Truck and Barter

More Reason to Like the WSJ Online: The Numbers Guy

I've been enjoying this series, and forgot to mention it to T&B readers.

The Numbers Guy, over at the Wall Street Journal.

Here's just a quote from the top page I think Kevin, given his recent focus on errors in data, might appreciate:

Jan. 28, 2005 Some 63,135 cellphones were abandoned in the backseats of London taxis over the last six months, according to a quirky survey that made headlines recently. The precision of that number should be your first clue something's amiss.

Price Gouging Sans Tragedy?

Just :46 seconds into this report on the Michael Jackson jury selection process, and the reporter (Carrie Kahn) dredges up the evil spector of "price gouging."

The worries over price gouging usually arise in the wake of some natural (as though others were "unnatural"?) tragedy, such as the hurricanes in Florida. In this case, however, the epithet is being applied to people who are "lucky" enough to have their businesses close to the courthouse where the Jackson trial is taking place. Rooftop locations for viewing, local eateries, hotels, and other places have raised prices -- or in the case of spectator seating, had to create them to answer a demand that was not there before -- as the swarms of journalists and onlookers have flowed into town.

Aside from the trouble I have in viewing any sort of price changes in the face of changing demand as "gouging", I'm even more confused by the use of the term in this instance. Clearly the reporter is attempting to make a case that the circus surrounding the Jackson case is somehow tragic in nature and scope, as it comes with the things that normally attend a great tragedy or shock. And, to go further, we see that the trial atmosphere brings out the worst in some local merchants who have been so crass as to charge for the use of their space, raise prices on a hamburger, or take advantage of similarities in naming. Clearly we should see this as a great failing all around.

Obvisouly the reporter feels she is above it, and should be excluded from this, though she herself makes her living on the spectacle, gains notoriety and thus financial and reputational reward in proportion to amount of coverage and the continued public fascination with what is, no matter the outcome of the trial, a horrendously flawed and troubled man. If she didn't, would not the labels she hurls at businesspeople indicate that she herself would be horrified by her own participation?

My issues: First, does Carrie Kahn's pay increase with this sort of trial, given the nature of the work as opposed to other stories? Does she, or any journalist such as this, get an increase in pay or expenses due to the 24-hour scope of the work, the locality pay, or other varying factors? If she does, why is this not "price gouging", since the reporters are charging more in the face of greater demand?

And second, why can't we see these trials as boons to local economies? Reporters flock in, with all their attendant camera and sound people, various commentators and professional spectators are on constant watch, and all of them need places to sleep, eat, and get a drink after a grueling day of picking through the gory details. Local restaurants and hotels and bars most likely didn't stock up heavily in hopes of a future rush; their prodcuts are now relatively more scarce. A price increase seems not only natural, but beneficial. The resources move to the people more willing to pay, and the seller gets an appropriate price. If they went too high, no one would buy the burger/beer/hotel room/plastic lounge chair on a roof; then they come down.

Rather than engage in the hand-wringing and teeth-gnashing of concern about why we're all so obsessed with these sorts of events, I'm choosing to appreciate the spur in commerce this means for those folks in Santa Maria, California. (Hmmm, do I smell a research topic? Judicial Spectaculars: The economic benefits of sensational trials.)

Accountants & Literature

The latest Student Accountant of ACCA had a story about an interesting survey of reading habits of accountants:

According to a survey conducted on World Book Day last year, accountants read more for pleasure than many other professionals. It was estimated that accountants spend an average of more than five hours per week reading their favourite choices. Five hours may not sound much, but in the modern busy world it represents quite an investment of time to devote to reading – certainly more than the MPs, journalists and teachers surveyed were able to put in…..More intriguing, it turned out that humorous literature was very popular with the profession, together with fantasy novels such as those of J R R Tolkein...

About 35% of accountants surveyed admitted to liking crime fiction. One of the greatest writers of such fiction in the 19th century, Charles Dickens, gave accountancy mixed treatment. As the son of a father who had very poor money management skills, was chronically in debt and even imprisoned for his failure to pay up, Dickens had no great love for financial contracts, loans, taxes and indebtedness of all kinds. Frankly, it embarrassed and worried him. Perhaps for this reason some of those characters who record financial information, or show too great an interest in money, are not very attractive either physically or in behaviour. The exception to this negative image is Bob Cratchett in A Christmas Carol. Cratchett is the perfect and modest bookkeeper who scratches away busily with his pen in a ledger (you had to have a large thick ledger book in the 19th century to be taken seriously), keeping a faithful account of Mr Scrooge’s transactions while managing to remain unperturbed by the harsh treatment he receives from this classic employer from hell…. Truth is always stranger than fiction as they say, and if any of the 19% of accountants who admitted to liking biography were reading the story of Al Capone.

My New Year Resolution

I wish that I may never think the smiles of the great and powerful a sufficient inducement to turn aside from the straight path of honesty and convictions of my own mind. - David Ricardo

(quoted by Thomas Sowell, in his memoirs A Personal Odyssey, p.132)

Tsunami and Human Stupidity

Maldivian opposition newsmagazine The Dhivehi Observer had the following satirical joke related to the tsunami disaster that struck the Maldives and the region on the December 26th 2004.

On 26th Dec '04 early morning several hrs before the catastrophe happened, Honolulu Tsunami Monitoring centre have been trying to call our Meteorological Dept. monitoring centre at Male' International Airport, Hulhule but failed. They also got in touch with President's Office however it was informed that he's out of the island on a private vacation.

Finally they called Defense Minister's office, but Defense minister was out on his morning meeting. Thinking at least it's best to keep him vigilant on this, the Honolulu officials left the message with the person who picked up the phone to inform Defense Minister that there's a Tsunami coming from Indonesia.

On Defense Minister's return, the operator told Defense Minister Hon. Shafeeu about the call, said Mr.T. Sunami from Indonesia is arriving in 2 hrs. Defence Minister promptly took action to send a delegation to Male' International Airport with name boards ' Welcome Mr. T. Sunami – Indonesia…

Across in the Andaman and Nicobar Islands, the BBC reported, an Indian helicopter dropping food and water over the Islands was attacked by tribesmen using bows and arrows. The Indian government was relieved saying that the attack was a sign that they survived.

May be humans should learn from animals.

Dennis Rodman on Ebay

Dennis Rodman has pitched in to raise funds for tsunami relief by auctioning off a weekend in Las Vegas with the Worm himself. From the LA Times:

Surf City's Dennis Rodman is on the auction block.

"The Worm," a former NBA rebounding champ known for his body piercings and notorious parties as much as his skills on the court, put himself on eBay on Monday as part of a charity drive for tsunami relief.

"Celebrities are looking to do their own thing, I think this is a perfect fit for Dennis," Rodman's agent Darren Prince said.

The top bidder in the "High Roller Fantasy" auction would win an all-expense paid weekend trip to Las Vegas with Rodman. His publicist, Shannon Barr, said the trip would likely be a wild excursion where the winner could end up dining, gambling and visiting strip clubs with the Worm.

"I hope it's a man because Dennis is just debauchery," Barr said.
LA Times:

It's nice that he is in the spirit to help his fellow man, in more ways than one.

Graduate Student Responsibility

In some circles, the philosophy of self-reliance and self-instruction has momentarily resurfaced; the idea is that the actions and attitudes of students are more important than those of their teachers.

My dissertation adviser, Richard E. Wagner, has made a strikingly relevant philosophical note regarding the self-restraint (by instructors) and self-reliance (by students) required for successful graduate student education:

I do not think that it is my task to transfer material from my mind onto your minds, much as someone might seek to transfer software from one computer to another. In my classes I do not go directly over material that has already been written. I assume that you can read whatever has been written. You don’t need me to read it for you, or at least you shouldn’t... [Y]ou may have to spend many hours in reading material so as to gain a good understanding of the material. In any event, I do not directly go over what has already been written, for I assume that you can with effort understand that material, and I see no reason to substitute my effort for yours in this regard.

What then does he teach?

Both in my assignments and in the conduct of my classes, I seek to cultivate an orientation toward the articulation of what has not yet been articulated.

Translation: He wants you to get used to producing new stuff.

As a student of his Macroeconomics and Institutional Economics classes, as well several directed readings, I can tell you that he's not kidding. In his classes, he'll provide you with several maps of the same terrain, and set you up to explore using those maps. He wants you to read, talk, think, and write; this method favors open, eager, dedicated, bold, and confident minds. Students expecting lectures can easily be thrown off course; with this method, you can fail even if you try hard. Many adventures end in not-so-glorious failure.

I can tell you that in his classes, and researching for a dissertation, I spent many hours discovering that I'd best leave the exploration of some many most topics to others who have more interest and endurance.... which is a valuable lesson to learn.

GMU Econ's New Face

George Mason University's Economics Department has a much improved homepage, and a list of the blogs authored by students and faculty. Though it fails to include my ever more popularWal-Mart blog, it does list The Filter^, which I've irresponsibly failed to link to before.

Coordination Failures: Microwave Popcorn Edition

Every bag of microwave popcorn I have popped in the past two years has carried a singular warning: Do not use your microwave's popcorn button! or a similar warning. Act II, Orville Redenbacher, Jolly Time and so on all insist that you should listen to the pops, and when they occur in intervals greater than a second (or two seconds? pick one, please!), you should cease popping and commence burning yourself opening the bag.

