BY Bob

I was reading through some research from Piper Jaffray this afternoon and ran across some remarks about Apple:

Wildcard: The Apple Option - Another Reinvention. Given the magnitude of the success of the iPod , we believe that Apple will retain certain investors that will have a very high tolerance for lackluster performance seen in the Mac segment. We feel there is value in the "Apple option," potentially allowing the company to falter numerous times without investors becoming disgruntled. The Apple option is the bet that the company will be able to reinvent itself again through an iPod- like product and we believe that the huge success of the iPod will serve to offer the company significant leeway in the development of new products and potentially in keeping investors patient during difficult times. We feel that the Apple option is a psychological phenomenon that will drive shares of AAPL higher in the near-term.

Translation, Apple's shareholders tolerate mediocre performance, so buy the stock because it's going higher on some irrational belief in the company. For those of you afflicted with this psychological phenomenon, they have a $30 price target, but list it only as a market perform.

4/30/2004 08:40:44 PM
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BY Ian

IOC Gets Olympics Cancellation Insurance

The risks cited are terrorism, earthquake, and flooding.

What, no civil dispute risks?

4/30/2004 01:04:50 AM
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BY Ian

Looks like Prof Kiesling's place of work is going to be getting one of my profs come next year. The loss to da sowt-side is the North Shore's gain, that's for sure.

I mention this largely because of a couple slights made against game theory over at EconoPundit of late. (Including, it would seem, someone from T&B itself.)

Perhaps the person writing in to EconoPundit the second time does have a point that one's taste for game theory can largely be attributed to the person they learned from (and, it must be said, I did not get the mathematical inundation that the correspondent to EconoPundit did, though there certainly was some). Personally, I found it among the best classes I've taken, and have reoriented a good portion of my educational goals directly due to the instructor and the class.

What? You expected a defense of game theory? In my view, it needs no defense. It just needs a good teacher. I was lucky enough to get a great one.

4/29/2004 01:00:54 PM
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BY Ian

For my part it's going to be short pieces and quick pointers for the next day or two. (Unless someone has a really good tutorial on Heckman two-step estimation in STATA 8. The help file is a little light on this one.)

The Cali Governator is pushing competition among energy suppliers to large consumers. Of course, I have to wonder why greater competition shouldn't also be available to the small scale buyers, but maybe the Golden State isn't quite ready.

Enacting these measures would encourage investment in California's energy infrastructure, ensure long-term electricity reliability and reduce the likelihood of blackouts, Schwarzenegger said.

I'm presuming that the logic of this would follow the lines of: new energy companies realize profits can be had by selling to big buyers, install infrastructure to help do so, state reaps benefits of having energy companies revitalize the grid. Or something like that. (No one will mistake me for an energy policy person. To that, there's no better place to go than The Knowledge Problem.)

My mind naturally wanders to potential hold-up problems, but I'm sure one good flex by Arnie should smooth over any contracting problems...

4/29/2004 12:40:34 PM
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BY Ian

On the eve of the new discount card program in Medicare, a new site has been launched allow enrollees the chance to compre prices on the medications they take and even choose the right card/program for them.

There's an interesting story about the site -- DestinationRx -- in today's NYT. It asks, but never even approaches trying to answer (I'm just not a fan of the NYT, in case people didn't already know that) at least one good question: Why is the government spending money to build something that exists elsewhere? Drugstore.com, Pillbot, Compare-prescription-prices.com and a slew of others already provide the same service -- what need did we have for taxpayers to fork over $3 million dollars for another one? (One that plays incredibly annoying video ads in a space you have to scoll to get to in order to stop the sound.)

4/29/2004 09:55:29 AM
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BY Ian

Looks like the US has chosen the carrot over the stick in economic dealings with China.

WASHINGTON- - The Bush administration announced Wednesday that it has decided against launching unfair trade investigations into China's currency practices and alleged violations of labor rights.

The decision in two high profile cases was announced by four top members of the administration's economic team. They argued that the U.S. government had a better approach to get China to change its trade practices than threatening to impose punitive tariffs on Chinese imports into the United States.

I wonder if the experience with steel tariffs has shied Bush away from the combatative course on dealing with trade issues.

Perhaps economic policy has moved out of the shadow of foriegn policy? The administration view of China as a peer competitor to be clamped down on might either be losing favor, or someone has decided that trade wars are bad proxies for real ones.

4/28/2004 02:59:11 PM
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BY Kevin

In the post below I note the glaring absence of macroeconomic data about Iraq, but soon there will be data--at least for those with the right connections (not me). CPA leaders think that economic data are essential to optimize their planning, and recently put out a contract bid for economic data and reports (details here):

The contractor shall provide deliverables that include, but are not limited to: economic studies, reports, analyses, charts, graphs and other standard economic products to be produced at weekly and monthly intervals subject to final definition by the CPA project coordinator in consultation with the contractor.

Work is to be done in Iraq. The contract requires all economists to be native Arabic-speakers with English fluency and a graduate degree in economics or business:

2.2. Pursuant to this contract, the contractor will be available for, at a minimum, monthly meetings with CPA project coordinator to discuss project implementation and emerging economic issues in each of the regions of Iraq and to collaborate with the other economists and CPA personnel throughout Iraq. Project economists shall also attend at the CPA project coordinator’s request at the contractor’s cost.

2.3. The economists will be required to receive training to include primarily on-the-job-training and other possible training programs provided by entities identified by the CPA project coordinator. This training will be provided by CPA at no cost to the contractor. The contractor will be required to make the economists available for this training at the contractor’s cost

2.4. The contractor shall ensure that at least one of the economists will live and work in each of the larger metropolitan centers of Iraq. Emphasis is placed on having at least one economist living and working in each of the following locations:

Baghdad
Najaf
Karbala
Nasiriyah
Basrah
Mosul
Kirkuk
Dahuk
Sulimaniyah
Ramadi
Erbil

I'm interested to see the quality of data that will be culled by a privately-run, government-funded economic statistics and research agency with a one year firm-fixed price contract. There will be a minimum of 20 top economists, but the rest of the corporate structure is left to the contractor.

This leads me to one of my main research interests. Question: Does the expansion and stabilization of the Iraqi economy require the production and distribution of macroeconomic statistics by the goverment? Will such data improve the efficacy of central planning? Other than a more stable US economy after major macroeconomic statistics began to be kept in the 1930's, (which is a rather weak correlation), is there any theory or evidence to suggest that keeping such statistical data is a requirement for good economic governance?

4/28/2004 01:52:30 PM
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BY Kevin

An avalanche of data are available about the US economy, but data about the Iraqi economy simply don't exist. If you're the top Iraqi central banker--Sinan Shabibi, Iraq's Alan Greenspan--how do you gauge output and unemployment? Well, you use your own eyes:

"I see many tangible, everyday signs the economy is moving forward. One cannot miss the huge influx of automobiles in the country, the recent installation of satellite TV dishes on most building in Baghdad, the widespread use of cellular telephones, and the markets and streets stacked high with consumer goods and the presence of shoppers," Shabibi said.

Mr. Shabibi is trying hard to get private banks into the country:

At the moment, only six licenses have been granted to foreign banks to operate in Iraq between now and Dec. 31, 2008....

