Wednesday, June 6, 2012

I'm changing blog titles.

New updates will now be found at Suspicious Heuristics. I think the name is a better fit (and much more fun to say!) All the old content will stay here to avoid confusion, but please join me at the new URL!

New legislation responding to old EU crisis

From BBC Business News on the status of Spain and a potential bail-out:
On Wednesday, the European Commission unveiled proposals designed to stop taxpayers' money being used to bail out failed banks.
The aim is to ensure losses are borne by bank shareholders and creditors and minimise costs for taxpayers.
However, new legislation is unlikely to come into force before 2014 at the earliest, too late to protect taxpayers from any further immediate bank failures.
"The proposal we have today may be only useful for the future but it does not solve the current problems we face," said Sharon Bowles, chair of the European Parliament's economic and finance committee.
There would be new requirements for countries to prepare for a bank collapse, collecting money through an annual levy on banks that would be used to provide emergency loans or guarantees.
Brilliant. The European Commission will have new laws on the books to prevent a redux of the EU crisis occurring again in the future... if the EU even still exists in the future.

It seems European politicians are acting as if their policies could apply retroactively, but even if these sort of reforms could have stopped the current crisis, that's no guarantee that future crises will look anything like the current one.

There's also the chance that this new legislation - "an annual levy on banks that would be used to provide emergency loans or guarantees" - will just add to the moral hazard problem and make excessive risk-taking by banks even more likely.

Responding to the last crisis is of great temptation to politicians, who must be "doing something" in order to satisfy their constituents, but this foolhardy rush to action may do more damage than good. Post-Enron accounting reforms have been blamed for making the U.S. financial crisis worse, and Europe could be reading a parallel story five years from now if these proposals go through.

Tuesday, June 5, 2012

Will Xbox Gold be Set Free? Doubt It.

This post today on Gizmodo, It’s Time for Xbox Live Gold to Be Free by Brian Barrett:
Why would I go to the club that has a cover charge when there are three right next door—each almost exactly identical—that'll let me in for free? Xbox 360 might offer great streaming, but it's also got a hell of a moat.
Yes, your Xbox Live Gold membership includes online gaming. And Microsoft is totally within its rights to charge for that; it's an added value experience unique to its ecosystem...
But the calculus has changed. Microsoft is so focused on making the Xbox the beating heart of your home theater, it's even convinced Comcast to stream its on-demand offerings through it. You can watch ESPN live, 24 hours a day, without ever signing out of your Xbox Live account. And when SmartGlass arrives later this year, you're going to route every piece of content you own through your Xbox.
All of which is wonderful. It's a beautiful future, and one that's never going to happen if Microsoft keeps a velvet rope up around all those wonderful services. It's frustrating enough to pay once for things that used to be free. Xbox Live Gold makes you pay twice.
So let's try this, Microsoft: Forget subsidizing a cheaper Xbox with a more expensive Xbox Live plan. Go ahead and charge a monthly fee for online gaming. Do it in Xbox Live points or yuan or mustard green bushels for all I care. But leave the services your customers are already paying good money for—and that every other set-top box serves up for them free—out of it.
A noble sentiment but not likely to happen. Looking at Microsoft's annual shareholder report tells the story.

In 2010, out of $62.4 billion in revenue, Microsoft took in $6.2 billion from their Entertainment and Devices Division, which includes the Xbox and Xbox gold. That same year, it was estimated that Xbox Gold subscriptions pulled in over $1 billion for Microsoft, or 1.6% of their overall revenue.

Sounds small in comparison to the total, but that Xbox Gold revenue matters a lot: operating and R&D costs to keep it running are relatively low compared to Microsoft's other divisions, I would guess. Also, revenue in the Entertainment and Devices Division grew by 40% between 2010 and 2011, much faster than any of Microsoft's other four divisions.

Don't expect Microsoft to kill the goose now that it's started laying golden eggs. Roku can try to compete with its cheaper offerings, but the Xbox still has a relatively slicker interface and better multimedia integration, so I don't think Microsoft is under much pressure.

Microsoft is also starting to offer Gold subscriptions at retail outlets rather than just online. All signs suggest that Xbox Gold is almost certain to stay a paid service.

