed than the target NYT audience that Krugman was writing for), the footprint of Keynes' theories in the real world might not include anything particularly sharp at all, and probably includes nothing comparable to the endless megabytes of regularities in the flood of genetic data which started coming in only long after Darwin's death. I was under the impression that the footprint of Keynes' theories is more like the footprint of theories about the effectiveness of capital punishment in deterring murder: one can come to conclusion "yes" or "no" (esp. if one is predisposed to prefer that conclusion!) but either way, one's strongest conclusion might be that the effect is not so huge compared to the other confounding effects that it's easy to pick it out without clever statistical analysis.

On the flip side of predictive power, Darwin's ideas perennially take flak for allegedly not being "falsifiable" in the sense of Karl Popper; one example I picked up from a little Googling is here. But in at least one sense, natural selection seems cleanly falsifiable: I can easily imagine a history of the last 130 years in an alternate universe where natural selection was wrong, and where we would have realized its falsity by now. If, e.g., our universe had no nuclear fusion, so that Lord Kelvin's famous analysis showed correctly that the Sun could not be nearly old enough to have kept things running for a suitably long period of evolution, then we would at least have very serious doubts about natural selection origins of modern life forms. And if instead of all one genetic code, it had turned out that apparently-related organisms generally had gratuitously incompatible genetic mechanisms, with no reasonable way to evolve incrementally from common ancestors, the theory of evolution might have dropped dead right then. Is there an alternate history from 1930 to 2005, in some alternate universe where Keynes was wrong, that would have convinced the Keynesians in that universe that they were mistaken?

Of course, even if it turns out that Keynes' ideas have relatively weak predictive footprint in the observable world compared to Darwin's ideas, that doesn't mean that they're necessarily unimportant or wrong. Human nutrition doesn't explain most disease, and picking its effects out of messy real world datasets can be tricky, and some formulations like "nutrition affects health" might even be hard to falsify in general. Still, it would be foolish to deny that nutrition is vital in understanding disease and health, and if in the early 20th century Senyek had exploded the conventional wisdom by revealing that nutrition affects health, perhaps he might be compared with Darwin. On another hand, though, the footprint of nutrition isn't always hard to see: it would be easy to point nutrition skeptics to extreme cases like scurvy on early ocean voyages where the effect of nutrition on health is enormous. And while theories with hard-to-see footprints can be important, tolerance for them is a necessary condition for people believing for centuries that human health is usefully modelled with humors.:-| So I sort of hope that the Keynesians have a standard evidentiary smackdown for ignorant but interested skeptics.

Incidentally, sometimes I see flareups of an ongoing low-intensity conflict about how much mathematics is appropriate in economics, and whether current math emphasis tends to displace other useful methods of analysis. The intellectual history of the falsifiability-related ideas that I'm slinging around here might be an interesting case study to think about. Popper and Lakatos did a lot of qualitative philosophical work on the qualitative idea of falsifiability, but at about the same time, people like Shannon and Kolmogorov were working out the math of information theory and computational complexity, which can be used to make quantitative versions of similar arguments. And to me, it looks as though the math results are more useful. In particular, my superficial study of the philosophers (mostly in one semester of undergrad philosophy of science) left me with the impression that the philosophers got tied in knots by situations like Newton's theory being mostly right, but "falsified" a little bit: subtly but clearly in the real world by the precession of Mercury, or grossly and clearly in a hypothetical world where, e.g., a moon of Neptune reversed the direction of its orbit every two years. For theories with numerical values, like computational complexity (number of bits) and information theory (entropy), this seems to be less of a scary problem, just a messy one. If you're working with qualitative definitions, it's easy to get stuck on, more or less, "a little bit falsified is like a little bit pregnant." But if your definition of a theory's goodness is quantitative, so e.g. "the messages in this stream are written in English" means "with an English-specific computer program I can compress the messages effectively" then when it turns out that some of the messages have Russian quotes in them, you can still say useful things about how useful the English-specific computer program is in compressing the mostly-English stream, instead of just saying "the old hypothesis has been falsified and must be discarded!" It's like Occam's Razor on performance drugs: once you can actually measure ad-hoc-ness, you can in principle say something like "yes, I grant this part is ad hoc, but still my theory is still 14.8 surprisons more predictive than yours over the entire dataset." In this one case, it seems to me that the math folk were ahead of the (nonetheless justifiably highly regarded) qualitative folk.