"The accelerated introduction of foreign banks will result in the implementation of new lending programs and other banking services that will help speed the formation of new Iraqi businesses and help create new Iraqi jobs," Shabibi said in a speech at the Financial Services Roundtable in Washington.

See also Mr. Shabibi's recent explanation of economic policy under Saddam:

I welcome this opportunity, on the occasion of the winter meeting of the G-7 finance ministers, to share my thoughts on the progress we have made in reconstructing the Iraqi monetary and financial system and the challenges that lie ahead.

To appreciate the nature of our task, it is important to keep in mind the state of our financial system under the Saddam regime. Policies in the financial and monetary area, like other economic policies, were directed toward meeting the self-serving military goals of the regime, and much needed improvements were neglected. Indeed, the monetary and financial system degenerated over the dozen years prior to the conflict last spring, undermined by the corrosive effects of rapid inflation resulting from monetary financing of the regime’s agenda. At the same time, the regime’s reckless military activities depleted the nation’s assets and plunged the country into a hopeless debt burden.

Here are pictures and design plans of the Iraqi central bank, built under Saddam.

In another bizarre note, a whois search tells me that the Federal Reserve Bank of New York owns the domain name central-bank-iraq.org; although the web site is currently not being run, requests to operate a foreign-owned bank in Iraq are to be sent to a central-bank-iraq.org email address.

4/28/2004 01:07:15 PM
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BY Kevin

Bastard Sword points us (via this excellent article) to a Russian music download site. No, it doesn't cost $1 per song, or even $0.80 per song, but 500 MB for $5, which at 5MB per song yields about $0.05 per song!

That's the apparently insane price proposition that a Russian site called allofmp3.com offers its customers. You buy your music by the megabyte, at the rate of 500 MB for $US5 and you dial in the sort of encoding you want: MP3, MPEG4-AAC, OGG, MPC, WMA etc at various bit rates using different encoders _ say the LAME alt-presets. If we were prepared to pay more for the bandwidth, we could elect to have the music encoded with lossless algorithms, giving us the same quality as the original CD.

Computers at allofmp3.com encode them on the fly and spit out the files, at an impressively fast rate. It will even email you when they're ready, or you can use their software, Allofmp3 Explorer, to manage the transfers. The software - like everything else on the website, from the catalogue to the order and payment mechanism - is surprisingly well written and professionally presented, the range of popular music is vast, and the quality of the music is at least the equal to anything we've heard.

Some economists might consider Russia a normal country, but Russians never will.

4/28/2004 12:03:10 PM
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BY Kevin

In a bizarre misread of this news report, Drudge claims, "BOOM: Median Price of a Home in California Increases 22% -- in One Month!", when the report actually begins by saying, "The median price of an existing home in California in March increased 22 percent and sales increased 4 percent compared to the same period a year ago."

That's a 22% increase in a year, not a month. If you read the table, the actual increase for the month was 0.2%.

Must credit T&B!

UPDATE: Drudge realizes error, and promptly fixes mistake. But T&B has a full screenshot!

4/27/2004 03:24:14 PM
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BY Ian

Through Kevin (who's got another hot project you should all be reading regularly -- after T&B, that is), I caught wind of this interesting article on the state of horserace betting (RR). The whole thing is worth a read if you're interested at all in games and lotteries (the distribution of probabilities across a set of possible outcomes, that is). There were a number of thoughts that sprang to mind as I read through it, so I'll just excerpt and respond. The comment section is there for the usual bouquets and brickbats...

The crux of the article is a review of a practice known as "rebating", in which a place that takes bets refunds a certain percentage of a wager no matter what the result. Your fighter went down in the 3rd? Lord Gracie's Total Lack of Humility not a mudder and fell behind on the 3rd turn? Cubs treating you like the Cubs always do? No problem, you get, say, 5% of your initial bet back.

The effect of this, of course, is largely psychological -- though this almost certainly enough to increase the amount a person might bet and thus bring in more cash for the rebate shop. If you're willing to bet 100 bucks on a 10-1 payout for a lottery with a, say, 5% chance of occuring, the expected value of the lottery for a risk-neutral person would be (.05)(1000)-(1-.05)(100), or -45 (the negative is to reflect the loss of the $100 should the gamble go against you). Strictly speaking, it's not a great deal. But then, gamblers are often risk-seekers, meaning that we have to look at the expected utility of the gamble, not the expected value. The utility is just a function of the person's interest in the wager over the value of the money itself. Given the right preferences, the foregoing could be a heckuva great bet. The introduction of the rebate, however, changes the potential loss to only -95, in the case of the 5% payback. This means the calculation would be (.05)(1000)-(1-.05)(95), or -40.25. Better, though not a sure thing. The odds aren't better -- they just appear that way.

Among the concerns of the system is this:

¶Do well-financed gamblers have an unfair advantage over the $2 bettor or even $500-a-day players?

The simplest answer is no. The odds are the odds are the odds. Whether I bet 2 bits or 2k, I'm facing the same odds. Now, to complicate things, in the case of horse-racing's parimutuel system large bettors often have the side-effect of being "market-movers". That is, when someone lays down a large wager on a long shot, odds making changes in proportion to the size of the bet to reflect the new potential information. If someone is willing to make that bet, they 1) are possibly incredibly risk-seeking, 2) might have enough money that the loss is small relative to overall spending, or 3) know something other people don't. Changes occur with just about every bet in this process; while small amounts have limited effect, massive amounts of money may dramatically shift the odds.

I think, however, the NYT is asking more of a normative question, as is their wont. Well-financed gamblers will often have the ability to gather better information. Because of the ability to generate larger absolute returns, they might face equal or lower opportunity costs for pursing such information. (This also requires some tough comparisons. If a person making little money spends an hour gambling, the foregone wages are low. But those wages could mean a great deal in terms of money for food and clothes. The opportunity costs are higher for higher wages, but the lost money doesn't impact consumption in the same way.) Better information means being able to better evaluate the probablity inherent in the lottery. The bigger bettors might be advantaged in the information they have available to them. Which is why the people sitting at home with piles of data and historicals and expert opinion might be in a better position than the guy at the track with the racing form in one hand and Uncle Louie's lucky rabbit foot in the other. But is this advantage "unfair"? I'll leave that up to you to decide.

¶Is gambling on a horse race a game, or is it a financial market that a skilled player can manipulate for profit?

This question is the more interesting one, to me. My answer would be that they've presented not only a false dichotomoy (why can't it be both?), but have made a conclusion I don't agree with: financial markets aren't games.

To stretch the bounds of simplification, I tend to think most facets of financial markets are games since they involve not just the precise calculation of various values and ratings, but also depend heavily on the expectations of the future levels of those calculations. That is, they all depend on people thinking "what will this number be tomorrow?"

I believe it was Keynes who used the "beauty pagent game" to help explain the stock market in a newspaper column (a Google search is coming up empty). Given a selection of several pictures, readers were asked to write in with their guess as to whom they believed would be picked by the others who wrote in as the most attractive. The trick here is to try to guess what other people find appealing. Much could be said for stocks, futures markets, currency shifts, and more. What, among the options, do I think everyone else is going to bet will increase? If I come to a conclusion, I should start buying stock in it now. But then, isn't everyone else going to think the same thing? And so on... To my mind, horse racing is clearly a game. Financial markets are too, just more complicated ones.