Intrade and hedging your bets in life

The prediction market Intrade is a neat contribution to economics as well as everyday living. It offers odds on a variety of important world events occurring, and allows users to buy or sell "shares" in the occurrence of events (take a look at the site for details of how it functions).

If you're interested in knowing what the chance of some upcoming event is, go to Intrade and you can see what the market rates the odds as. It's better than listening to pundits because on Intrade, people are putting money where their collective mouths are.

The recall election of Governor Scott Walker is going on in Wisconsin as I type this. Ballots are yet to be counted and Intrade currently prices his chance of victory at 93.6%. I'm ignorant about the political climate in Wisconsin, but even so I can quickly see that it would be an extremely strange event for Walker to lose this recall.

There are more subtle benefits to be gained from Intrade besides just information. Mainstream economic models of consumer behavior predict that people want to equalize consumption across time; a stable income with minimal variance is most desirable. Another nice aspect of Intrade (although I suspect rarely taken advantage of) is smoothing consumption over time.

For people who are deeply concerned about the outcome of political events, this should be a great service.

For example: if you expect that a loss for Walker will cause fiscal crisis and collapse of civilization, you should bet against the possibility that he wins, so you'll have enough shotgun shells and canned beans to survive the oncoming apocalypse. If instead you think that Walker winning another term will bring about a neo-fascist corporate state and crush middle-class living standards, you should bet heavily that he wins so you can bribe your way out of the country. Either way, the option is there!

Realistically, few people likely think that the outcome of political contests will have such divergent results. If money was used to match political rhetoric, Intrade would have even more money and traffic flowing through than it does now (hopefully enough to keep the site open, unlike some past attempts at prediction markets).

Obesity: Class Warfare, Imperfect Information... or both?

Saw this on CNN today: Poor and fat: The real class war, by L.Z. Granderson. Some figures from the article:
Ground beef that is 80/20 is fattier but cheaper than 90/10. Ground turkey breast is leaner than the other two but is usually the more expensive. And many of us can't even begin to think about free-range chicken and organic produce -- food without pesticides and antibiotics that'll cost you a second mortgage in no time at all.
...The American Journal of Clinical Nutrition recently published a study that found $1 could buy 1,200 calories of potato chips but just 250 calories of vegetables and 170 calories of fresh fruit. And it is also true that Mississippi, the poorest state in the country, is also the fattest.
In fact, the five poorest states are also among the 10 fattest, and eight of the 10 poorest states are also among the 10 with the lowest life expectancy.
I guess one could dismiss this as one big coincidence, but is it also a coincidence that half of the top 10 states with the highest median incomes are also in the top 10 in life expectancy?
I would interpret Granderson's argument as: low-income leads to unhealthy foods leads to fat (leads to more healthcare spending and even lower incomes). Looking at calorie counts compared to food prices does seem to support that. However, bringing some micro theory into the discussion complicates this causal story somewhat.

We can quantify the effect of income on food choices through this simplified model. Imagine two different families, both trying to fill a calorie requirement of 2000, but the low-income family has a food budget of $3 and the high-income family has a food budget of $10.

After plugging numbers into the formula above, the high-income family buys only 0.3 servings of potato chips and 9.7 servings of fruit, while the low-income family gets about 1.4 servings of potato chips and 1.6 servings of fruit.

The same intuition is expressed graphically below. Purchasing decisions are represented by points where the red and blue lines cross.

So far, so good: as one would expect, the high-income family buys more fruit and less potato chips than the low income family. One problem for this example, though, is that neither of these families will be gaining any weight!

If people only eat the necessary calories to keep an even weight, it won't matter whether their income is high or low. They'll just adjust their purchasing choices to get the right amount of calories. A dietitian might frown on you for eating chips as a snack instead of fruit, but as long as your consumption of chips is small, it won't necessarily cause you to gain weight.

It takes some extra assumptions to model over-eating. Maybe there's some property of potato chips that causes people to eat too much of them, i.e. what if someone buys potato chips thinking that a $1 serving will be 1200 calories, when it's actually equivalent to 1600 calories? Keeping with the numerical example above, the rich family would overeat by about 120 calories and the poor family by 560 calories.

It's only imperfect information or self-control problems which make food choices cause weight-gain. If we assume that low- and high-income types have exactly the same sort of bounded information, we'll find that the rich gain less weight, because their greater resources have them purchasing less unhealthy food to begin with.