Another possible point of comparison is that Darwin's ideas have turned out to be fruitful in ways which would have been very hard to anticipate in the 19th century. In particular, now that we have powerful computers, people can use computerized "genetic algorithms," simulating natural selection in a computer program by allowing millions of partial solutions to "mutate" randomly and "breed" and "reproduce" with no designer input other than granting more offspring to partially successful solutions. Not only do such genetic algorithms turn out to be a surprisingly effective way of solving some kinds of problems, but the detailed analogy to natural selection in biology provides clear guidance for algorithmic improvements. In particular, features borrowed from biological sexual reproduction are extremely effective for helping genetic algorithms find good solutions faster. I would be interested to hear of Keynes' insights cross-pollinating other fields; I haven't so far.

Incidentally, I have also heard people say that some of Hayek's ideas have also been fruitful outside of the field of economics. I gather that Krugman would be hostile to such claims, and I don't know enough to address his hostility on that point. Perhaps fair is fair: I have heard people say that Marx's insights have been fruitful outside economics, and *I'm* hostile to that.:-|

Also incidentally, perhaps genetic algorithms aren't really a case of Darwin's insights cross-pollinating other fields, but a case of Darwin's controversial analysis being validated by later independent discoveries in other fields. If Darwin had been eaten by a Galapagos Giant Finch before writing up, and somehow no one else in biology had come up with his ideas by 1980, I'd guess that workers in algorithms would have reinvented these search tricks independently. Then, if they had, the analogy to sex is so strong that I'd rather expect that algorithms researchers would have been able to follow the analogy in the opposite direction and conclude that aha! Nature seems to be refining its designs using a selection process analogous to what we use in our computers!)

Finally, by (happy?) coincidence, if I were to nominate a theme in twentieth century economics comparable to natural selection, and if I were to nominate such a theme in twentieth-century economics to twit Krugman by highlighting left-wing closedmindedness and willingness to ignore the Nobel-prize-level well-known when it is politically inconvenient, it would be the same theme: not Keynesianism, but public choice theory. With or without the idea of natural selection, messy biological arms race situations (like the ecology of parasites and infectious disease, and the immune system, omigod) are still bewilderingly complicated. But once you appreciate natural selection, you find regularities all over the place which reliably help to simplify things...

Iraqi Dinar - Discussion & Commentary

THIS POST IS CLOSED TO NEW COMMENTS. A new post has been created: Here's a link to the current active post.

Here are all the posts in sequence:

1) June 16, 2004 - June 27, 2004
2) June 27, 2004 - November 6, 2004
3) November 6, 2004 - April 11, 2005
4) April 11, 2005 - June 22, 2005
5) June 22, 2005 - July 22, 2005
6) July 22, 2005 - April 30, 2006
7) April 30, 2006 - July 13, 2006

8) July 13, 2006 - ...

If you guys & gals encounter any problems, email me at kevin-at-truckandbarter.com. Your previous email has been very helpful in the administration of this site.

Thanks for your patronage.

Teach Econ In Prison

For those people looking for a teaching position in Econ, I spotted one you might be interested in:

Economics (Adjunct — Fort Dix Prison)

So, what do you suppose the effects would be of teaching those people with a far higher-than-average propensity to commit crimes the optimal strategy for the...ah....Prisoner's Dilemma?

I'm not a Certified Economic Accountant, but I Play One on My Blog

Don Boudreaux insists that the style and attractiveness of modern airports are not included in GDP. This is a debatable point. 30 years ago airports were no-frills affairs, but now have shopping malls, restaurants, cleaner facilities, etc. inside.

Let me answer with another question: Climate controlled luxury shopping malls (some provide free wi-fi) have increased the comfort, pleasure, and style of shopping. Is the increase in their attractiveness accounted for by GDP?

Answer: None of thse "public space" issues are well-reflected in real GDP, although the cost of building them shows up properly in nominal GDP.

You might point out that taxpayers and consumers pay for these amenities, and this should be reflected in GDP. Then I'd reply that just because something is paid for (in nominal GDP) doesn't mean it's properly accounted for in real terms.