Obviously, this isn't as clear to some:

"It's a game, not a financial market, and if people at the racetrack think they are chum and have been thrown out in the water for five or six players to take down, then the chum is going to move on to another game and the whales will move on to another financial market," said Mr. Scherf of the Thoroughbred Racing Associations.

One of the interesting things to me about racing or any game using this kind of system, is that the bettors are in a game that is, in many ways, similar to a zero-sum game. Certainly, everyone can bet on the same horse, and everyone could be declared a winner. Once the betting was set that way, however, the payout would be minimal on a win. The odds could approach 1-200, so a $200 bet nets you a single dollar. The actions of others has reduced your potential winnings. (No, this technically isn't zero-sum: I simply use that to illustrate that what one player does can alter another players earnings in the opposite and possibly equal direction). By pooling the wagers, players play against each other, as opposed to the House. At a blackjack table everyone can win, and everyone can lose. Payout is based on the odds set by the house. The amount I bet or win doesn't affect the amount you can win or lose. Not so in horseracing. In this way, every player, regardless of wager levels, is looking to take down every other player. It just makes the winner better off to have gotten the best of everyone else. (Imagine being the only person to win on the other side of the 1-200 supposed "sure thing". A $100 bet turns into a down payment on a house.) This is the real meat behind the Hunter S. Thompson declaration: "The Kentucky Derby is Decadent and Depraved."

At the heart of the controversy is that less betting is taking place on the track:

Track owners attribute the loss to the rebate shops. The N.T.R.A. says there are currently eight rebate shops, but the number is rising. While rebate shops often pay a higher fee for a track's simulcast signal, they have far less overhead because they need only a small office, a computer system, telephones and a lean staff of operators and technicians.

"What you've done with rebates is you have put people in business with your own product and allowed them to undercut your price and steal your best customers," said Chris Scherf, executive vice president of the Thoroughbred Racing Associations, which represents 45 tracks. "That's not how they teach you to do things at the Wharton School of business."

If that's true, might I recommend another school? Someone found they can provide a similar service (the betting, in this case) at a cheaper cost and decided to reflect that in the fee charged for the service (rebates can be seen as cutting down profit for the rebate shop) and can capture a good portion of the market for a low per-customer aquisition cost. Sounds like a great business plan to me. What the above quote seems to be doing is conflating the horseracing with the gambling. A racetrack could be described as having a product and a service: the race and the bookmaking. One complements the other, but in no way demands its presence. If you're losing business in one, either find a way to make it more competitive, or find a way to make more profits from other (I'd recommend hiking up those prices at the concession stand -- you've got a captured pool of customers in desperate need for food and drink).

Or, and this is really the rub, the track can reduce its takeout. That is, the amount of money removed from the pot to cover the costs of running the track and the gambling mechanisms. If the track business doesn't cover the costs, gamblers are in effect subsidizing it for an amount over what they might actually get out of it in usage. The rebate shops have no such concerns, and are thus able to offer a rebate, and take advantage of the spread between the rebate level and the takeout players get hit with at the tracks. One effect of this is that if tracks were to reduce their own takeout, rebate shops would have to increase their rebates since the value of gambling at the track is increasing (the 80 cents on the dollar earnings mentioned in the article would increase towards the returns seen by rebate shop players). The rebates might appear more attractive, but soon the shops wouldn't be able to afford the cost of doing business (at the limit, I should probably add). The increased volume from higher rebates could well price some shops out of existence.

It is, after all, a rough business. Hunter seems to know it best:

On our way back to the motel after Friday's races I warned Steadman about some of the other problems we'd have to cope with. Neither of us had brought any strange illegal drugs, so we would have to get by on booze. "You should keep in mind," I said, "that almost everybody you talk to from now on will be drunk. People who seem very pleasant at first might suddenly swing at you for no reason at all." He nodded, staring straight ahead.

All good, clean fun.

4/26/2004 07:40:32 PM
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BY Ian

Time to let some of my colors show.

Kerry's campaign is apparently catching a little flack for not using a unionized air carrier for transportation. The reason the Kerry camp gives for not being able to fly Union Air?

Commercial carriers, it seems, can't supply what he needs, largely because of costs. Paul Hallisay, political director of the Airline Pilots Association, says he has even contacted airline CEOs to help, but no luck yet. "The Kerry campaign has done everything they can do to secure a union airline," he says. Hallisay, whose union is likely to endorse Kerry next month, concedes that no union label is a problem, especially for the AFL-CIO. "We would like to see him flying a union carrier, but we're workers and we're not management and we cannot dictate procurement policy to the airlines," he says.

Hmmm. Interesting. Could it possibly be due to the cost of being unionized puts union carriers out of reach? The numbers from this article certainly make it look possible. (BACK doesn't have access to their data online. I'm as suspicious about news reporting on statistics as can be, so grains of salt are necessary. Though, these would be relatively simple data to get right for the paper.) Labor cost growth contributes to revenue decline, so the numbers (12% and 10% respectively) can't be combined easily, but it's not a rosy picture anyway you look at it.

That, and it raises the more normative question about the tradeoffs to be made between supporting the union label and getting the most for your money.

4/26/2004 03:39:37 PM
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BY Kevin

From Gay News Now, we find that, as always, smart companies are targeting advertising and reshaping their messages:

[D]irect advertising to gays by big corporations was almost unheard of just a decade ago when Subaru began courting the gay dollar. Their strategy was met with such success that many other companies soon followed. At first, they simply used mainstream ads run in gay-themed publications, but more and more often, they’re creating ads specifically for this demographic. For instance, Volvo’s recent ad campaign that ran in The Advocate, Out, and HRC’s Equality Magazine featured, among other pictures of same-sex couples, two men with a baby, and a woman embracing her pregnant partner. The text reads, "Whether you're starting a family, or creating one as you go... Whoever makes up your family, think about making Volvo a part of it...."

The list of companies that are advertising directly to the GLBT market seems to be growing every day. There’s even a website that keeps track of them all. As their mission statement says, CommercialCloset.org works to lessen social discrimination of the gay, lesbian, bisexual and transgender community by encouraging corporations and ad agencies to improve GLBT portrayals in the powerful, persuasive medium of mainstream advertising....

When companies see their support of the GLBT community bringing rewards, not only will they continue to support us, but you can be sure other companies will be quick to follow. In the corporate world, the bottom line is always the almighty dollar. We’re all just working together to make that dollar a little less green and a little more rainbow.

The average U.S. income is 8% higher in gay households--for a "gay market" totaling $550 billion in spending power annually. The 2000 Census found 600,000 same sex couple households.

In other news, the old Brawny paper towel man was fired to make room for a more metrosexual version. I kid you not:

The press release from the company reads, "Gone is the blond hair and mustache. The Brawny Man for the new millennium is dark-haired, dimpled and clean-shaven, although he still wears his familiar plaid shirt." The new guy appears multi-ethnic and his new commercial proves him to be "metrosexual" too.