It's a good thing this warning is omnipresent, because my microwave runs for 2:15 on the popcorn setting, but almost every bag I've popped requires 2:45 for optimal kernel popping. Many others have noted the same inconsistency:

Many microwave ovens have a designated popcorn button on the control panel. Do not use this button! It is evil. Always follow the instructions on the bag, or summon a grown-up to assist you.

Why this grand coordination failure on the part of microwave manufacturers and popcorn makers? Doesn't GE test their products? Why can't they send interns to the local Wal-Mart Supercenter to pick up a few bags, and align their hardwired settings for optimal popping? If they can't, why bother with the popcorn button at all?

Is popcorn really that diverse a product? Apparently, yes, and my problem is that I just don't have the really expensive microwave, which has humidity sensors to ensure proper popping:

[Swamy Anantheswaran, associate professor of food science in Penn State's College of Agricultural Sciences,] says microwave popcorn pops differently because of such variable factors as brand of popcorn, brand of oven, quality of the kernels, quality of the bag, age of the product and whether the product is salted.

Joy Daniel, senior manager of product development for Sharp Electronics Corp., explains that popcorn buttons differ in two ways. A "timed" popcorn button is designed to cook for a pre-set time based on the average cooking time for consumer popcorn brands. A "sensor" popcorn button will shut the oven off as soon as it senses a certain level of humidity indicating the popcorn is fully popped.

"Microwave popcorn may have more unpopped kernels because the manufacturers are less concerned with popping all the kernels than with providing the indicated quantity," Daniel says. "The manufacturers include more kernels to make sure the corn pops to a full bag every time."

I should have known that it's somebody's job to balance the quantity and quality of kernels in a bag of popcorn... I kind of like this reaction, though: "Wait a minute. My microwave doesn't have a popcorn button. I wuz robbed!!" One can hope for a simpler life...

Coffee Market Pessimism

Prof. Don Boudreaux has an interesting thought about coffee buying over at Cafe Hayek.

Whatever the reason, it’s heartening to see the seeds of commerce sprouting in Rwanda, for no matter who or what planted these seeds and supplied them with their first drops of water, only the sustained growth of commerce will turn Hutus’ and Tutsis’ energies from conflict to cooperation – from predation to production. And sustained growth in commerce won’t happen without secure private property rights, freedom of contract, freedom of trade, and the free market that these blessings generate.

I'll second the notion that seeing Rwanda move out of its gory past is a great thing. It's the choice of products, though, that has me concerned. The good Prof makes mention of the benefits of a growing economic base, but I think he is too light on the "Fair Trade" movement and the role USAID played in sponsoring the coffee growth.

Coffee is currently overproduced on the world market. A glut of coffee has sent prices plummeting (as we'd expect), and has helped spur on the "Fair Trade" movement which advocates setting a floor on the price of coffee beans.

The issue I have is that the Fair Trade price is, by definition, above a more realistic market price for coffee. While this helps some growers increase their profits and provides some with a sense of satisfaction, it also induces more production. And more coffee growers the world does not need. If a glut sent prices falling, why is it a good idea to induce more market entry?

While I don't have a good source for this, I would tend to believe that the USAID people, thoughtwell-intentioned, helped spur on the movement towards coffee production. A choice that would appear decent as Rwanda is a good climate for the crop, and the demand for the product seems robust. The trouble is, more coffee producers in the world will simply extend the glut, keep prices low, and give motivation for the "Fair Trade" notion of setting a price floor on all coffee rather than just that grown with "sustainable methods". As long as the Fair Trade price is set to reflect what growers need to make a living, the less it will be an accurate reflection of the demand for coffee. This sort of process would strike me as one prone towards escalation: the price induces some people into entering who then find they cannot make enough money at the current fixed price, so pressure induces the Fair Trade group to raise the floor, which only induces more people into the market. The only other option would be to have the price floor fall, which would mean all the current growers facing big losses in revenue, and some having to leave the market (something none of them would take well; the reality of some growers being thrown again into unemployment/poverty not being something the Fair Trade folks really appear to want to deal with).

If the Fair Trade price and the urging of USAID moved Rwanda towards expanding coffee production, I'm not sure they've done the country a favor. Of course, if the temporary spurt of growth does have the spillover effects Prof. Boudreaux mentions ("more-secure property rights, on a firmer commitment to long-term integration into the global economy, and on increasing prospects for lasting peace") then it may well be worth getting involved in an unstable industry.

Closer to Reality Than They Thought?

So, the discussion begun by LibertarianGirl and followed up by Catallarchy might have been a bit more prescient than even they thought.

Lawmakers Look to Tax Plastic Surgery

Lawmakers trying to plump up the bottom line are considering a "vanity tax" on cosmetic surgery and Botox injections in Washington, Illinois and other states.

Plastic surgeons and their patients say the idea is just plain ugly.

The case made for taxing these procedures is not the same one advanced by LG above. In this case, the notion is that these are voluntary exchanges (elective surgery), and that they can be taxed as such. It's also a blatant case of pointing the tools of state at a group that is unlikely to organize to prevent the tax from occuring. How likely are people to protest in the streets for untaxed tummy-tucks? And how easy would it be to make these people look foolish by simply branding them as examples of vanity gone amuck?

Just for reference, here are just a few statistics on plastic surgery (both reconstructive as well as cosmetic).

Two thoughts on this. First, I have a general dislike for levying taxes simply because the state or federal government feels it needs more money and can locate an easy target. Second, the cause for such taxes as suggested by LG is a bit troubling once it's extended to what I think is a logical conclusion. If these procedures should be taxed because they ultimately create a cost for those who don't get the procedure (that is, the women who do not get augmentations are now less desireable in the pool of potential mates), then the same analysis should extend to those who are simply more attractive by birth.

While I'm grateful that I've found someone in this world that doesn't mind looking at me for extended periods of time, I harbor no illusions that I appear as appealing as another Scottish lad I might envy in the looks department. Clearly, then, I'm suffering a cost due to handsome men's mere existence. Plastic surgery for some might raise their particular value and lower that for others in relative terms, but it's not as though we all began on a level playing field. In fact, if we are to assume a single axis of attractiveness, with people more or less randomly dispersed across it, then the movement of numerous men and women up and down the line does little in overall terms.

Consider it this way: not only are people attractive on some objective points, they are more or less attractive based on a relative measure. If we all look like neanderthals, then we might all be kinda goofy looking. But some of us would be less goofy looking than others. So, since a "mean attractiveness" is heavily dependent on relative standing and is calculated by looking at, you know, the population that we're interested, then if the whole group of people got better looking (all women got rhinoplasty, all men got liposuction), the mean would simply move. Low cost, safe procedures available to all would, in the long run, simply result in another sort of equilibrium mixture of attractiveness. Shift everyone up and a similar problem still exists: while you might have a washboard stomach after surgery, someone else already had that naturally but got an eye-lift and is now still a bit ahead of you in the rankings. Untaxed, the market is left to sort out people for whom their standing is important enough to correct via money.

As such things so often are, a plastic surgery tax might end up being distortionary, in that it places the procedure out of reach for the less well-off in the group that would choose to have a procedure in order to move up on the axis (assuming "up" is better and that the world still has some sort of homogeneous taste for attractiveness), but has little effect on those people for whom the expenditure is well within their reach. Since people well-off enough in relative terms to not mind an extra 10% on top of the cost of a pair of butt-implants are likely to be better fed and better educated, and thus better groomed and better looking in general, then we'd expect to see a clustering of ever-more-attractive people at the high end of the distribution. A fattening of the tail from a thinning of thighs, if you will.

The tax, then, has the potential to make more people worse off in this case, since the solidification of a "pretty class" will necessarily shift the mean (that is, the mean moves so that higher and higher levels of attractiveness are now considered "average" relative to the position of the average before), while simultaneously denying a whole group of people the ability to correct the imbalance.

My solution? Government subsidies on cosmetic surgery. New tummies and boobs for everyone!

[N.B. Never mind the fact that "plastic surgery" as a category also includes the very valuable work of reconstructive surgery for such things as scars, burns, bone damage, maxillofacial issues, laceration repair, and more. To call it all "vanity" simply to make it taxable strikes me as lawmakers being callous.]

Quote of the Day: Trump Edition

It's not by Trump, but about him:

In the past the arc of social ascendancy was usually tied to a narrative driven by philanthropy and art. Rockefellers, Mellons and Carnegies bought their way up with museums, hospitals and libraries, just as Wrightsmans, Kravises and Weills put their names on wings at the Met, the Guggenheim or New York Hospital. Trump is the first to get to American royalty by making his alliance instead with the tabs and the TV culture, where everything is commodified, everything is transactional. The man who first understood that the only thing that matters is protecting the brand is now the reigning aristocrat of our promotional culture. To the happy couple, a toast!

I can't believe I just quoted Tina Brown.

More GMail Invites to Give Away

For those that are interested, I've got 6 more GMail invites to dole out.

Leave a comment if you're interested.

It's a good explanation, but my finacee will still glare at me...

In an all-too-rare post at The Idea Shop, Andrew Chamberlain has a great explanation for why punctuality is inefficient.

Here’s the logic: You don’t know when I’ll show up, and waiting is costly. If you’re early you’ll have to wait. If you’re late you won’t. So you come late. I do the same thing. Presto, we’re both late.

Rain, sleet, snow or privatization

Andy Kessler wrote an opinion piece in the February Wired, "Stom the US Mail!" (UPDATE: Now published) Ironic that this article arrived, delivered by the US Postal Service into my government regulated, USPS approved, postal receptacle.