If prices increase because airports are masterpieces of design, then the "real" price paid for using an airport might very well be less, because you're now using the building as an airport and as a work of art. The marginally higher price is paying for an additional service: art.

In other words, Grand Central Station is more than a train station; at least, it is to me. Real GDP doesn't reflect this. I doubt that nicer spaces like Grand Central are accounted for in real GDP, as "niceness", like "good art", is not measurable. But I don't think real GDP can or should reflect my view of art. That's not what real GDP is for.

(Btw, Penn Station isn't more than a train station).

In Don's airport case, we have commerce coming to the rescue of dismal airports. Inasmuch as this commerce is done inside of domestic airports, final sales of goods sold there are included in nominal GDP, and the wages of the employees working there are in nominal GDI.

Airport stores and restaurants are not treated any differently than non-airport stores. It doesn't matter to the BEA whether Don purchases a Brooks Brothers suit inside of Reagan airport or inside of a local shopping mall. (I don't know how international airports' "duty-free" shops are handled, though I think no differently). If the BLS adjusts for quality change in the goods sold at these stores nationwide, then that quality change is reflected in real GDP.

Hence, the real question is whether the prices (and taxes) paid for airline tickets and goods in the airport somehow account, in real terms, for the nicer amenities at airports.

Prices serve to co-ordinate activities; they do not serve the purpose of measuring quality-adjusted value to the end consumer. They can be used for the latter only under a narrow set of circumstances. Simply put, the market isn't providing prices to the data agencies that adjust for quality change of public spaces. That's not the job of prices, nor of markets; it's the job of the agencies. And right now they don't do it (it's NOT easy)... I know of no way to verify this conjecture for you other than asking BLS and BEA statisticians if they are manually adjusting for nicer shopping spaces...

In fact, government services, like airports, are valued at COST, and there are horrendous difficulties in measuring the productivity of government enterprises. That airports have become joined with shopping malls makes things interesting.

Back to my question above, if you think nicer shopping malls are not reflected in real GDP, and modern airports have just integrated shopping malls, you might think that nicer airports have not been included in real GDP. If nicer airports have come about through government spending, then nicer amenities haven't been accounted for, since only the small imputed productivity increases in airport building would have marked down the cost of prettying them up.

(Note that V. Postrel recently noted the difficulty of filtering hotel room quality change from price change; Don's question is, in fact harder, since airport amenities are not directly charged for.)

Sex and GDP

In my view, the use of aggregate economic data had already gotten out of hand by the 1950's. We have to get back to basics, and understand what the data are actually trying to measure.

What does GDP purport to measure? NOT WELFARE and NOT LIVING STANDARDS. Get over it, folks! As much as some would like it to be, GDP is not a people-experience counter. GDP is ONE account of the value of goods and services produced and exchanged via markets and governments. It does not put a value on most intrafamily exchange and production, although farmers growing food for themselves do have the value imputed. The standard example of non-counting is housekeeping; if it ain't paid for, it ain't counted. If it is paid for, it is. Quality change is not really much of an issue for housekeeping.

But to see in greater detail how arbitrarily some things are counted and others aren't, how about a more controversial example: sex. If it ain't paid for, it ain't counted. In fact, because it is an illegal activity, even paid sex is not included in the U.S. GDP. (Moving to the System of Natonal Accounts will change this, and I'd like to see how the BLS will get its prices!) When counted, I have no personal or academic knowledge of whether quality change will be a "problem" with prostitution.

Don't think paid sex is an important service? Some say sex, drugs, and smuggling would increase Swedish GDP by only 0.2%. Others have noted a much larger figure for elsewhere, "According to Marilyn Waring, the sex industry accounted for about 14 per cent of the GDP of Indonesia, Malaysia, the Philippines, and Thailand in 1998". This puts economic growth in a new perspective, no? Prostitution could also be about 2% of GDP for those countries, it depends who you ask. Poland and the UK both estimate about 0.2% of GDP is prostitution. I get the feeling that 0.2% is just an assumed nuisance value, like "50% unemployment in Iraq".

I ain't no Expert

Please note that Don is on my dissertation committee, so he knows that I cannot pass up a chance to discuss error in macroeconomic data.