Here's a website showing the evolution of the Brawny Man.

4/26/2004 12:53:16 PM
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BY Ian

Personally, I go back and forth a lot on my opinions for the function of the IMF and the World Bank (to the extent that I've taken to calling it the International Moral-hazard Foundation when on a tear). At just about any level, I'm of the mind that the presence of guaranteed bailouts and assurances from lenders of last resort must necessarily have an impact on the financial behaviors of countries that might be in a position to need such measures. For instance, in the case of the Asian financial crisis of late last century, there was good reason to believe that the presence of bailout guarantees helped pushed asset prices in South Asian countries way, way too high, helping to contribute to the eventual fall when the investments turned out to be worth -- as my Scottish friends like to say -- f*$k all and bailouts stopped coming through.

But, in the interest of fairness, here are two recent news items that might be of interest. First, on the continuing work of the two institutions:

WASHINGTON - World finance leaders agreed yesterday on the need to continue canceling the debts of poor countries and to provide more aid in the form of grants rather than loans, but critics said their pledges fell short of what was needed.

The International Monetary Fund and the World Bank concluded two days of deliberations by declaring their intent to expand an existing debt-relief program and secure more funds to help developing countries achieve poverty-reduction goals.

And now this, on the attitude one country is taking towards the IMF:

CARACAS, Venezuela, April 25 (Reuters) - Venezuela was recovering from an economic recession without the help of the International Monetary Fund, its finance minister said Sunday, adding that it shows that Latin American governments need not follow IMF policy recommendations.

In a statement sent to Reuters, Tobias Nobrega rejected an IMF report last week that said oil-reliant Venezuela needed to take urgent measures to restore fiscal stability and to reduce its vulnerability to a possible fall in oil prices.

Of course, this is not to say that Venezuela is doing all the right things; simply that there is room for the idea that countries can and should pursue their own path.

4/26/2004 11:52:04 AM
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BY Kevin

Jan Ozer of Streamingmedia.com has an excellent article on the impending death of MPEG-4, a video standard:

Are standards better set by so-called monopolists (e.g. Microsoft) or standards bodies? On the last issue, he writes:

"The battle to create and own a proprietary industry standard generates rapid improvements in price and performance, at least until somebody emerges totally dominant. If fact, even after a monopolist emerges, there is still considerable pressure to innovate, because unless you can induce your installed base to upgrade frequently, you have a hard time continuing to grow. There is a risk that a monopolist can misbehave, but slow moving, least-common-denominator, nonproprietary, committee-developed standards are often much worse than any monopoly."

Hat Tip: John Farrell

4/23/2004 11:08:08 AM
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BY Kevin

I mentioned a month ago that many Russians now use an indeterminate unit of currency, the y.e., when posting prices. I have now received Russian spam with prices quoted in y.e.:

Лучше не бывает САМСУНГ от - 300 у.е. TOSHIBA от - 550 у.е. Panasonic от - 550 у.е. Звоните есть все!!!

I get a lot of Russian spam. The first line means very roughly, "It doesn't get any better", and we would use "Call Now" to substitute for the last line.

4/23/2004 09:45:17 AM
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BY Yazad

I accepted Kevin's invitation to blog on T&B in January but never really got on to post here. Apologies for the delay!

Quick intro: I'm a libertarian based in Bombay, India. Studied economics (major) and political science (minor). Currently work for a foundation that promotes transparency and accountability in government. Run my own blog.

I've been fascinated by economics, specially what Marshall described as a study of mankind in the ordinary business of life. That's what my posts are also going to focus on: the economics I see as I wander around, living life.

It'll be a largely Indian perspective and I'd use the Indian rupee when mentioning prices. For a quick conversion, 1 US $ = 50 Indian Rs. (although the rupee has been gaining recently and the current exchange rate is around 44 to the dollar)

My first post is going to be on trust in the marketplace.

4/23/2004 09:17:47 AM
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BY Ian

This happened sooner than I though. Well, that is, if it's actually going to happen. From the little I know of Chinese politics, though -- and it really is little -- the leaders aren't the sort to let too many loose comments out without good reason.

"We don't think the fixed system is good. We think that a floating system is good," said [central bank deputy chief] Guo Shuqing in an interview with the Financial Times.

That's good to hear. Though, a few paragraphs on, it seems like their idea of "float" is a bit different than mine:

Mr Guo said that his staff had done a lot of research on the likely impact of switching to a basket of currencies, suggesting it was the most likely choice.

4/22/2004 05:32:48 PM
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BY Ian

Via Asymmetrical Information comes a link to an article about a very cool machine: a mag-lev train in regular operation.

The darn thing hit 432 km/268 mph during the commute! On it's own, that's pretty darn cool. However -- and I think this kind of reaction is the thing that's keeping me from all the best cocktail parties in Chicago -- what I find even more interesting are the reasons the train isn't doing so hot on getting business: people are choosing other conveniences over speed.

Surely there are other causes [for low ridership], from the nearly $10 a one-way ticket cost originally - reduced to $6 this week in an effort to lift ridership - to the five-minute hike from the terminus to the airport, to the train's once abbreviated, somewhat irregular schedule in the early months after it began operation.
...
"I wanted to take the new train, but I couldn't find it," said one befuddled Shanghai resident as he jumped into a taxi for the heavily trafficked 20-mile ride to the city. "I was looking all over for it. How does one ride it?"
...
"It may take me longer, but the taxi is more convenient," said Jin Ri, a smart-suited businessman who puffed on a cigarette anxiously as he waited in an airport taxi line.

One can almost hear the engineers and designers wanting to have a good talking-to with these people.

Non-Rider: It's not close to the gate.
Train Engineer: But, it will get you home so much faster.
NR: Then I have to walk to my place from the station.
TE:. But, think of all the time saved because it's so much faster.
NR: I like the service of taxis.
TE: But, this is FASTER.
NR: And I'd have to change cars.
TE: BUT. THIS. IS. FASTER....

Now, I would have assumed that saving 45 or more minutes on a commute would be enough to offset the costs of walking to a terminal, catching a cab from the station, etc. But, as it turns out, not everyone is in such a hurry to get wherever they're going. At least, not so much that they're willing to shift their habits for it.

Efficiency isn't everything, I suppose.

4/22/2004 01:54:58 PM
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BY Ian

Apparently, it's not so much that women of high aptitude opt out of teaching because better jobs can be had at a higher compensation, but rather it's that the teaching job pays so poorly for improvements in skill. So says a study from Hoxby and Leigh, as reported by the Heartland Institute. (NB: The multiple Hoxby pieces is due to my having simply run across them in a short period of time, rather than any concerted effort to espouse one position. That said, it's more than reasonable that the uniformity of source should raise some questions.)