Andy's primary argument is that if the US Postal Service is privatized or dissolved, the mail will still be delivered. The nationwide package delivery companies would be likely to pick up the slack or buy the Postal Service assets to continue offering inexpensive postal service.

The existence of at least 3 major international shipping companies is proof that the postal service no longer benefits from government protections. All three companies have networks of infrastructure that deliver packages to ANY home or business in the United States and most of the World.

Over Christmas, I discovered that FedEx Ground service was in fact less expensive and faster than USPS Priority to most of my destinations. I was also able to track my package for constant updates. USPS tracking has yet to deliver any information on my packages until after they arrive.

I think every reasonable person with faith in the free market believes that under a condition of competition, consumers will benefit from cheaper services and more innovation. Why have we continued to ignore the postal service monopoly?

Another postal pet peeve, I have about 300 $0.32 stamps. These stamps are no longer good for mailing a letter. My investment in 1999 should have appreciated. If only adjust for inflation, shouldn't $0.32 5 years ago be worth $0.37 today?

To be fair to all involved, the USPS claims they are as efficient as a private business in this response to another editorial.

Andy's article is excellent I recommend picking up a copy of Wired. I will post the link when it becomes available.

Quick Quote

Reading about the earnings reports coming from Merck, I am reminded about this quote:

I ask myself a question: Suppose I am a physician in the public health service, and somebody presents to me a new drug. I can approve it now, although we do not know its full effects, and commonly we shall not know the full effects of a new drug for five to ten years after it comes out. If I approve it, and a series of tragedies such as [the then recent] thalidomide tragedy comes, what will happen to me? I shall certainly be discharged, and I will be held up to public obloquy. The public at large will demand that heads roll. The penalties on me are very heavy indeed if I approve a drug I should not have. Suppose on the other hand, that it proves to be a fine drug, and in the long run its achievements are wonderful, but we do not know this yet. If I hold up the use of the drug for five years until all the results are in, a large number of people may die becuase it was not available. Their survivors will not write and complain that I did not approve the drug earlier. All the penalties are on me in making the mistake of approving the drug too early and none on the mistake of approving it too late. This combination of rewards and penalties seems undesirable.

George Stigler, "The Formation of Economic Policy" published in Current Problems in Political Economy 1965.

Quick Book Review: The First 40 Pages of The Secrets of Economic Indicators by Bernard Baumohl

After two hours of reading The Secrets of Economic Indicators, I must regrettably write an excoriating and punishing initial review of this book. But before my tone and goals are misunderstood, you should know that I highly recommend that you read and study this book, at least up to page 40. Dollar for dollar, there is no better introduction to the current beliefs and attitudes about the use and utlity of economic data. If you ever wanted to understand why bond traders rip out limbs out when the jobs report is poor, read this book.

Frankly, it's not Baumohl's fault that his book inspires no confidence in me, and left me baffled about exactly how I should incorporate economic data into my decisions. In many ways, the entire subject of economic indicators is stale and corrupt, almost beyond redemption, built on fundamentals that are shaky, and yielding doubtful nonsense. But that's life, so let's get on with it.

First off, Mr. Baumohl sparkles in prose, with a readability second to none; the man can write. He chucks overboard tons of refuse, but his remaining cargo is infested by rats. He piles through indicator after indicator, talking about importance, construction methods, where to find the important stuff online, revisions, and a release's impacts on bond, stock, and international money markets. And he makes it easy to follow

But for me, the real moral value of Mr. Baumohl's tale is to confirm for the reader that he does not need to bother with data; in fact, instead of worrying about last quarter's GDP of the U.S., Germany, or Japan, the reader should be traveling there to experience those economies first-hand. This is because 1) the data don't actually represent much that is enjoyable about an economy--you don't learn about skyscrapers by looking at construction data--and more importantly 2) other people--investors and economists--are no doubt quicker and better at using this data than you will ever be.

Don't be worried that the book informs its readers about how people use macroeconomic theory to digest macroeconomic data, regardless of the quality of either. That's how it works. Accept it.

Remarkably, Baumohl invites readers to ignore the experts--like those that advised the mal-investments leading to the .com bubble--if they'll do the dirty work themselves. He wants readers to know that out of the seeming infinity of data availale, some indicators "have established a track record for being able to predict how the economy will behave during the next 12 months" (xix). He compiles sources for U.S. and international data, although Statistics Canada might be justifiably annoyed at this judgment that "No country collects and disseminates as much high-quality economic information as the U.S. Its breadth and integrity make it the gold standard in the world." That's true but misleading, as in the judgment of other statisticians, Statistics Canada ranks higher than the U.S. in terms of data quality, and Australia might come in a close second.

The first chapter (available free online, see Mahalanobis) begins with a cute story of the process of data embargo, with journalists given the data at 8AM, and a release to the public at 8:30AM. Traders, who have already in essence, placed bets on the outcome, react to the news. So do policymakers. Sometimes, when the numbers come in far from forecasts, hilarity ensues...

What really got under my skin is that Baumohl conflates the actual history of economic activity with the collection and dissemination of that data:

All will eventually feel the fallout from the news that came from the Labor Department's press room that morning. That fallout will produce a mixture of both favorable and unfavorable developments. (6)

That release was a compression of history into a single figure. Will economic actors in the future be responding to the complexity of activity behind that figure, or to the figure itself? Perhaps it doesn't matter, but I ask what would happen if the BLS and BEA shut down tomorrow? Would economic actors no longer respond to the economy because it wasn't contained in official news reports?

Also, Baumohl notes that the reactions to this single release are not permanent. They will be modified in a fundamental way by future releases. In the story, predictions that a release of X will have some short-run effect are made without reference to tomorrow's release, which will once again change future plans. Hence, all this talk about impact on markets is intended to explain short-run movements, most of which amateurs would lose money on, if they were to try to time their investments.

The book is a solid introduction to domestic and international economic data, though it is an introduction. Most honorable is Baumohl's emphasis on the impact data release have on the interconnection of markets, and the ever rising importance of international trade.

However, the most terrifying aspect of this book is that there are no footnotes, no endnotes, no documentation, and no sources. The index is feeble. I am expected to trust Baumohl that the first of the "economic indicators most sensitive to stocks" is the payroll survey. Sorry, but I like looking at original research...

One paragraph was absolutely infuriating:

Of course, to many investors, it makes little difference whether the intial data is realible. They'll trade on these numbers anyway because the figures represent the very latest information they can get on the economy. Later, though, as more information is received and after statisticians have had a chance to review their computations, the preliminary figures undergo one or more revisions. Though revisions to earlier data are also read by investors, they generally do not spark much trading because by then the information refers to a time period that has long since passed. Investors usually focus on the future, not the past. Economists, however, take revisions more seriously because the new figures can affect their forecasts of economic activity.(21)

OK, let's figure out how bad data are useful to investors, but late data aren't. 1) All data are about the past. Do data about the past matter or not? Of course, but only the really, really recent past??? 2) If the data are not reliable at all, then they do not contain information, they contain misinformation, and should be disregarded. But they are regarded well, so they contain some useful information about the past. But revisions contain even more information about the past. Why is it that a past that is probably an additional month ("long since"???) or so older is no longer relevant. Isn't this quite arbitrary? What would happen if data were revised the next day???


Perhaps investors react because they expect others to.

The Biggest Secret of Economic Indicators

The biggest secret of economic indicators is how to profit by using them. In fact, it's so secret that economists and journalists who write about economic indicators don't tell it to their readers.

This was brought to mind when I saw that Tyler Cowen just linked to a book review of The Secrets of Economic Indicators by Bernard Baumohl.

Although I have not read this book (yet), over the past 6 months I have read a half dozen books about economic indicators, all of which claim that economic data are essential for proper decision-making in the short-run and long-run, and none of which tell the reader how he can use the data profitably.

This book might be different, though I'll reprint an excerpt from the review that leads me to a pessimistic outlook:

But why should anyone other than Alan Greenspan care about economic indicators? "Because these are vital barometers that tell us what the economy is up to and, more importantly, in what direction it is likely to go in the future," Baumohl says. He characterizes them as essential knowledge for investors worried about their portfolios, company chief executives trying to make business decisions they can justify to shareholders, and workers just trying to gauge the health of their industry.

I like the idea of continual interaction between people and data: in one period, everybody's economic activities are recorded, and in the next period, their economic activities are based on knowledge of everyone's past activities as well as future plans. I just don't know how much an improvement would occur if people dropped their apparently puerile attachments to making decisions without reviewing macroeconomic data. As Richard Wagner impressed upon me, just how did smart people make smart decisions before such data were available?

In other words, what is the potential value added of these data--in billions of dollars--if everyone knew their secrets? Is there evidence that macro data have increased macroeconomic coordination, and hence GDP? How much can we gain through the persistent devout following of data releases? I have not seen one good answer to these questions! Perhaps this is all a large waste of time? Given the data, how likely are we to guess CORRECTLY the direction of the economy? Without the data, how likely are we to guess correctly? If I were working with Vernon Smith and the experimental economists at GMU, I would suggest that a large-scale economic experiment be conducted in order to measure how valuable macro data like "retail sales" and "initial unemployment claims" is to micro agents.

All macroeconomic data are vestiges the past, some of a week ago, many from last month, a few from last quarter or last year. If the data indicate small changes have occurred, you need a subtle theory and a calculator to make a conclusion about the likely direction of the economy in the future. If the data indicate large changes have occurred, I think hope most people in an industry will already have spotted the difference in activity and have adjusted...