First of all, no economist can truly be an expert in GDP; the economy is too massive and complex for one person to understand how to make GDP. This is for the same reasons, but with far greater potency, that nobody knows how to make a pencil.

I'll grant that you can understand the outline of all the processes of national accounting. But no man can know what to do with all the prices, quantities, formulae, regressions, guesses, estimates, and the like for a 300 million person strong, complex flux of growth and decay. How do I know this? Because I tried! How they are all these elements put together? How wide in scope is each available data series? What means are used to measure the different goods and services? How do we adjust for the birth and death of firms? How do the scope and quality of estimates differ from last quarter, last year, last decade? What is missing from these estimates?

The matter of economic accounting is so complex that someone just proposed the idea of a "Certified Economic Accountant". Really:

Hence we advocate a Certified Economic Accountant (CEA) degree or diploma program to gain enhanced recognition and greater understanding for national economic accountants and their work.

Manure

This is a somewhat odd story from the Boston Herald:

An Ivy League economics professor, of all people, should know that a market economy is based on the principal of paying for goods and services.

But Martin Weitzman, Harvard University's Ernest E. Monrad Professor of Economics, allegedly got caught in the act of swiping a truckload of horse manure Friday, police said.

``You'd think he'd know better,'' Rockport horse farmer Charlie Lane said.

``We had to go up there and put a lock on the gate. He was in there when my stable manager got there,'' Lane said.

The stable manager, Phillip Casey, penned Weitzman's truck in and called the cops.
``He offered $20 to let him go,'' Lane said. ``Phillip said no, and he offered $40. Phillip still said no.''

Weitzman, 63, of Gloucester, is charged with larceny under $250, trespassing with a motor vehicle and malicious destruction of property under $250 for tearing up some land with his tires, police said.

He didn't return a call to his office.

Day Trading

Undoubtedly, some of our readers have thought of quitting their jobs and becoming daytraders. Of course, I went to graduate school to possibly get away from the vagries of the financial markets if I so desire to at some point. You'll be happy to know if you do choose to quit your job, that your personality doesn't look to play a significant role. From the research paper "Fear and Greed in Financial Markets", the abstract:

We investigate several possible links between psychological factors and trading performance in a sample of 80 anonymous day-traders. Using daily emotional-state surveys over a five-week period as well as personality inventory surveys, we construct measures of personality traits and emotional states for each subject and correlate these measures with daily normalized profits-and-losses records. We find that subjects whose emotional reaction to monetary gains and losses was more intense on both the positive and negative side exhibited significantly worse trading performance. Psychological traits derived from a standardized personality inventory survey do not reveal any specific "trader personality profile", raising the possibility that trading skills may not necessarily be innate, and that different personality types may be able to perform trading functions equally well after proper instruction and practice.

I should say that this isn't new information. Every trader knows this, even I have battled this and still do, but researchers need to publish something afterall. I find it interesting how academics take common knowledge, throw some math and statistics in, and then pat each other on the back for a job well done.

Philly Wifi: 40 Bucks Makes All The Difference?

Oh, well then. That's so much better than I first thought:

Though Philadelphia is seeking help from private companies to build the system, a nonprofit organization would own it and sell wholesale access to Internet service providers, which would market it back to city residents and businesses at capped rates expected to run between $16 and $20 per month.

It's not that the city government of Philly is going to provide free wireless to downtown. Instead, the city has created a non-profit organization that will control access in order to sell it to ISP providers who then get the privelege of selling access to customers at rates defined by...yes...the city. Because, after all, the more layers of opaque, non-responsive bureaucracy one can put between customers and the people who "set" prices, the better.

What does all this accretion of regulatory reach and manpower provide for the city (at about three million at year for the next five years)? Wireless access at...wait for it...$20 a month instead of $30-60. Even taking the high side of the range, is it really possible that the one thing blocking the traditionally underserved from getting internet access is truly $40? Or could it be the lack of computers in the first place? Perhaps I'm wrong about this, but my view of the average individual in the communities on the lacking side of the technology gap is that these aren't people/families sitting right at the margin, waiting for broadband access to drop a couple of dollars to finally get online. Local businesses do fine with limited internet access all over the country -- a phone line is all that's needed to take credit card transactions.