Clearly this in line with the questions of "productivity" that Hoxby addresses in the paper I linked to below. An increase in the productivity of a teacher isn't being compensated by a corresponding increase in wages, at least in the eyes of those who either avoid teaching or leave the profession after a short time. Aside from the general discrepancy between what people feel they ought to paid for their extra investment in their own human capital and the value placed on it by the market (stretching credibility for the moment by considering teacher supply and demand resembles anything close to a market), there are serious problems with addressing this issue. From the Heartland article:

A specific example of The Teaching Commission's influence can be seen in Schools Chancellor Joel Klein's recent call for changing the way teachers are paid in New York City. Klein proposed teacher bonuses based on student achievement and higher salaries for teachers who work in troubled schools or difficult-to-staff fields like math and science. "Lockstep pay, seniority, and life tenure" are the heart of the problem, said Klein in a January 2004 speech, sponsored by Crain's New York. "Together they act as handcuffs and prevent us from making the changes that will encourage and support excellence."

Generally, I agree that such measures are surefire ways to ensure a good portion of your workforce is unmotivated and underperforming. Extra effort brings no extra reward, while shirking earns no punishment. The very expectation should be that you will see high levels of underperformance. That said, though, correcting the problem simply isn't as easy as basing pay on student achievement. (I think the other measures, such as assigning risk and subject premia are far simpler, though they do raise their own issues.)

Coupling pay to performance necessarily means having to measure performance, which most often means testing children in schools: an idea that sees its fair share of debate. Other measurement techniques would most likely require in-class monitoring, which would be both disruptive to class and massively expensive. Even if we simply allow for testing to occur, the policy isn't simple or even assured to create higher achievement scores.

First, there's the problem of seperability of effort. In most grades above elementary school, and even in some lower grades, students will have more than one teacher providing lessons in a variety of subjects. To which teacher should the benefits accrue if the class performs better? If the money goes to a school in general for a broad-based improvement in scores, then it is up to the school to partition out benefits in a process that may exhibit problems that mirror current issues -- deference to seniority, lack of recognition of greater training in some teachers, etc.

Secondly, the prediction of achievement scores isn't based simply on level of teacher training or effort. One has to take into account the variance among natural skill of the students as well as a considerable effect of simple random chance. Test scores can be subject to a number of influences that don't correlate with other factors. How many people take the SATs or GREs a second time because they just had a bad day the first time they tried? So, even if a state were able to find a level of compensation that created a general level of higher effort and induced better-trained people to become teachers, there's still the chance that achievement scores might not reflect it.

Nothing is ever perfect, and there has to be some sort of trade-off between improved educational performance by students and the teaching status-quo. In the absence of better measures, I tend to favor testing. And I roudly reject a notion that some school administrators appear to be certain of:

But the principal's enthusiasm for the Bush education reforms is tempered by the knowledge that her school, like many others, will probably never be able to meet the performance targets. Several characteristics of the student body have historically correlated with low test scores: Nearly one out of four Raymond Park students is in special education; 35 percent are African American; 54 percent are eligible for subsidized lunches, a common benchmark of poverty. Under No Child Left Behind, every subgroup is required to demonstrate "adequate yearly progress" until it reaches 100 percent proficiency.

Underfunded schools is one thing; suggesting that certain groups simply cannot perform is another.

Since I tend to dislike criticism without recommendations, here's mine: tough licensing standards and much higher starting pay. While the study above indicates that the "pull" of higher paying jobs isn't the major contributing factor to seeing higher-aptitude women avoid teaching, creating higher standards (possibly requiring advanced degrees or certification classes that mirror master's programs in admissions requirements) would initially reward the woman who was willing to seek more training (as a proxy for higher aptitude) by being tied with a higher base pay. The idea would be to reward the extra effort to enter the profession with a differential between possible pay with and without such training/effort. Pay increases could be then left to the assessment of principals and others who have more direct ability to measure the effort and productivity of a particular teacher. Though I've not seen research one way or the other, from reasoning alone I would not be surprised to find that one of the reasons that children in private schools do better is because the teachers were of a skill level that met the requirements of the private institution in providing the higher compensation.

That's not devoid of problems itself, of course, most notable of which is the sheer feasability of essentially ending the system the teacher's unions hold so dear. Then, how does the system create higher certification standards when the process is sure to be packed with the underperforming teachers who would certainly be unqualified under the new rubric? And, obviously, there's the issue of locating the money to pay the higher salaries.

Then again, I'm not sure how much longer this country can afford to keep the system we've got.

4/22/2004 10:22:36 AM
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BY Ian

I have to admit off the bat that I support the idea of school vouchers in the abstract. The proliferation of choice when it comes to education strikes me as a good thing simply on the face of it. Instinctually, I pretty much disregard the entire "taking money out of public schools" debate since, for most every program I've seen, the money for the voucher is as much as or less than the effective per-student funding that comes out of state and Federal monies (I've looked at the property-tax funding and Federal grant issues in-depth in Illinois). Should the school simply have one less student, the funds for that student wouldn't be included in the school's appropriated money (all else equal, of course). Plus, there's the whole notion of introducing competition into a system that has, in my opinion I grant you, become riddled with complacency. Above and beyond the ideological issue, however, I've yet to see a good study demonstrate that voucher systems actually hurt the public schools students would opt out of.

This study by Caroline Hoxby (via Crooked Timber) doesn't do it either. In fact, it appears somewhat favorable to the whole idea. One of the main reasons I suggest reading this one, however, is the stress it places on the changes in school productivity rather than on the odd question of changes in student achievement scores. There are numerous troubles with looking simply at achievement scores that have to do with things that are largely unobservable/very hard to measure well (does the kid work harder because she understands the change means she's going to be watched more closely? does a more industrious attitude spill over from one child to the next? does the incurring of new transaction costs such as providing transportation to school in the absence of a bus incent parents to take more time with their kids than they did before?), so I applaud the alteration of focus.

Harry at Crooked Timber raises some interesting questions, so I do suggest reading his post closely. I've not had the time with the paper I would prefer, but did pick up one odd note Hoxby makes. In discussing the difference between effects on non-blacks and blacks exposed to treatment, she suggests:

"We may speculate that, owing to discrimination by teachers and administrators, staff feel more comfortable underserving students and taking rents when they work in schools that serve black students, as opposed to non-black students."

This, after mentioning just a few pages before that the location of voucher programs are places where the poor student population is predominantly black, seems an odd assertion. In Chicago, at least, the vast majority of teachers in poor, high-black population schools are, themselves, black. Is the assertion that black teachers are feeling more able to shirk in their efforts to serve black students? It's not methodologically important -- just an odd note to strike, to me.

As I mentioned, I've not read it through with the attention it most likely deserves. My biggest oustanding issue so far, however, is that while differencing including the growth trend is useful, I don't see (and would certainly appreciate being pointed to, if I've missed it) anything addressing the question of regression to the mean. Harry at CT points out the importance of the 97-98 school year; the question is, of course, how persistant any downward trend prior to the treatment program was, and whether the change is fully do to the program or if there might be some sort of die-off of a previous shock (a really bad year or two prior for reasons like budget shortfalls, union problems, test changes, etc) that is helping the treatment appear more significant than it really is.

Just some pot shots from the gallery. Take a read, if you're so inclined. (For the non-technical, skip the lines with the greek letters, and read the rest. Hoxley writes well enough to make it accessible for a wide audience.)

4/22/2004 02:37:08 AM
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BY Kevin

Light posting on T&B continues while I push hard on the Wal-Mart blog. In the meantime, I present to you some interesting Ferengi Rules of Acquisition:

9. Opportunity plus instinct equals profit.
13. Anything worth doing is worth doing for money.
22. (a) A wise man can hear profit in the wind.
79. Beware of the Vulcan greed for knowledge.
218. (a) Sometimes what you get free costs entirely too much.