My advice: you should follow economic indicators if 1) you know how to profit off using them more than you could profit doing something else with your time, or 2) you genuinely enjoy messing around with economic data--making forecasts, and pretending your forecasts are accurate, or 3) you like following the politics of economic data, or 4) just doing something to manage your portfolio makes you feel better.

EasyJet Conquers Geneva & Basel; Withdraws from Zurich

Last year, we noted that Geneva airport was cheaply remodeling an old terminal for EasyJet. Air France, KLM and Lufthansa were... upset, to say the least. However, the courts and boards keep ruling in EasyJet's favor. Still, using legal maneuvers, Air France has managed to delay the opening of the new terminal from November 1, 2005 until the middle of 2006.

Not counting on complete success at Geneva, EasyJet is opening a new hub in Basel:

“EasyJet is already the largest airline at Geneva airport and this deal will make us the largest airline at [Basel's] EuroAirport,” said easyJet chief executive Ray Webster in a statement issued on Thursday.

In that statement, the company calls for consumers to email them their most preferred new destinations out of Basel.

easyJet is in the process of negotiating a number of new routes from the airport, but is also inviting consumers to suggest where, within Europe, they would like to travel and why. Consumers can post their suggests to a special email address wohinvonbasel@easyjet.com or debalevers@easyjet.com. Those whose recommendations match the destinations chosen by easyJet will enter a draw of 1,000 free tickets to fly on the new routes during the Summer.

Statistically significant, judicially bothersome.

Amusing tale about being exempted from a jury over at the Division of Labour.

Lawrence White gets asked a statistical question -- "do any of you think that members of certain groups in our society are more likely to commit violent crimes than members of other groups" -- and gives an affirmative, knowing that there is statistical evidence that the prison population does not accurately reflect the general population of the US.

What we said was a statistical answer to a statistical question, not an expression of racism. Nonetheless the defense attorney may have rationally excluded us, figuring that those who didn’t agree with us were better indicating that they would not be biased against a black defendant. They were indicating that they would not volunteer to say anything that might seem unsympathetic to the defendant. Any (non-dissembling) anti-black racist in the pool would raise his hand (for the wrong reason); anybody who thinks that “over-representation of blacks in the prison population is entirely due to bias in arrests and convictions” would not raise his hand.

Social Security - 1

I want one, and only one, modification to the Social Security "system".

I want out. The rest of you can do whatever you want with it.

Please don't laugh (or cry). This post is not about sensible policy; it is about being tied to a system that makes me worse off. It's a vain plea to all of you who support SS: please let me go my own way.

I know that my release from SS is not going to happen; too many of my fellow Americans -- current beneficiaries, politicians, and those ideologically committed to national collectivism -- really want me to stay.

For several years, I have been a fine source of free money; I know I'll be an even better source with a Ph.D. But you have no right to determine which, if any, elderly, widowed, orhpaned, or disabled person deserves my financial support.

The system, as it is currently set up, doesn't care about my welfare, because if it did, I would already be estranged from it. In this world, here and now, I would prefer to support my Russian mother-in-law, somebody who will never receive a dime from SS, and a few other Russian relatives who live in far worse conditions than many on the SS dole.

You Americans don't care about my mother-in-law, but I do. Your laws tell me that through SS, I must support my own mother, who lives in a McMansion. I must also support my mother's boyfriend, who just bought a Lexus. To hell with you. My world, my preferences, my horizon extend beyond political borders.

How many others are there, immigrants and nonimmigrants alike, who struggle to send remittances to loved-ones outside the U.S., and are forced to support people in the U.S. who are much better off?

I would have liked to have opted out when I graduated college, but this was not an option. As a result, I would have owned a much larger portolio of assets that I would have sold to support my family while I earned a Ph.D. in economics. Instead I did save some, but the sum I "gave" in social security taxes over the term I worked would have made life a lot easier.

Do I sound crass to you? Well, maybe that's because you haven't looked at SS from my perspective. So, here's a crash course on my views of the SS program: I've worked and have given money to the government, which has spent it on a potpurri of beneficiaries (some "needier" than others), and through a gimmicky transfer of funds cooked up to look like investment, the general Federal budget. The benefits of this income redistribution are real, and I recognize the beneficiaries were former "donors" to your involuntary retirement program, but this investment of funds into an asset trust fund is a pretense.

From the SS perspective, that transfer is a huge fund of assets, short and long-term interest-bearing U.S. Government securities. But from the view of the rest of the government, those securities are debt. From the view of the taxpayer, the assets and debt cancel, and the transfer of funds is simply an accounting entry indicating accrued spending--the amount of money taken from SS taxes and spent on non-SS activities.

I know that the SS deduction is an income tax with a funny label, that's all. If there were no SS taxes to pay for SS benefits, the SSA would have to take money from the federal government. Instead, the federal government takes the SS tax surplus.

Notice I use the word "take" -- some would use the loaded term "raid" -- not the word "borrow". The federal government may use Treasury Bonds (a debt instrument) to complete these transactions legally, and those T-Bonds may accrue interest, but the government is no more borrowing from itself than my pants are when I remove my wallet from my left pocket and put it into my right.

The government spends every damn dime you and I send in through SS taxes, much of it on non-SS matters. Granted some of the government's expenditures on non-SS matters are investments that will yield returns. In 2003, the OASI "Trust Fund" increased its "assets" by $138 billion, all of which was "invested" in government securities. How much of that $138billion was actually invested, and not spent on paper clips or bureaucracy? I don't know, and there's nothing I can do about it. The SSA promises to give me benefits when I'm old or disabled, but I need them now. When I'm old, I'll have my own nestegg.

Thanks for nothing, folks.

I think it's clear that I feel absolutely no larger committment whatsoever to this program. In fact, I'm owed an apology by the government for being shady and dishonest with me. All those pathetic statements from the SS telling me how much I've put into the system... and what I'm "entitled" to later on. I know what this means, and it is not a philosophically principled, glorious future. Since you insist on keeping me in the system involuntarily, somewhere down the line, I'll be collecting benefits, while some other schmuck will be supporting me. Whatever. This wage slavery is patently dishonest, and I want no part of it. I don't like it, and want out. If the government can pretend that there really is a separate Social Security system, I can want out of that system.

But I know moral pleas won't convince you to free me. So what would you say to the following exchange?

I relinquish your "obligation" to pay me in the future; in exchange, I give you no more "contributions". You may keep all the money I've already "given" you.

This modest proposal is extraordinarily fair. You've taken my money; I don't want any back. Sounds good, right? In fact, I'll do one better. I'll work for X more years, giving you all the SS contributions you currently require, and then I'll relinquish your obligations, if you'll relinquish mine! More free money for you! No strings attached!

You don't want it? Why not? How about if I get my mother to let you relinquish her benefits too? What can I offer you guys to let me out of the system today?

This dickering process is similar in principle (though definitely not extent) to how most nations freed slaves: compensating slave-owners. Hamilton did it in New York, 80 years before the rest of the country, and Lincoln wanted to end the civil war by compensating slave-owners around $400 a head. This what I would like to do--emancipate myself from your system by buying my way out.

Just think of it in those terms for one minute.

UPDATE 1-21-05: I forgot to mention that when a slave was freed, so were his decendants. I guess that stream of future contributions would slightly increase my net present value to the SS system, and raise the current spot price of liberation from SS.

Quote(s) of the Day

If you haven't been reading some of the posts about the Intelligent Design movement that Steve Verdon's been doing over at Deinonychus Antirrhopus, you really should. Compelling stuff; to say that I tend to side with Steve in the argument is putting it lightly. You can start here; this is a really good recent post as well. A good portion of the debate is around determing what is, and what is not, science. Personally, I see a lot of this as akin to definitions of "art." To a certain extent, we may consider anything "art." Just wander into any local Museum of Contemporary/Modern Art to see things that, absent the museum surroundings, would likely be ignored as a messy room, a garbage spill, or in some cases, the product of a problematic sewage system.

Sure, call it all art if you feel so inclined. The issue, then, is whether or not it is good art. This is largely subjective, so I'll stay out of that. But in terms of Intelligent Design, if one feels the absolute necessity to call it science, fine, but it should then be judged as good or bad science. In that vein, these bits from Thomas Kuhn's "The Function of Measurement in Modern Physical Science", taken from R.H. Coase's essay "How Should Economists Choose?" (Essays on Economics and Economists):

The road from scientific law to scientific measurement can rarely be traveled in the reverse direction. To discover quantitative regularity one must normally knw what regularity one is seeking and one's instruments must be designed accordingly; even then nature may not yield consistent or generalizable results without struggle.

And:

Anomalous observations...cannot tempt [a scientist] to abandon his theory until another one is suggested to replace it. ...In scientific practice the real confirmation questions always involve the comparison of two theories with each other and with the world, not the comparison of a single theory with the world. In these three way comparisons, measurement has a particular advantage."

(Emphasis in original.) Of course, the text from which I crib this is excellent in itself, as, unlike some, Coase exhibits exceptional communication as well as analytical skills. To wit:

Instead of confining ourselves to a discussion of the question of how economists ought to choose between theories, developing criteria, and relying on exhortation or perhaps regulation to induce them to use these criteria in making their choices, we should investigate the effect of alternative institutional arrangements for academic studies on the theories that are put into circulation and on the choices that are made. From these investigations we may hope to discover what arrangements governing the competition between theories are most likely to lead economists to make better choices. Paradoxically, the approach to the methodological problems in economics that is likely to be the most useful is to transform it into an economic problem.