Councilman Frank Rizzo sums things up nicely:

"If this government did a great job filling potholes and plowing the street ... then I'd say 'Go for it,'" said City Councilman Frank Rizzo. "But I know what goes on under the rocks, and I'm just not confident."

Rizzo predicted that the final cost of the system will far exceed the city's initial estimates. He also said the city shouldn't be venturing into the Internet marketplace at a time when it is cutting services at public libraries.

The only quibble I have is that, apparently, the city government isn't -- from what I can tell -- actually responsible for doing anything in this set up. They picked a price, blocked off an area, and said "build it for $15 million, or go away". Down the line, it's not government employees that will fix the boxes on streetlights, it's the workers from the company that built the infrastructure responding to complaints filed to the non-profit board who has to get in line with all the other complaints being filed at the company. And when the price is capped for each area, do you really think the company will respond with the same speed as they might for customers with a choice? So all the city government has to do is see that the $16-20 rule is enforced and sit back and congratulate each other on a job well done.

So, for the privelege of paying a few dollars less a month, Philly gets slower service, unclear lines of responsibility, and service that will likely be spotty and quickly outdated at best. Or you can just write off those tax dollars and buy better service for yourself. For those who don't service will be $20, for those who do, it's $60+your share of tax expenditures. Good enough for government work!

The upside? Might provide an interesting experiment on community attitudes and pressures towards/against mistreatment of common pool resources when you look at which streetlight-top-wifi boxes break most frequently, or go missing altogether.

Slotting Fees are Efficient (or Maybe not)

Via Progressive Grocer, we find an empirical study that supports the hypothesis that slotting fees -- extra payment for the best shelf space in a retail stores -- are "efficient":

The authors of the report, "Are Slotting Allowances Efficiency-Enhancing or Anti-Competitive?", said they obtained a unique data set consisting of all new products that were offered to a large supermarket chain in a six-month period. It captures more than 1,000 product offers in 21 categories, from major manufacturers such as Kraft, General Foods, Procter & Gamble, as well as smaller manufacturers such as Seneca Foods.

The researchers, K. Sudhir of the Yale School of Management and Vithala R. Rao of Johnson Graduate School of Management at Cornell, maintained that the lack of empirical research on slotting allowances prior to their project was due in part to the difficulty in getting retailers and manufacturers to part with information about these transactions....

"We find that when retailers perceive that a product is likely to be a sure hit, they don't seem to ask for slotting allowances; further, manufacturers don't offer slotting allowances when they perceive the product to be a sure dud, either, because they are unlikely to recover the money from sales," said Sudhir.

"It is in the unknown middle, when uncertainty about product success is greatest, that slotting allowances offer the maximum benefit to obtain retail shelf space," according to Sudhir, adding, "This flies in the face of arguments that slotting allowances are merely a form of extortion by retailers."

Using data on all new products that were offered to one retailer for a period of six months, we
empirically investigate support for the alternative rationales for slotting allowances. Our analysis indicates that broadly there is more support for the efficiency theories than for the anticompetitive theories. We find evidence that slotting allowances (1) serve to efficiently allocate scarce retail shelf space; (2) help balance the risk of new product failure between manufacturers and retailers; (3) help manufacturers signal private information about potential success of new products and (4) serve to widen retail distribution for manufacturers by mitigating retail competition. We find little support for the anti-competitive rationales in our data. The fact that we find support for the efficiency rationales suggests that the FTC was correct in being circumspect about banning slotting allowances outright.

UPDATE: Read about contrary views on ALP.

The FDA is a Political Body

Instapundit doesn't want the politics stirred in his FDA contraceptive cocktail:

I don't think the FDA should politicize this issue; I think its decision should be based entirely on safety.

Now, I'm all for safety, but the safety of a drug depends not just on its chemical properties (which you can figure out in a lab), or how those chemicals support or degrade the functioning of the human body (which you can, more or less, figure out in clinical trials), but on how and when people choose to injest these things (which you can try to guesstimate, but can never actually figure out once and for all).

In the end safety is really about the personal responsibility of using drugs so that their benefit to you outweighs the costs to you. This requires that people make smart decisions for themselves, even if frequently those decisions are "limited" to choosing between the competing advice of teams of doctors.