4/21/2004 01:08:32 PM
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BY Bob

A fellow student from Japan brought this story to my attention:

A Kanagawa Prefectural Police officer stood and watched at the middle-aged man in the expensive suit as he tailed young women in miniskirts as they walked around Yokohama Station.

He kept his eyes on the man as he got on a train headed for Tokyo, then boarded the same carriage.

Almost 20 minutes later, Shukan Shincho (4/22) says, the man got out and the cop followed close behind.

They went down an escalator at JR Shinagawa Station.

Upon reaching the bottom, however, the well-dressed man suddenly turned around and hopped onto an escalator leading back up the way they had just came.

Immediately in front of him was a high schoolgirl with a hemline so short her attire barely deserved to be called a dress. Bringing up the rear, unknown to the well-dressed man, was the cop, peering intently at the target acting suspiciously.

He wasn't the only one doing some intent peering, however, as the well-dressed man whipped out a tiny hand mirror and directed it up the schoolgirl's skirt.

He was still looking as the cop thrust an arm on his shoulder and informed him that he was under arrest.

Given a closer look at the man he had been following, the cop was surprised to learn that his catch was a household face at least, if not name.

If perhaps lacking in other areas, Kazuhide Uekusa, the well-dressed man caught leering up a schoolgirl's skirt, was regarded as one of Japan's top economic brains.

He passed through some of Japan's top academic institutions before beginning a career including stints at the Ministry of Finance, a research fellowship at Stanford University and the Chief Economist post at prestigious Nomura Research Institute before he assumed his current post as a professor at posh Waseda University's graduate school in Tokyo.

There's more in article.

4/21/2004 12:55:19 PM
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BY Dragos

Some of you may know that 2004 is the year with elections happening in several countries. Spain held elections in March, and others are countries such as India, USA or Romania. You can see the entire calendar for yourself, what I find it really interesting though is that Indians - who just started the Parliament election process today - are doing all the voting electronically. And we are talking about 650 million voters for 543 candidates!

The voting process will last until May 13 and requires electronic voting machines carried all over the country (800,000 polling stations) The Indians claim that the system is quick and that makes cheating virtually impossible. I am not so sure about that, however I am quite impressed by the Indian openess of embracing a technological solution that it is so obvious and yet not really used in Europe or even in US. In spite of a different situation when speaking of e-readiness. (pdf)

The story did get slashdot-ed and apart from the jokes there are some interesting related-arguments you can spare 5 minutes with.

4/20/2004 02:13:37 PM
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BY Dragos

NBA Dallas Maverick's owner Mark Cuban writes a very good piece about what stock market is and what exactly drives the demand and supply for a stock. It should be taken with a grain of salt but I tend to agree that it is all about making noise and marketing it accordingly, at times you may even call the stocks value proposition empty words very nicely wrapped up. I particularly liked this:

"Volume creates demand. Stocks don't go up because companies do well or do poorly. Stocks go up and down depending on supply and demand. If a stock is marketed well enough to create more demand from buyers than there are sellers, the stock will go up. What about fundamentals? Fundamentals is a word invented by sellers to find buyers.

Price-earnings ratios, price-sales, the present value of future cash flows, pick one. Fundamentals are merely metrics created to help stockbrokers sell stocks, and to give buyers reassurance when buying stocks. Even how profits are calculated is manipulated to give confidence to buyers."

4/20/2004 01:59:56 PM
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BY Ian

To those who will listen to me when I happen to get up on yet another soapbox, I often decry the lack of more general economics education in the country. That highschools don't routinely offer economics courses strikes me as a glaring omission from basic educational numeracy. Beyond just knowing a little about supply and demand, I tend to think it is one of the best ways to foster rigorous analytical thought, whatever your personal interests might be. I still contend the only two real skills I got from my undergraduate education were 1) a decent ability to construct and analyze arguments, and 2) how to string together a few coherent sentences, either in support of an argument, or just for general communication. Random other courses (did I really take "Literature of the Cold War?") were just ways to have a decent time spending some federal loans.

In light of the absence, I offer a recommendation for a new book that does a decent job of covering a lot of ground in terms of basic economic thought in a way that is entertaining without being overly simplistic. Naked Economics is an engaging romp through a lot of the major categories (micro, macro, a little monetary policy including a decent look at the Fed, some international trade, and even labor issues) that manages to get at the heart of what the informed citizen ought to know. For anyone used to slightly more technical works, this would be a very fast read, obviously more interesting for the style of writing than for the ideas therein. Andrew Chamberlain has noted the importance of people who can write about economics in an engaging way; I would count Charles Wheelan among them.

Full Disclosure: Wheelan got his PhD from my school. Not sure why this would matter in a book recommendation, but I find more information is usually better than less. (And yes, dear game theorists and assorted bargaining folk, I do understand when that isn't the case. Yeesh. Touchy.)

4/19/2004 10:34:06 PM
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BY Dragos

A must read presentation (pdf) from the Wall Street analyst Mary Meeker or the "queen of the internet". It's about 12 trends driving change on the internet, mentioning that the search-find-obtain (SFO) will provide the basis for the next killer application for the web. Also, online gains share from the offline, residential broadband became a standard as it hit the critical mass and thus prices started to decrease so that the internet became the growth distribution medium of the century. It is interesting to see that some of the things predicted by Mary are already happening -- see Google and Amazon case.

4/17/2004 11:41:42 AM
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BY Kevin

Yes it does, says USA Today:

Manufacturers across the USA are having problems finding qualified employees, even though millions of factory workers lost jobs in recent years....

Traditional, labor-intensive, assembly line jobs are largely a thing of the past. Employers are looking for workers who are experienced with technology, are analytical and are problem solvers....

Employers say it goes beyond skill, saying they are having problems with work ethics...

Could this possibly be true? A vast swath of the unemployed are simply unprepared to be employed?

It's implied that the even the top workers in the current pool of unemployed lack basic skills, have little work ethics, and just can't do the job required. But it's also possible that manufacturers are not paying high enough wages to attract the skilled unemployed. Perhaps in the labor market, as elsewhere, you get what you pay for.

Some manufacturers are having a hard time finding people who can write correctly and show up on time, while others want creativity in addition. These are two separate labor pools, and perhaps two separate problems.

Those 3 million competent former manufacturing workers are NOT just waiting around, begging to be hired. The labor market is tremendously dynamic, and it is very likely that most of those 3 million workers are in other manufacturing jobs, have jumped ship to the service industries, joined the military, started a business, have left the labor force, etc.. Are manufacturers putting enough effort in trying to steal former manufacturing employees away from the service industries they've entered?

4/16/2004 12:57:11 PM
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BY Ian

Via Marginal Revolution, I read this odd piece from Charles Murray at the American Enterprise Institute on a possible modifcation to the tax code: allowing payers to direct the funds they pay to the programs they prefer.