Bryan Caplan at Econlog

Bryan Caplan, Associate Professor of Economics at GMU, proprietor of the Museum of Communism, and my Micro II instructor is now blogging with Arnold Kling at Econlog.

Tufte Takes Aim At Economists

Edward Tufte, he of the Napoleon's March to Moscow fame, has posted a chapter of his new book, wherein he savages David Galenson for, among other things, inadvertantly using puns. The rather slipshod way in which economists often present data, in Tufte's view, is worthy of an entirely new word:

economisting: (e kon' o mist' ing) 1. The act or process of converting limited evidence into grand claims by means of rhetorical ploys, especially punning. 2. The belief or practice that empirical evidence can only confirm and never disconfirm a favored theory. 3. Conclusions that are theory-driven, not evidence based. See also confirmation bias, painting with a broad brush, Iraqi weapons of mass destruction, post-modern critical theory, marketing.

Now, I've not read the book Tufte goes on a tear about -- Galenson's Painting Outside the Lines -- so I've got no way to comment on Tufte's discussion about the various arguments presented in the book.

What I will say is that attacking economists for their use of language is a bit of a low- blow. Trade-offs occur in every part of life, and devoting oneself to the study and practice of economics might mean spending less time focusing on the art of written communication. Now, like many people who stop through T&B, I've suffered through any number of economics texts that are truly terribly written, regardless of the the quality of the analysis (in my anecdotal evidence here, there is no correlation between quality of analysis and writing), that could have done with more judicious input from an editor. And certainly being better writers might well help economists communicate their ideas to a wider audience, but surely some allowance must be made for the very different sort of pursuit science is from the humanities. I tend to think Tufte grabbed some "low-hanging fruit" for his book; why choose economists over, say, nuclear physicists? I would guess it's because, as a statistician, Tufte doesn't face the technical hurdle of understanding the analysis in Galenson's work and can so make a better judgement between well and poorly written work. His own biases showing, perhaps. After spending some months looking at the energy industry in the US, as well as the possibilities/problems with some alternative energy, I can assure you that physicists, geologists, and what seems to be the vast majority of environmentalists suffer from the same problems Galenson is taken to task for. Namely, not being great writers. Their messages get lost, to greater or lesser extent, due to varying abilities to marshall language to the service of their point. Why economists require a special category is unclear to me.

(NB: While the one chapter cannot represent the book as a whole, I'm mystified by one part of this sample. When Tufte angrily notes that Galenson mentions not a single auction price (emphasis his) in his graphs and tables, Galenson's text mentions it frequently. This criticism comes just below two graphs apparently taken from Painting Outside the Lines with the abscissa labeled "Age" and the ordinate labeled Ln(Price). That sounds suspiciously close to "prices" to me. The use of a log in speaking about prices -- as with wages -- is a frequent and long-standing habit of economics. As I said, not having read the Galenson book, I can't comment on the value of choosing this measure. But if it is this choice that is truly Tufte's bugaboo, then perhaps he should have brought up the reasoning that lead to the practice, rather than suggest by selective presentation of a single example, that Galenson is simply slipshod in his work.)

Larry Summers Defends Himself

Mahalanobis has the... ah... goods on Larry Summers' remarks about men having higher genetic variability in intelligence and lower family opportunity cost. Dr. Summers is sorry that so many women misunderstood him! Btw, my wife has always agreed with the substance of Dr. Summers' claims.

UPDATE: Gene Expression has relevant links and commentary.

Arctic Refuge

I received an e-mail from Robert Redford forwarded to me this weekend. The text of the message can be read here. Mr. Redford, speaking on behalf of the Natural Resources Defense Council (NRDC), argues that oil exploration should be stopped in this country. Right or wrong, using the political process to inhibit exploration does not address the underlying issue of oil consumption.

I enjoy the beauty of Alaska, Montna, Utah and the rest of this great nation as much as anybody. However, these areas have only been opened to our exploration and enjoyment because of industries pouring billions of dollars into airports, roads, utilities and building a local economy. Allowing any special interest to deny economic self-sufficiency to these areas will effectively cut off access to all but the richest adventurers. In Alaska, the oil industry has single handedly built the economy and attracted thousands of workers, residents and visitors who would otherwise have never seen that great state.

The National Resources Defense Council (NRDC) uses flawed logic in their argument that fuel efficiency regulation will have the desired effect on our contry's consumption of oil. Andrew Kleit effectively analyzes the actual impact of changes in the fuel economy standards. In the end increasing the fuel economy will only reduce the marginal cost of driving each additional mile. This only encourages more driving.

All resources are limited on this earth. The ONLY efficient means of choosing who gets those resources is by awarding access to those who assign the highest value. Jerry Taylor, of the Cato Institute, proposes some solutions to the problem of allocating the resources of the Arctic Refuge. If the FCC can auction off the national resource of bandwidth, why not auction off public land. Certainly Robert Redford could pitch-in to help his environtmentalist organizations to buy a few hundred acres of the Arctic Refuge.

It is an honorable effort to preserve beautiful land and protect wildlife. However any effort which ignores the welfare of our human family is short-sighted.

Graphing What Cannot Be

I've always liked John Tukey's work...

At the other extreme, they must, at almost the same time, be honest in assessing the uncertainties of their final results. In the latter they cannot be satisfied with allowance for only the likely size of "sampling errors", a task with which routine manipulations can often help them; they must, most particularly and responsibly, make explicit allowance for the likely size of "nonsampling errors", for the extent to which the data given to them was neither what it purported to be nor what it ought to have been. No other profession must support itself over so wide a span from security to insecurity. (Tukey, The Future of Data Analysis, 1965; 23-24)

Instead of studying and graphing what we know, Tukey suggested graphing what we know cannot be, and improving graphs, “by shifting emphasis from "what might be," inevitably truly fuzzy, to "what we know cannot be," which only has fuzzy edges” (Tukey, 1986, 73). He presents an evolution from the most certain estimate of what we know to the most certain estimate of what we don’t know: from best estimate, to the likely interval, to range of the impossible:

The difficulty we face (in economics) is that total error bounds are not known; nonsampling errors have not been investigated enough for me to come to any general empirical conclusions. For macroeconomic data charts like those above are mere guesswork.

We simply do not know enough about nonsampling error, nor are we likely to during my entire professional career. What stance am I to take towards data? How am I to use it seriously, without prejudice or bias? That’s it, I’m not really concerned with the bias in the data as much as I am with my own personal bias in understanding and using it. I want to know, if the unemployment rate is 5.4%, what kinds of stories using that number are real, and which are imaginary?

Accuracy vs. Precision in Economics

Here's another appendage mercifully sliced from the dissertation proposal. I have no idea why I wrote an elementary discussion of accuracy vs. precision in the first place; upon further review, I'm rather embarrassed that I didn't obliterate it months ago...

In physical science, the terms accuracy and precision have specific meanings generally accepted by practitioners. Accuracy measures how close any single estimate (or average of a group of estimates) is to the true value of interest. Precision measures how close several estimates are to each other.

For an example in economics, an accurate measure of employment growth would be within x% of actual employment growth, with x selected arbitrarily An "equally" precise measure of employment growth would have two standard measures of employment growth generally within x% of each other. Another example of precision of x% would be if a single series were regularly revised upward or downward by that amount.

Revisions of statistics can be treated as a means of gauging the precision of a macroeconomic data series, but not its accuracy.

Both accuracy and precision are objective properties of the measuring tools and processes used; however, measuring accuracy requires a generally accepted benchmark, while measuring precision requires only the data at hand.

Most variables in physical science are estimated using commercially developed tools—telescopes, microscopes, etc—that have been tested under many conditions to yield a known level of accuracy—a level that can then be used as a portion of the total measurement error. In physical science, “measurement error” is addressed through repeated measurement of the same variable under tightly controlled conditions. That, is all biases are assumed to be irrelevant, to cancel out. Repeated measurement is meant to gauge the precision of the particular measurement process with particular tools; accuracy is assumed to not be the concern of statistical analysis.

In economics, “measurement error” is not similarly addressed. The statistical distributions of measurement must cover both accuracy and precision. Most variables in social science are estimated using surveys of individuals, households, and businesses. Each of these units is sampled once, yielding an unknown level of accuracy at the unit level and consequently at higher aggregation levels. Sometimes, as with employment figures, more than one independent estimate is made of the same concept; after reconciling the differences in construction, it is possible to compare the estimates, and develop a measure of the joint precision of the two measurement processes.

Ludwig von Mises on Macroeconomic Data

Here's another "think piece" cut from my dissertation, in which I decided to reread and comment on portions of Mises...

The quality of the commodities produced and consumed changes continuously. It is a mistake to identify wheat with wheat, not to speak of shoes, hats, and other manufacures. The great price differences in the sycnchronus sales of commoditieis which mundane speech and statistics arrance in the same class clearly evidence this truism. An idiomatic expression asserts that two peas are alikel but buyers and sellers distinguish various qualities and grades of peas. A comparison of prices paid at different places or at different dates for commodities which technology or statistics calls by the same name, is useless if it is not certain that their qualities—but for the place difference—are perfectly the same (Mises, 1996, pp. 220-1).

Is this really true? Are price indices “useless” if they are taken over commodities of non-homogenous quality? Shouldn’t it be possible to quantify--or describe--the errors involved in the index-number creation process, to separate the signal from the noise? That is Yes, one must explicitly hold quality constant. Only if quality is not measurable or estimable within useful margins is it reasonable to reject the index-number procedure.