A genuine role of the FDA is not to remove or limit personal responsibility to the point that people are required to blindly follow its dicta. The role of the FDA, should it have a truly legitimate one, is to review, analyze, and summarize openly all publicly and privately available scientific data, so that consumers and doctors know exactly the effects drugs have had on people in scientific studies and clinical trials.

As a political entity, I doubt that the FDA could ever honestly engage the American public this way...

Free

I just received an e-mail from Panera. It was advertising a new sandwich, but what I noticed was a graphic at the bottom. Next to a "wireless" looking symbol and the word "Wi-Fi" was a great little paragraph appealing to all of us who are addicted. Not to the food, but to the free internet access and free drink refills. :)

More than one of us at Truck and Barter has been known to set up office at Panera.

And How Much Did it Cost Us To Get This Amendment Written?

Via Slashdot: Congress is considering making daylight saving time two months longer.

What is behind such a move? Why, energy savings, of course:

"The more daylight we have, the less electricity we use," said Markey, who cited Transportation Department estimates that showed the two-month extension would save the equivalent of 10,000 barrels of oil a day.

Naively using Congress' numbers on this, considering that the projected growth in oil use (at constant dollars, mind you) according to the EIA is from a little over 20 million barrels a day to just about 40 million barrels a day by 2025, that means we're looking at a simple growth of 2380+ more barrels of oil every day in the US. Even if the 10000 bpd figure is net for the new daylight saving period, this gain would be soon swamped*.

Instead of becoming infatuation with being able to "change" time itself, is there any chance we could get Congress to focus on those things that fall a little closer to their purview: government waste.

[* Note that I'm assuming a very simplistic calculation of that savings. That is, I believe they might have said "we use N kilowatt hours of electricity during the average waking dark hour, which requires Q barrels of oil to produce, and there would be R fewer waking dark hours..." Of course, with the price of crude going up, energy will get more expensive, but not as visibly as the price of gas. Might people switch from driving to/from nights out to staying at home and burning more energy during the dark hours? The effect might not seem huge, but Congressmen took time and our money to figure out how to save us around 0.0005% of daily oil use. At that level, minor changes could overwhelm the policy quickly.]

Of course, if two months is good, 12 months should be better, right? How about doing away with the whole thing entirely and get government out of the businesses of setting my watch.

MMOs Turning Into Laboratorys

Here's an interesting piece indicating that I might not be in the minority thinking that online games could be a fascinating way to not only work with other people, but to actually model issues and interactions.

Second Life was crafted as an open-ended environment that would allow players to fly, drive fantastical vehicles, dress up in outlandish outfits and build just about anything they could imagine. The game's developers at San Francisco's Linden Lab, however, didn't expect it to be used as a way for business school students to test entrepreneurial talents or for abused children to rediscover social skills.

This just sounds ripe for building social experiments that would be ruled "unethical" if performed in real life. Randomizing people in and out of various conditions, sharp shocks to abilities, and so on. Imagine the varieties of common-pool games that could be constructed almost without explicit agreement from players of Second Life!

Wal-Mart: ALP Infringes on Our Trademark

[This is cross-posted on Always Low Prices].

After a year of my blogging about Wal-Mart on ALP, Wal-Mart has had enough. WM has sent its attorneys after me -- to stop me from using their slogan "Always Low Prices", and to scoot me off the alwayslowprices.net domain.

Let me be clear at the outset; there is no scandal here. I am not outraged. This is about business and control of property -- not persecution. Unlike GM, WM did NOT send a goon squad. And though I find many of Wal-Mart's claims spurious, I am not a lawyer, and I will have to consult with my own lawyers before proceeding formally. And though they will tell me to not discuss the matter any further, I think transparency is more important than most lawyers do.

I promise to fight to keep the alwayslowprices.net domain and Always Low Prices name. And I want the blogosphere's help and advice on how to proceed.

Here is a cropped PDF copy of a letter sent to me by email and snail mail by Wal-Mart's attorneys regarding my use of their "logo". (I have removed sensitive contact information).

What is the claim?

The claim is that I am in voliation of the Lanham Act -- §1125(a), §1125(d), and §1114. Basically that I pretend to be allied to Wal-Mart, and that I use Google Ads to profit off of Wal-Mart's trademark.