This seems similar to the proposal I've heard from a Quaker friend (one she insists is a common suggestion among pacifist circles, though I'll be darned if I can find the technical proposal online) I currently go to school with (PLUG!), suggesting that people who don't wish to support military (and by some proxy, foreign) policy of the country be allowed to "opt-out" of putting their tax money to it. She suggests that those who choose this option be given a tax break entirely for that amount of money; the inevitable unraveling of payers, however, makes this almost too odd to discuss. Presented with the almost certain case where everyone would seek the tax break in the short run ("Hey, my $4,240 isn't going to make much of a difference, someone else will cover it this year."), she does resort to then suggesting that the money could just be given to a program of their choice.

National security is the most stark example of a problem that Murray's suggestions face as well: despite not having paid for a program or service, people will most likely not be able to be prevented from using the program or service. Non-excludability runs rampant through such things as fire departments, parks, environmental programs, and, of course, national defense. Despite not having paid for it, my neighbors would enjoy the same level of protection offered by the US Air Force as I do -- unless we were to somehow indicate that her lot is free for attack while mine isn't. Would the police department have to confirm that you paid taxes to them before they respond to the a 911 call about a break-in in progress? If I haven't paid for air-traffic control regulation, but others on the plane have, do I get protection of FAA regulations: say a case of air rage strikes my row-companion, the stewardess may have to deny me protection by not interfering with the aggressive acts of the flyer since he's only affecting a non-payer?

Murray makes a point to mention the "public good" nature of certain items, suggesting that people would inordinately donate TO those programs, since we're not "stingy or shortsighted", rather than others that don't seem to provide as direct a service. This seems a dubious belief to me, since one of the common concerns about public good is the uncertainty over provision that arise because of variations in personal valuations and the interaction between people's willingnesses to pay, cost structures, and perhaps most importantly, their beliefs about the same characteristics of other people. I have to value good highly enough that I'm willing to bear not only some cost, but the chance that, if it did get provided, you plan to consume it despite the fact that you value it less than it would cost you (again, with the condition of non-excludability). The costs may be borne by a few, while the benefits are received by several. The propensity for this to happen can alone drive people away from contributing to the provision of the good, making me doubt (in theory) the veracity of the claim that certain programs would simply get flooded with money.

In the case of the fire department, why do I need to pay for it's maintenance every year, AND pay for insurance to cover me in the case of a house fire? If my place burns, the fire department won't come, but I get money approximately equal to replacement value (the fire department is rarely able to save a significant amount of a place that is fully ablaze that emotionally valuable items won't get burned OR flooded with water). Why do I have to pay twice, just to make sure some OTHER person's house doesn't burn down (the externality of having a 2-story bonfire in your yard). If my neighbor paid for the fire department, they'll come and protect his place -- that is, unless he's thought the same way I do. And hey, just how common are fires anyway? No one in my family has had their house burn down! I don't mean to be overly flippant about arson; it's simply that people often have a hard time doing cost-benefit analyses of high-cost, low-probability events. I just may decided that a single bill is all I really want to pay, and thus forgo paying the tax. After all, there is competition among insurance companies, so I'm sure to get a good deal and save some money.

(Yes, you in the back? Well, we could ask for disclosure of tax payments to fire departments, and certainly premia would increase on insurance payments for those who refuse to pay the tax, but only to the level where they would approximately equal the prior buyer's situation of paying premia plus taxes, lest the buyer simply go back to paying the tax and the lower insurance rate.)

The explicit belief in the Murray article is that people would not pay for what they do not understand or find value in. (Though, as I just contended, it's not even clear that people would pay for ones they did understand.) This would force the government agencies to describe just what the heck it is they do with our money -- and upon realizing the assinine things government often does with taxpayer money, we could punish this behavior through the denial of tax revenue. But those layers of barnacles are hard to seperate from the solid core of a program. I'm a fan of my local police department, but who am I to tell them that they really only need 3 dispatching shifts per day per station instead of four (just a random example -- I have no idea how they staff dispatchers)? Or that they don't need as many Public Defenders in the DA's office? The advertising wouldn't be per job. ("Hi, I'm Mary, and I'm the assistant to the head of the Chicago Board of Education. I believe I'm more necessary than the guy handling grant applications, so please send your taxes to me instead, and we'll just not worry about experiments to help improve schooling. After all, isn't seeing Mr. Duncan gets to all his meetings much more fun than talking about grant-writing?")

Lest anyone think me in favor of ever-expanding government, let me disabuse you of that immediately. I find the inefficiency of government as infuriating as anyone; I just view it in a slightly different way. The scope of government, to me, has expanded far too drastically. As size of government goes (amount of GDP created or earned by federal and local government, depending on your macro persuasion), we don't rank that highly in the world. The accretion of useless items to existing programs is lamentable, though largely unavoidable. The problem, I think, is that we allow certain functions to exist at all. The scope of what the federal government is allowed to participate in creates more and more material upon which barnacles can grow. I second the horror Murray feels at taking a close look at the organizational charts of governmental agencies, but cannot see how such a proposal would be a benefit in any way. If it's just a thought-experiment, it seems like a horribly failed one.

4/15/2004 06:04:49 PM
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BY Kevin

Businesspundit notes a wonderful example of entrepreneurial insight -- pizza vending machines that make a fresh pie in 90 seconds. And they're made right here in the USA by our robust manufacturing sector:

Vending machines that deliver hot pizzas in less than two minutes are to be installed in railway stations and other public places around Britain.

The Wonder Pizza UK company is importing the machines from the US and plans to install 2,000 in the UK over the next three years.

However, as I found out after a little digging, these made in the USA vending machines--and the frozen pizza--were previously made in Italy as late as August 2003!

The units and the pre-made pizzas will be shipped for the first few months from Wonder Pizza headquarters in Torino, Italy. But, the three said production of all aspects of the business will eventually take place in the United States with manufacturing of the machines planned for the Midwest.

Here's to the insourcing of manufacturing jobs!

4/14/2004 04:27:21 PM
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BY Kevin

Occasionally, T&B gets a flurry of hits looking for the meaning of Truck and Barter. I refer students to Book 1, Chapter 2, Paragraphs 1 and 2 of Adam Smith's Wealth of Nations:

Of the Principle which gives Occasion to the Division of Labour

This division of labour, from which so many advantages are derived, is not originally the effect of any human wisdom, which foresees and intends that general opulence to which it gives occasion. It is the necessary, though very slow and gradual, consequence of a certain propensity in human nature which has in view no such extensive utility; the propensity to truck, barter, and exchange one thing for another.

Whether this propensity be one of those original principles in human nature, of which no further account can be given; or whether, as seems more probable, it be the necessary consequence of the faculties of reason and speech, it belongs not to our present subject to enquire. It is common to all men, and to be found in no other race of animals, which seem to know neither this nor any other species of contracts. Two greyhounds, in running down the same hare, have sometimes the appearance of acting in some sort of concert. Each turns her towards his companion, or endeavours to intercept her when his companion turns her towards himself. This, however, is not the effect of any contract, but of the accidental concurrence of their passions in the same object at that particular time. Nobody ever saw a dog make a fair and deliberate exchange of one bone for another...