[T]here exist different methods for the computation of averages. There are the arithmetic, the geometric, the harmonic averages, there is the quasi-average known as the median. Each of them leads to different results. None of them can be recognized as the unique way to attain a logically unassailable answer. The decision in favor of one of these methods of computation is arbitrary (Mises, 1996, pp. 221-2).

Why is Mises talking about this? He's trying to show that Irving Fisher’s desired adjustment of the quantity of money to meet purchasing power is not a logically proven method. Sure, any method chosen is arbitary, but VERY frequently, the results (of the most popular estimators) yield estimates in the same direction. Some decisions can be made reliably with this data. Others cannot. What is absent in Mises’ formulation is the recognition of the uses of data, to which each average must be benchmarked for appropriateness. The diversity of calculation methods is actually a diversity of estimators of the “middle”, and there exist tradeoffs between these estimators. While there exists no “logically unassailable estimator” for a given population parameter, there do exist minimum variance unbiased estimators and the like.

Mises has a far more potent argument when he insists that anybody’s carefully chosen measurements of their own purchases are just as scientific as index numbers:

A judicious housewife knows much more about price changes as far as they affect her own household than the statistical averages can tell. She has little use for computations disregarding changes both in quality and in the amount of goods which she is able or permitted to but at the prices entering into the computation. If she “measures the changes for her personal appreciation by taking the prices of only two or three commodities as a yardstick she is no less “scientific” and no more arbitrary than the sophisticated mathematicians in choosing their methods for the manipulation of the data of the market. (Mises, 1996, pp. 222-3).

Now this is a cute analogy. But what else can one say about this? For Mises, it’s either science, or it ain’t. There seems to be of little point to seeing how much better the average housewife can do than the statistician, even if both are not “scientists”. But one sees why Mises holds this opinion; for Mises, there is stable statistical truth about populations, but market processes destroy (what I'll call) continuity. Index numbers are estimates of discontinuity, and work when estimating large areas of discontinuity, but fail utterly in an attempt to gauge small changes. I think most economists will recognize that when one is trying to measure the average movement of millions of prices, there’s simply no reason that movement must follow a known general pattern.

Hence, choose your index number to favor your ideology; in the end political arguments shift to irreconcilable arguments over statistical methodology:

[N]obody acquiesces in an index number if he does not expect a personal advantage from its acknowledgement by public opinion. The establishment of index numbers does not settle disputes; it merely shifts them into a field in which the clash of antagonistic opinions an interests in irreconcilable. (Mises, 1996, p. 223).

The first sentence above suggests the potential existence of 1) undue influence in the calculation of index numbers, 2) a theory of collective choice over statistics.

The second sentence suggests that a plethora of data exist because production of social statistics is a game—a game in which all sides have every incentive to hide their shoddy calculations. Non-technical individuals have no means to challenge the data. All sides realize this, and now have a “gentleman’s agreement” not to discuss the dirty details—biasedness, large variance, imprecision of population, the unknown applicability to real world problems—of index calculation. Everybody gets their turn to use bad data, and the costs of declaring that your opponent’s data are bad include are having them declare your data are no better.

Yet, there is a system of measurement even Mises could consent to:

A datum of experience and a statistical fact is only a price paid at a definite time and a definite place for a definite quantity of a certain commodity. The arrangement of various price data in groups and the computation of averages are guided by theoretical deliberations which are logically and temporally antecedent. (Mises, 1996, p. 351).

One jumps to reply, “So let them be guided by such deliberations!”

No aprioristic theory exists to determine the exact outcomes of changes in law that apply to the economic system. In fact, Mises is fine with data, as long as you are not trying to construct economic theory out of it. If one is trying to estimate the impact of rule changes, and such changes have occurred elsewhere, Mises would applaud looking at the historical record as a guide for lawmakers and businessmen. But this is not economic theory, and there is no way to determine where—inside or outside the historical range—actual outcomes will lie.

(Regarding) Economics=prediction=forecasting.

As against mathematical economics the request for a dynamic theory is well substantiated. But there is no means for mathematical economics to comply with this request. The problems of process analysis, i.e., the only economic problems that matter, defy any mathematical approach. The introduction of time parameters into the equations is no solution… (Mises, 1996, p 356).

What about the persistent elaboration of the distribution of prices, wages, etc., from one month to another, estimating frequency distributions, and using changes in the parameters of those distributions to view economic change, historically? This is clearly acceptable to Mises, but it does not generate a permanent theory of economics.

------

And what of theory? Daniel Bell in Models and Reality in Economic Discourse is all over the map:

Economic theory, unlike physics, is not constitutive of a single underlying reality. Nor can it be, pace Alfred Marshall (and Gary Becker), timeless generalizations about human behavior. In consequence, economics cannot be, as its model in classical mechanics, a “closed system” which ignores change or the effort to discern specific patterns of change. (Bell, 1981, p.80).

Quite frankly, arguments like this get tiring after a while. If I want to construct a static, timeless, and a priori theory, that’s my business. If I want to construct a model that ignores process, that’s my business. And I emphatically deny the following:

[E]conomic theory should not be taken as a “model” (or template) of how human beings behave, for these will always be inadequate, but as a “Utopia,” a set of ideal standards against which one can debate and judge different policy actions and their consequences. That, it seems to me, is the meaningful role of any social “science” in theorizing about human affairs. (Bell, 1981, p. 80).

The idea that economics is a science of benchmarking the frail reality against the impossible ideal has a substantial draw for many. But what if one disagrees with the benchmark? One is left in Mises’ quandary about the best index number to use as a benchmark, with no scientific way to resolve the issue.

[Note 1/13/05 | 15:36: Formatting and verbal changes have been made.]

On the Price of Wheat in Smith's Wealth of Nations

I don't remember writing this paragraph, or even thinking about it:

Let's examine the price of wheat in Smith’s Wealth of Nations--an extensive historical series compiled from one major source and many minor sources. We ask a simple question, "what are these prices supposed to represent?" The median exchange price, the mean exchange price, the first or last price of the year, the average price on a certain day? What is the error in this data? What does this imply about markets, people, processes, end states (equilbria), welfare, statistical procedure?

That's an entire dissertation in itself.

AAFRP

Many nonprofit organizations have special chapters for children. But as far as I can tell, AARP doesn't. As flush with cash as they are, they could have websites, literature, and meetings for children grandchildren to teach them all about the benefits of pro-elderly activism.

But the parents of these children are likely to be younger and working; they are definitely not of one mind regarding the policies AARP would like to see enacted or maintained. In fact, the median view of this younger group is likely opposite to many policies AARP lobbies heavily for.

Of course, the AARP openly discriminates against the young--i.e. those who are younger than 50. They can be members, but only "associate members" who get no benefits, and only if they "support the association's goals and objectives", which in the libertarian view are evil..

How can one effectively oppose this goliath?

What if the 87.5% of the U.S. population not in AARP formed an association to further their own interests. This organization would discriminate against those older than 50--call it the American Association of Future Retired Persons, or AAFRP. It would profit and lobby like the AARP; it would solve shirking and collective action problems in the same way that AARP does, by jointly producing activism and selling personal services.

I'm not certain that another tremendously powerful lobbying organization--even one that opposes AARP--is something that would work out well in the long run. In particular, time would put an AAFRP at a clear disadvantage to AARP, since every member of AAFRP would eventually be eligible for AARP... Given the relative rise in the retiree/worker ratio, maybe a feeder organization is not such a good idea.

Free Wi-Fi in Alexandria, VA Libary

My post about the disturbance caused by an unexpected wireless network in my local library was joyfully mocked on several techie sites. Well, you may continue your derision; the gods did it again.

Last Saturday, the Alexandria Beatley Central Library began offering free Wi-Fi to all comers--residents and nonresidents. Watch out Panera!

Since the library is a government enterprise, there was no attempt to profit from the wi-fi network. There was no advertising of this achievement--not even a small sign--, and no hip college student selling coffee swill at a stand. Nobody at the library could tell me anything sensible about the network. Even the ordinarily sharp ladies at the reference desk had just received a typed memo informing them. Note that they mentioned that users of the wi-fi network must accept the library internet use policy, even though no message or login screen prompts them to accept it.

UPDATE: There are signs up now. It's a beta test...

Marginal Revolution's Google Ads

I'm probably late in noticing that the premier economics blog Marginal Revolution has purchased Google Ads. But if I'm late, maybe you are too.

Either way, I bring this up because we at T&B are wondering how to better serve our current readers, and how we can attract and keep new readers; advertising might help us do the latter in the short-run, but does not help us with any long-term goals.

Readers, what do you want from T&B?

What do you think is missing from the business, finance, and economics blogs?

Food Choice and Income

In an interesting inversion of a problem seen here in the US, it appears that Chinese children that come from wealthy families are more likely to suffer from bad eating habits.

A Chinese study has found that children from wealthy families are more likely to suffer bad nutrition than those from low-income homes, partly because they eat more fast food, state media said on Friday.

"Children from high-income families are inclined to eat more fast food because the pace of life of their parents is rapid and they ignore a balanced diet," the Beijing Evening Post said.

In the US, choosing a healthier, less processed-food-rich diet is actually a more expensive option than loading up on processed goodies that come at a relatively cheap price. Not so, apparently, in China where fast food buying is a sign of affluence, and more vegetable-based diets are prominent for lower income groups as a result of an economy still heavily agrarian. Both places, of course, still seem to place the value of their time on the top of preference lists; for China, "pace of life" demands faster food, and in the US time spent attempting to prepare healthy, yet inexpensive, meals for a family possibly means time away from the more fiscally rewarding hourly-wage job.