I am sympathetic to Wal-Mart's desire to control its private property, but my use of this domain has in no way taken business away from them. Indeed, as one of Wal-Mart's most ardent defenders, taking this domain away from me is likely to hurt Wal-Mart in the short and long run. Who else regularly faces off against Wal-Mart's opponents, union sympathizers, and the like on the internet?

Why are they after me after a year of blogging?

WM filed for a service mark for "Always Low Prices" (with a few variants) on 2/2/04, for both retail store services and online retail store services. As of today, according to the US Patent and Trademark Office, WM has not had this sloagan registered as a trademark. However, their claim went forward on March 29, 2005, and will likely have little problem under further review (unlike WM's older slogan Always the Lowest Price, which was without a doubt, a bald but understandable lie).

As far as Wal-Mart's specific claims go, I will reply honestly:

I admit that I have their logo prominently displayed. But I think it's a fair intellectual use. Low Prices are the primary consumer aim of Wal-Mart, and should be the core of discussion about Wal-Mart. I don't think anybody has ever been confused ALP and WM, walmart.com, walmartstores.com, or walmartfacts.com. Does anybody actually think that Wal-Mart would stick "The Best and the Worst about Wal-Mart" on top of its own website?

The URL, alwayslowprices.net, is the same as the blog nam -- that's the entire point of name recognition. Anybody who comes to ALP will realize immediately that they have not come to Wal-Mart, but to a site that discusses Wal-Mart. If the URL was so critical to Wal-mart's business, why didn't they buy it 10 years ago, when they starting using their slogan?

Of course, I should have had a disclaimer up on the sidebar the entire time; As Kevin Drum once noted, I did at the beginning, but in one of my reformattings, I must have dropped it by accident. So, a new disclaimer is up.

Wal-Mart claims that I pretend to be a part of Wal-Mart by linking to walmartstores.com under the label "WM News". Does anybody find this an even remotely sensible position?

Wal-Mart claims that my use of advertising for services that "might be of interest to Wal-Mart's partners and vendors" concurrent with use of their trademark and name on the blog is against "U.S. law" and my "domain name agreement."

The entire $95.83 I have collected from advertising has not even been enough to pay for the $11 monthly bandwidth charges. Though I'd rather not have to, I have decided to take down the advertising. I know that free speech isn't free, and I'm willing to pony up.

Victim of Negative Income Tax

Because of his four young children, Lee S. Wishing has become a beneficiary victim of the defacto negative income tax:

Believe it or not, the federal government is going to give me $646 of your money.

Dayton goes WiFi

The city of Dayton, Ohio, now has a wifi "hot spot" all over downtown:

You can now surf the Internet for free in Downtown Dayton.

Your wireless computer, P.D.A., or cell phone can now surf the Internet for free if it's Wi-Fi equipped.

The free service is available within one square mile around downtown.

The city will pay about $5,000 a year for it, but most of the cost is paid for by the advertisers.

Well, I suppose we'll get to see what works and what doesn't. My first guess is that the $5K a year the city "pays" now will skyrocket before long. Either the idea will grab so many people the system can't handle the load (imagine all those businesses deciding the skip paying for private broadband access for a couple of years, then trying to run webcasts through the same line every one at every fast food joint is trying to use to download the new Nelly single) and the city will be on the hook to expand it even more, or, and I think more likely, it will experience the same result as wifi spots in other downtown locals that see highly variable traffic that doesn't exhibit much of a demand, meaning that the advertisers may not realize a benefit for what they've paid out. In fact, I don't see the argument that swayed these "advertisers". In the case of heavy demand beyond just the local kids surfing blogs and Friendset, I'm not sure how patient people would be with a heavy does of advertising. Personally, I'd pay to get a clean line and avoid having even more ads pouring at me. If the demand isn't heavy, who's going to see the advertising?

From the city's plan, it looks as though the advertising comes in the form of branded pages (such as log-on, and possibly frames?). Who pays attention to those, I'm not sure. And I'd predict a hack to be out in about 24 hours. The big plus I do see for the advertisers, however, is that the general audience is so oblivious to protecting computers from viruses and intrusion, that it won't dawn on people that without pricey software (or expert users versed in good open source stuff) this is the electronic version of licking the floor in a public restroom.