For at least the past century, economics has focused on exchange--supply and demand--as a fundamental social phenomenon. But the propensity contains two other aspects--namely, trucking and bartering. Aren't truck, barter, and exchange all synonyms? Well, if they were identical in meaning, why would Adam Smith, and a host of other famous names, keep listing them all together?

Reading through the Oxford English Dictionary, I gather that in a formal sense, they all describe the same acts.

However, this reading ignores the fine differences. To me, it appears that exchange was the most general term--a trade of anything for anything, with few connotations. Also, what we would call a "barter economy" was once called a "truck economy", apparently because truck implies commerce--or exchange for profit. Believe it or not, although barter seems so pure, as it is defined as an exchange of equal values, it actually sometimes had a sordid conotation, as if the act was trickery or huckstering. This makes sense, since we know now that trade occurs when values are divergent, which in a world of asymmetry leads to an unequal distribution of the surplus. Think about it; if values were equal, would you trade? No, you would trade only when you value something else more than what you have, and vice-versa.

4/13/2004 05:24:53 PM
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BY Kevin

Economics uses a standard classic example--a factory polluting upstream and somebody using the river downstream (like a clothes washer)--to show that a well-defined and enforced set of property rights can lead to outcomes that are economically efficient. Under robust situations, well-defined property rights help find the least cost way of eliminating externalities (situations in which two persons' actions conflict by affecting each others opportunity cost). This will let a balance of highest valued use (either all factory output, all clothes washing, or something in between) continue unimpeded.

However, to many people in the real world, direct state action seems to be cheaper and far more efficient in getting what they want. Along these lines, a reader asks the Washington Post how best to handle a neighbor's clothes washer waste line that empties directly into his garden. The post tells him to be friendly, and then if that fails, use the brute legal force of regulatory state:

A more practical approach would be to discuss the matter face to face with the neighbors, assuming they are inclined to cordiality, and to ask that they relocate the open end of the drainpipe. If neighborliness and friendly persuasion fail, you can report the matter to the local health department, building department or equivalent agencies. In most areas, draining such water onto exposed ground is illegal. It's particularly egregious when disposal occurs on someone else's property.

Notice that the responder does not suggest that the complaining gardener has a right not to have his neighbor's waste ooze onto his property. Instead, nobody (including the letter writer) has a right to ooze waste anywhere--even on his own property.

To me, this is a strange response. If the neighbor threw empty soda bottles into the garden, it would be not be solved by health inspectors, but with civil action in court to resolve trespass--unlawful interference with another person's property. Hence, another approach for the gardener to take, after being rebuffed with gentle asking, is to inform his negihbor that he will take him to small claims court for damages totaling the replacement of all the soil and plants in the garden--and the labor to set them there.

Now, I ask you, which method is the most efficient solution--in this case, and as a general rule?: For nothing to happen? Voluntary compliance? For the neighbor to pay for the right to dump waste water in the garden? For the health inspector to clamp down? Or to go to court?

4/13/2004 01:04:53 PM
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BY Kevin

Ten graduate students studying economics at George Mason University have come together on cornersolution.com to discuss the issues of the day from a general free-market economic perspective.

We at T&B welcome you to the blogosphere, and look forward to ruthless blog-eat-blog competition.

4/13/2004 07:28:40 AM
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BY Ian

As has been mentioned in several places around the blogging community, the furor over the "record high" gas prices is largely a construct of an incompetent media in search of a story. I was content to just ignore the process as more posturing by a press corps that refuses to pursue even a basic level of numeracy.

But now things have gone beyond the press. Illinois Governor Rod Blagojevich has decided that things are getting so bad that the state needs to involve itself in the process of setting gas prices. In addition to putting any suspect gas providers under state review if prices are seen to be "suspect", Blagojevich supports a remedy along the lines of price freezing:

Blagojevich also says he supports a measure sponsored by several lawmakers that would prohibit retailers and suppliers from using a state of emergency, such as a severe tornado, to increase gas prices. The legislation would require gas prices to stay at the level they were seven days before an emergency happened.

The way people are carrying on, one would think we're back to the days of the 70s oil crisis, queueing up for hours to get our rationed 5 gallons of gas. So far as I can tell, it's now a couple of bucks more expensive to fill up my tank. Obviously, we're not. And isn't there something rather irresponsible about the highest power of the state using the media to further this idea by using a term usually reserved for the actions one might see following a severe shock to our country?

The Guv is worried about the possibility of "unjustified" gas price increases, but offers us no way to judge what might be considered "unjustfiable" about deciding to set a gallon of gas to $5 (and thereby almost guaranteeing the station loses all business aside from lotto and candy bar sales in a matter of minutes). What, pray tell, is so dangerous about providers responding to a market change?This comes absent any proof of illicit activity (such as price collusion or undisclosed dilution of gas). A rise in prices alone, it appears, is enough to warrant investigation, forcing the stations to respond to the investigative group. For those of you into institutional economics/political economy, I believe this might be a good example of the strategic use of transaction costs.

Blogojevich claims this is a way for the state to fight rising gas prices. I can't think of a worse way of categorizing this type of policy. The policy attacks not the prices, but the providers of the gas. Not that I would agree with such a policy, but actually addressing the question of prices themselves would require simply setting markup rates, tax levels, or the price per gallon outright. By inspecting the relation between the price paid by gas stations and the ultiamate sale price, the explicit accusation is against the seller. Of course, most people probably got that out of the name "price gouging", since someone has to be doing the gouging with the prices. Instead of fighting rising prices -- which will continue to be set by factors well beyond the range of Springfield, Illinois -- this fights the ability of gas providers to go about making a living.

Frankly, I'm not entirely sure it's a good idea to fight price "gouging" to begin with. Outside of making somone pay $5000 for a bandage while they're bleeding to death (violating good samaritan laws, by the way), I'm not convinced of the horrors of suddenly pricing scarce goods such that only those who value it highly enough, actually get it. Aside from the efficiency factor, there has to be consideration for the fact that, in the face of a true shock, restricting prices can result in shortage (or complete absence) when the good isn't replenishable in stores, gas stations, or wherever. If the price of gas should be $5 a gallon, and the state has set it to be no higher than $2.50, you're just about guaranteeing shortages, lines, rationing, and more. Once you go down that road, it's almost impossible to find the off-ramp.

4/12/2004 08:05:52 PM
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BY Kevin

Al Sistani tells us that participation in a lottery is not acceptable:

Question:I am really confused and having hard time explaining the difference between betting in:
1- Horse racing & Archery
2- Lottery

Why is the first permissible and the second impermissible?

Answer:Lottery is a sort of gambling and there is nothing one may do to deserve the property. But horse-racing and archery are for a purpose which is called "Self-defense"....

Question:I work at an exchange office but they also make me sell lottery. Is it permitted to sell lottery in this case?

Answer:Selling lottery cards is not permissible. Yes, it is permissible to take the property with the intention to contribute in a charitable project such as building a mosque or a bridge not with the intention of earning profit or a prize.

Now, this makes me question whether participation in the US green card lottery is acceptable. After all, Brad DeLong and Tyler Cowen agree that increased immigration is superior to strengthening the welfare state in making the poor better off, but being eligible to emigrate to the US does not imply one deserves the benefits of emigration. Or perhaps moving to the U.