In an interesting policy suggestion, one expert made this comment:

"As to the food mix and eating habits, rich families should follow the example set by low-income families," an expert was quoted as saying.

Well, I suppose that's one way to look at it. Of course, one might want to also consider that some of those lower-income groups may have children that don't eat as regularly as the higher-income children, or have options from a highly constrained menu. In other words, how "low income" were they?

Lack of Merit

I was sadly disappointed by the analysis in The Economist's article
Meritocracy in America. The article's arguments rely on the assumption that genetic heritability of traits producing financial success is completely negligible. However, the article doesn't try to justify that assumption. In fact, unless I'm suffering from some mental block, the article never mentions that assumption. This is inexcusably silly for an article in 2005 which runs to three pages, and which repeatedly uses that assumption to use statistics about overall inheritance of success to derive conclusions about the strength of social mechanisms for inheritance of success.

Actually, I am predisposed to agree with some of the article's conclusion. It'd be pretty easy to convince me that social mobility has been decreasing (at least in the post-Jim-Crow era -- it would be harder to convince me that barriers today are as godawful as the Jim Crow laws were). It'd also be pretty easy to convince me that some reasonable measures of meritocracy could be declining too (emphatically not including skewedness of income as an indicator of nonmeritocracy or nonmobility, because I don't think professional sports, e.g., are wildly more nonmeritocratic and sclerotic than most of the economy). But many of the arguments in the article just don't support the conclusion unless, for reasons unexplained, alternative explanations are excluded.

(I usually pick up The Economist on Thursday when I visit Barnes and Noble cafe to play the game of Go. Thus, the article has been out for almost a week, and maybe someone else has dumped all over it for me. However, the only notable response I noticed in Google "economist meritocracy america" was here, and I think the article merits more dumping than that. If the definitive mo'-dumping response is out there already, then I'd appreciate feedback about how to improve my web search skillz to find such responses.)

Now, possible genetic heritability needn't necessarily involve psychological characteristics, and needn't even involve economic meritocracy or anything else which might reflects favorably on the system. Consider that The Economist itself within the last few years ran an article on "heightism", reporting a correlation between income and height. Height is strongly genetically heritable. For all that might be known by a thoughtful reader whose worldview is shaped by several years of reading The Economist, the reality behind the success statistics reported by the article might have little to do with social mechanisms for parents to favor their offspring, and much to do with the economic importance of inherited cosmetic factors like height, and/or other less-often-measured factors like complexion and hair. However, an even more glaringly obvious ignored explanation is that of inherited psychological characteristics (and/or inherited physical characteristics, like general health, which affect the mind) influencing success. (This influence needn't necessarily be through the usual meaning of "merit" either; it might be through things like predisposition to lie, ability to lie convincingly, predisposition to take risks, or predisposition to devote little energy to direct pursuit of sexual partners and to trust instead in the indirect outcome of one's single-minded pursuit of financial success.)

Discussion of inheritance of psychological characteristics is sufficiently politically incorrect that I feel little curiosity about the article's curious assumption that this effect is obviously zero. However, this political correctness at this level on this date seems woefully clueless or dishonest. Stephen Pinker's book The Blank Slate is full of evidence for the strength of inherited psychological characteristics and contains some evidence on their effect on economic outcomes. And it was quite a successful book, so it's not as though the ideas aren't widely known in 2005. The book is also sharply critical of solemnly blinkered silliness of research work silently excluding the possibility of genetic inheritance, e.g., on p. 375,

Yes, from the many useless studies that show a correlation between the behavior of parents and behavior of their biological children and conclude that the parenting shaped the child, as though there were no such thing as heredity.

and page 384,

The First Law implies that any study that measures something in parents and something in their biological children and then draws conclusions about the effects of parenting is worthless, because the correlations may simply reflect their shared genes (aggressive parents may breed aggressive children, talkative parents talkative children). But these expensive studies continue to be done and continue to be translated into parenting advice as if the heritability of all traits were zero. Perhaps [Marlon] Brando [who in an interview gave some homely observations about genetic predispositions, and was mocked for it] should be asked to serve on grant review panels.

Taking Pinker's word for the older literature (essentially none of which I've read for myself) I notice that this shoe seems to fit in 2005. Research agenda: Since there's probably little genetic relatedness between 1978 researchers and 2005 reporters, factcheckers, and editors at The Economist, evidently foot size is culturally determined! Now to look into mouth size...

Also, were I an economics journalist, not only would I be embarrassed to be caught unaware of the ideas (and characterized by the criticism) in The Blank Slate, I might also be embarrassed to be caught not reading Marginal Revolution. Their recent article pointing to an article about parent-child income correlations in adopted Korean children vs. genetically-related Korean children is not definitive, but it's suggestive enough that in the absence of a considerable body of research definitively leading to other conclusions, I think this single study might be enough all by itself to justify my characterization as "silly."

Also, a particularly dodgy-looking statistic: the article reports "nearly 70% of the sons in 1998 had remained either at the same level [by quintiles] or were doing worse [again by quintiles] than their fathers had." I expect this is technically true, but it looks like "how to lie by statistics" to me. Unless I'm confused -- which does happen, sometimes for publication... -- the absolutely random uncorrelated result would be 60%. I don't believe that the journalists expected their readers to pick up on this, or that they intended the sentence to be a masterfully concise summary of "68% [or whatever] of the sons in 1998 had remained either at the same level or were doing worse than their fathers had; in a country where outcomes were assigned randomly, the figure would be only 60%." After all, it is really very odd to summarize 60-something percent as "nearly 70%" when the baseline uncorrelated result is 60%, so that the difference in significance between 66% and 69.5% is large. It makes little sense as an attempt to be concise or informative, and much sense as a hint to help lead one's readers into the misimpression that the insignificance result is so far below 70% that the rounding is irrelevant.

As long as I'm on the subject of this article, sometimes I'm nostalgic for the old Economist and regret, e.g., how often the current Economist passes up the opportunity to make thoughtful, sometimes irreverently subversive, often quantitative observations. So, after wishing that this article met basic standards of social science and statistical cluefulness, I'll wish also they could've dropped into the article somewhere a paragraph comparing the magnitude of within-the-country inherited success factors to the magnitude of the effect of inheriting US citizenship (compared to inheriting citizenship in a random country).

On the plus (?) side, the new Economist does have "slither of society" -- a witty play on "All Snakes, No Ladders," one hopes.

(Incidentally, since this blog seems not to have a category for "Economic Journalism" at the moment, I got to enjoy some found mordant wit of my own with the "Product Review" categorization of this article. I hope that doesn't make me a bad person; I also think it might be a good idea to add such a more specific category or, I suppose, to declare the this kind of article to be inappropriate.)

Hello, World

Thanks to Kevin for his offer of blogging privileges here! I'm Bill Newman, a computer programmer currently working primarily on a program to play the game of Go. On the web I'm probably best known for my work with SBCL, a compiler for the Common Lisp programming language. Back before I was a simple programmer I was a graduate student in theoretical chemistry (mostly a programmer), an undergraduate in biology (partly a programmer), and a high-school part-timer working on embedded systems (by now, you know the drill).

(And belated thanks to Kevin for his remarkable patience in not Siberianizing me yet!)

My formal qualifications in economics are, um, taking an undergrad survey course, and auditing a business school course in pricing derivative securities. But economics (especially that of a reductionist microeconomics flavor, including "economic imperialism" of microeconomic sensibilities applied to organizational behavior and public choice and so forth) has been an interest of mine for a long time, and periodically I feel the urge to write something about it.

Part of my long delay in doing anything with my new account here followed from nearly simultaneously banging an algorithms paper, proudly sending out the preprint, and almost immediately being told of a serious error in the paper. That took the wind out of my sails for a while; I hope that mistakes like that won't become a habit.

I actually do have a fair number of economics-related things I'd like to write about, and I've been fiddling about waiting for the gumption to do it. As I was phlegmatically contemplating the jump, an article in the Jan. 1-7 issue of _The Economist_ pushed me. If all goes well, my first real post, criticizing that article, will appear later this morning.

More on Drug Reimportation: Price Convergance

The massive discounts on drug prices in Canada don't appear to be too sticky.

Americans purchasing their drugs from Canadian online pharmacies didn't save as much money last year as they did in 2003, with the average discount dropping to 29 percent from 38 percent, a new study found.

The average drug price on Canadian Internet pharmacies rose 23 percent from the first quarter of 2003 until the end of last year. Meanwhile, drug prices at American online pharmacies rose 8 percent, according to PharmacyChecker.com, which tracks Internet pharmacy prices and released the study.

Apparently the efforts to block exportation to the US were tighter than I had thought:

To circumvent the restrictions and keep supplying their American customers, Internet pharmacies have been buying drugs from Canadian brick and mortar drug stores, which charge them a markup of between 7 percent and 15 percent above wholesale prices. The higher acquisition costs combined with being paid with weak American dollars is hurting Internet pharmacies' profits.

"This has become a really low margin business for us," said David MacKay, executive director of the Canadian Internet Pharmacy Association. "We are just trying to hang on."

The comment about the weak dollar here sounds a little like a comment about US economic conditions (though I might be a bit over-tuned, I admit), but in this case it can be seen as a small plus: drugs in the US are now relatively less expensive.