Not Fair Market Value

The City of Alexandria, VA insists that it assesses real estate at "fair market value":

Each year, the Department of Real Estate Assessments appraises each parcel of real estate in the City to assess its estimated fair market value. These values are used by the Department of Finance to bill for and collect the real estate tax, which accounts for approximately half of the City's annual revenue.

Now, my tax bill has gone up considerably since we bought in October 2001, all due to increases in "fair market value". And as David Bernstein noted (he lives in adjacent Arlington County, most likely in a reasonably small house I probably cannot afford), you can hear the "great sucking sound" for miles around. Personally, I would love to see an historical study of the productivity of city employees over the past 10 years, as tax revenue has soared... In any case the City has been underassessing it's resident-owners for years now, and I'm thankful for it.

Despite my glee over paying less that I could, reading public economics texts has taught me that tax rates and tax assessments are just implicit prices for a tremendous assortment of government services. Prices should broadly reflect market values of those services.

Personally, I don't think any such thing as an "efficient tax rate" exists when the funds that flow from thousands of diverse people are used to produce hundreds if not thousands of goods and services.

In this massive exchange context, "efficient" means "low" but "enough". But for some reason I've come to believe that "efficient" should also mean honest and transparent. If not useful to aid in the market efficiency local government financing of goods and services, at least it can give homeowners an honest assessment of current market values. (This easy-to-read paper (PDF) gives several points of view on property tax efficiency).

The most recent assessment for the City of Alexandria was completed in January. And its clear to me that assessments for condominium apartments in my building are way below actual market prices -- even though data is readily available to the assessors' office: three dozen apartments were sold here last year and thirteen have already been sold this year.

Given so much data about sales, just how close is "fair market value" to actual market prices in my condo-apartment building?

Fortunately, the city puts online all sales of all real estate in the City. The data used for the 2005 assessment are also online for all to see.

What's great about the former data is that it shows that already in 2005, the average apartment is selling for $30K (19%) above assessment.

What's great about the latter data is that it shows sales in 2004 and assessments for those same properties in 2005. Upon examination, it becomes immediately clear that the "fair market value" used is actually the historical average sales prices for the entire previous year -- the sales prices of last June. This is how the city gets "fair market value", which might be OK for a stagnant market like Buffalo, but is not OK for DC.

There are 5 types of properties in my building: 0, 1, 2, and 3 bedroom apartments, and commercial space. So here's a time-series chart that normalizes the different styles and sizes into one figure: 2005 assessments divided by actual sales prices:

What the regression figures tell you is that, on average from 1/1/04 to 3/15/05, the 2005 real estate assessment became lower than the spot price by about 0.07% every single day . Over a month that means the assessment loses 0.07*30=2% compared to the spot price. Over the year, the assessment loses 0.07*365=25% compared to the spot price.

Since we know with great liklihood that this will happen, what I'm suggesting to our benevolent despots in Alexandria City Government is that a more accurate "fair market value" be implemented.

For taxation purposes, you should utilize all sales information for the previous several years -- not just the last year. Use all that information to forecast the average prices to the middle of the current tax year, not the middle of the previous tax year. By adjusting your method, you could get the increase in next year's assessments today. In a fast moving sellers' market, your historical average only guarantees that the city will underassess nearly all properties.

For the sin of advocating abolition, economics became the dismal science. For advocating honest assessments, economics could become marginally more dismal.

Questions: 1) If governments want to maximize tax revenue, why haven't local governments gobbling up the windfall from sellers markets already switched over to forecasting next year's prices? Are they waiting until times get lean again?

If I were a budget maximizer, I would play a coy game. Right now I would simultaneously increase the assessment amount and decrease the tax rate. Then later on, I would raise rates to "historical norms" to justify myself.

Information Asymmetries and Dating

Oh, sure, the picture on the website looks pretty good, and the emails have proven that the other person seems to be at lest semi-intelligent. But how do you really know what you're getting into when you try finding a prospective partner online?

Enter, TrueDater.com featuring "customer reviews" of people who have dated someone found through an online source. Here's a Wired article about the new service.

Combined with the primary function of something like PunterNet (links to the place I found it: Mahalanobis, to keep down the link spam), it seems like the "anonymity" of the internet isn't the only driver for those seeking "romantic" connections via the Web.