Canada Tightening Hold on Internet Pharmacies

Canda's Health Minister might be trying to strike a fatal blow to the Canadian industry that sells pharmaceuticals across the border to the US.

Health Minister Ujjal Dosanjh may prevent Canadian doctors who do not personally examine U.S. patients from signing prescriptions written by American physicians, a move that could essentially kill the industry. Dosanjh may also create a list of widely used prescription drugs that cannot be exported.

Looks to me like the question of drug reimportation isn't going to be settled by US policy-makers.

Will Eisner, 1917-2005.

The father of modern comics passed away yesterday at the age of 87.

Certainly his most famous work is from The Spirit, a blue-suited crime-fighter that served to not only for revolutionizing comics, but was a model for countless detective characters for years. However, you'd do yourself a disservice if you didn't read his more personal works, such as A Contract With God or To the Heart of the Storm.

I nearly pursued a career as a comic book artist, in large part because of the work of this man and the people that followed him. Of course, when I realized that my ability to draw had peaked around age 14, I wisely looked elsewhere for a vocation. But if you want a glimpse at the promise and power of comics (a poor term, though not nearly as contorted as "graphic novel"), his work is the best place to start.

Iraqi Banks Gaining Ground

This is a couple days behind, but I thought it might be of interest to a few visitors: Iraq's Ailing Banking Industry Is Slowly Reviving.

Still, the fall of the Hussein regime has encouraged the private sector.

At least two new banks have opened since April 2003, and eight others have submitted applications to open. Foreigners have begun venturing in, taking advantage of investment laws that grant non-Iraqis a level of access to the country unprecedented in much of the Middle East. And Iraqi banks, mostly barred by Mr. Hussein from ties to the outside world, have been welcoming foreigners and venturing abroad as well.

It's a largely unresearched position, but I still contend that economic development will preceed physical security on the level we'd like to see (that is, without the need for armed patrols in neighborhoods). People will be far less willing to join or tacitly support armed resistance if they've got something to lose. Which makes this a disturbing statistic:

Indeed, Iraq's tight credit market has gotten worse. According to a study by Citigroup, which has no banking operations in Iraq, nearly 30 percent of the country's banking assets remain uninvested, up from 12 percent in 2001.

Lessons in Incentives

Hospitals are trying to figure out if it sends the "wrong signal" to have a Mickey D's in the lobby ready and waiting for the guy who just had heart surgery.

At a time when two-thirds of American adults are overweight or obese, putting their hearts and arteries at grave risk, health officials and physicians are urging people to be watch their weight and eat healthier.

Having french fries at a leading center for treating heart disease sends the wrong message, officials of the Cleveland Clinic believe.

Of course, if the hospital is private property, I don't mind at all if they decide that the only food service should be through Seattle Sutton, Lean Cuisine, Baja Fresh, the Outback, or Cold Stone Creamery. Then again, I would mention that, at a time when hospitals are losing money, turning away rent from high-volume places maybe isn't the wisest financial move. If they're just going to stop through a drive-thru on the way home, why not capture some of the market? But that could just be me.

If people bore more of the direct cost for their medical problems -- heart disease in this case -- would they be more willing to take care with their eating habits? Sure, the heart poblem the man in the story is having treated is going to drive up premiums, and makes it hard for him to get new or different insurance, but that's a far cry from getting a bill a week later that has, say, a five- or even six-figure bottom line. If there was some sort of tote-board next to the refrigerator, totalling up the likely medical costs for every extra slice of cheese or spoonful of sour cream, then the answer is clear. Since people are often very bad at weighing potential risks and assessing the future, however, it's not so clear.

To be sure, the poor are both the most likely to be without health care, and also the most likely to be overweight. The issue, I think, stems from the progress in making processed foods has driven out costs while infusing the product with items that put on weight. Or at least their concentration has increased dramatically -- think "high fructose corn syrup". Without paying monthly premia, these people also don't face a direct cost for health care, but do assume a much higher risk and face a far more worrisome situation. Eating well is an expensive proposition in this country as compared to pre-packaged meals and fast food, however, and the increased risk doesn't reduce the gap.

But my question then becomes: is providing state-funded health care -- such as proposed plans to extend health insurance in an ever-more socialized way -- to the riskiest possible group going to help in terms of producing better health results? Certainly the costs of health care provision would be driven up by the new people who are now using services at a higher rate than the less risky group. And the presence of health insurance hasn't created a drive towards healthy living among the covered. In fact we'd expect the opposite. I understand that some people would feel better knowing that more and more people are covered, but I'm not certain that I see how this results in what I assume to the be ultimate goal of health insurance and thus access to health care: healthier people. (Note that I don't count children or coverage of children in this, since I think there is a strong case to be made about their inability to understand -- though how we cover children alone is a question I've not got a good answer to.)

Is the desire to make sure people are covered, or to have healthier people? If it's public funds being spent to achieve and end, I'd prefer to have a clearer purpose.

More thoughts on giving...

Sorry I'm converting this into a second post Kevin... I ended up typing fifty times more than I had intended to in my comment reply :-)

Kevin made a comment in my previous post that got me thinking:

"Isn't that a classic question economists have of charity? If you give, is it for your utility directly, or for the recipient's?
If for yourself, you might donate the whole amount even with doubling, because you just care to give.
But if you care for solely for the recipient's welfare, you'll give half with doubling, so the recipient winds up exactly where you wanted him....
This is poor economic analysis... and I doubt many people cut donations because of explicit matching contributions... but I'm just trying to get the general flavor of the argument..."

That definitely is the reasoning that needs analysis - and my take is it ends up being a very interesting game.

Assuming that you are a social 'charity' planner that wants to ultimately maximise the recipient's welfare... the only way that the recipient's welfare is maximised is by maximising the utility of the donor. (I assume that this would be a crude Nash equilibrium.)

The problem is compounded from the donor's side in one important way - the heterogeneity of the donor group. Utility for people in the 'passenger class' may be unconstrained at heart - but ends up being restricted by our budgets - i.e. our ability to give (poor students and their wallets... sigh). However, lets make an (unfair) assumption that this group has one additional characteristic - the budget constraint motivates them to derive maximum utility from the end value contributed - leading us to assume that if a matching fund exists, they may (inequality) be prompted to give less than what they intended to.

Assume that the 'upper class' donor's budget constraint isn't binding. Lets make another (unfair) assumption that the 'upper class' wants a more 'premium' way to donate -i.e. by being part of an endowment fund or to have their names lined up in a plaque. Now if they find that their status isn't upto the mark - then this psychological constraint may kick in and they may not give as much as they would have.

For purposes of simplicity (though this is probably a stupid assumption to make), lets say that the inefficiencies created by the two assumptions we have made for each class of people is unidentifiable. It could be one of four situations - a) matching fund causes more passengers to give less - b) absence of matching funds causes the elite to give less - c) there is an equal loss between the two - d) there is no loss. This then leads to a problem of how to design an optimal contract.

Kevin's point, that people wouldn't cut their giving because of the existence of a matching fund, is subject to doubt. A possible (and important) consideration is cultural differences. Many communities (many many Indian communities) are extremely frugal by nature. It is not to say that they have a bad heart - it is only to say that they seek to reach the original maximum utility they sought to derive and not be attracted to the lucre of a better maximum and the impact it will have on their wallet. This also applies to people who have a lot less to give. Many may have scraped through all kinds of cookie jars to come up with whatever they could, and this could imply that they have a few bowls of soup less over the weeks to come so that others may share the forgone bowls of soup. With the matching fund - they may give less. I was at the Albany temple when they made the announcement and I overheard atleast a handful of people arguing the matching fund when asked to improve on the value of their check.

So thats my take on things - I know there are many many many loopholes in this argument's design, but it's an attempt. :-)

More thoughts?

Motivating collection effort

I post this with a tepid sense that I may be discussing an already well-established phenomenon... but since it's the first time I encountered it, it was worth a word or two.

Continuing with my earlier request to donate to the relief effort, my friends who work for AID in Boston's MIT chapter (which was has brought in the largest amount of money in the last three days - upwards of $500,000) told me to request people to visit this website that matches money that comes in. Basically, this web portal designed for expatriate Indians is trying to raise funds through two ways - a kind of 'upper class' and a 'passenger class' system. Sulekha, the portal's name, basically puts out a notice saying (text in brackets added by me to indicate a summary of the continued text):

"Sulekha has created a large matching fund (see above for latest amount) with magnanimous donations from its members, well-wishers and corporate clients/partners worldwide (see complete donor list below). This fund will match dollar-for-dollar all contributions made through Sulekha to AID on this site. If you are an individual or a corporation interested in becoming a matching fund donor" (get in touch....)

This effectively means that there are two ways to contribute - the big guns can donate to the 'matching fund' and people like me can make contributions to the regular fund which gets 'matched' by funds from the matching fund. Effectively, there is just one huge collection, but what I found particularly interesting was the psychological effect it has on the 'passenger class'. I was at the Albany Temple today, where I was talking to the board about where their money is going. They have earmarked a percentage of the money towards AID, and were excited about channeling it through Sulekha's 'matching' system. This 'matching' fund idea seems to inspire people into giving with a happy face - their money is being 'doubled'.

However, the counterproductive side to this is that people might be urged to give less... under the impression that the funds will be 'doubled' anyway. This could be potentially less effecient a means of collections than just a single channel of giving. However, the counterproductive side to that is that perhaps many of the larger donors wouldn't have the status of being a 'Fund Contributor'.

Does this make any sense?