This story gets even more pessimistic if there is some difference between low- and high-income people's capacity to overcome imperfect information. It might be that the poor have less time/energy to research and craft their diet than the rich do, so they are more prone to mistakes. Additionally, there could be some personal attribute - an impulsive nature or low conscientiousness - which both causes someone to have low income and also makes diet control more difficult.

While the costs of obesity are worth addressing given their heavy contribution to public healthcare spending, as Granderson rightly observes, the lens of class warfare isn't the best for understanding the problem.

Ultimately, to prevent obesity people need more incentive to monitor their own health. For me, it's knowing that on the current trajectory of public health care spending, there probably won't be any money left by the time I'm old and infirm. It doesn't entirely surprise that current beneficiaries of public health care are not too concerned about solving this spending problem for the rest of us (morbid fact: about a third of health care spending goes to patients in their last year of life). Which class is under attack, and which class is attacking anyway?

Maybe the obesity problem will resolve itself as young people make the calculations and figure they will likely be on their own, in terms of medical care, by the time it is most necessary. Or maybe the lure of potato chips is simply too great for us as a nation and will lead to our fiscal undoing.

Monday, June 4, 2012

Paycheck Fairness Act is anti-womens' employment

Scheduled to come to a vote in Congress tomorrow, the Paycheck Fairness Act is a bad solution to a statistically trumped-up problem.

The most frequently cited statistic is that women earn 77 cents for every dollar a man makes. However, not all of that gap can be attributed to discrimination.

The Bureau of Labor Statistics reports that comparing male and female full-time workers, men work more hours: 8.2 versus 7.8 hours per day, on average. Just assuming an exactly even hourly rate, we'd expect women to earn 95% of men's total on a yearly basis; however, there are also more women working part-time than men, widening the gap further. Men are also disproportionately likely to die from an injury on the job, as this chart shows.

Source: US Department of Labor, Bureau of Labor Statistics, Current Population Survey, and Census of Fatal Occupational Injuries, 2012.
But put aside those statistical details. A gap in male-female wages undoubtedly remains, and some of it is probably due to gender-bias and discrimination. What does the Paycheck Fairness Act do to fix that?

The Act would strengthen the Equal Pay Act of 1963, which already requires similar workers be paid the same. The new legislation would expand the damages that women can claim in court, and give women more tools to sue their employers if discrimination is suspected.

The new law would result in effectively unlimited liability for a business sued for giving unequal pay. Put yourself in the shoes of a small business owner. Suppose you are considering hiring either a male or female employee for an entry-level position. Suddenly knowing that your business could be shut down if a court decides your payment to the woman is unfair, who would you be more inclined to hire?

Let's think of another group that has been "protected" by sweeping federal legislation. Persons with physical disabilities are given additional tort resources by the Americans with Disabilities Act if it's found that they were treated unfairly. A paper by Acemoglu and Angrist (2001), using reliable econometric techniques, found that employment of disabled people dropped substantially following the ADA's passage. Now, twenty years later, physically disabled persons are unemployed at record levels.

There are obvious weaknesses in the analogy between the Paycheck Fairness Act and Americans with Disabilities Act - women are a larger segment of the population, and aren't physically limited from doing most jobs - but a lesson remains. Creating new protected classes of workers is not always to that group's overall benefit.

Even well-intentioned laws may end up punishing businesses for hiring certain workers, which hurts both individuals and the economy as a whole. The Paycheck Fairness Act is almost certainly dead in the water; even without passage, its political purpose will have been achieved. But, if President Obama and the Democrats want to show they are helping women, a first step is to not shut them out of the labor market.

The Conservative/Libertarian Echo Chamber on Twitter

Lately I've noticed many many free market think tanks showing up on my "Suggested People to Follow" list on Twitter. I'm not sure if this is because the Twitter suggestion algorithm has improved to better reflect my interests, or these organizations have been beefing up their efforts in preparation for the electoral cycle, or some of both.

I was curious how many of these free market think tanks are following each other. So I used some social network analysis tools to plot out what those follower relationships look like. I was hoping to see a diverse cast of players, connected perhaps by region or common interests. What I got instead was a hairball.

Monday, May 28, 2012

Zoos and Endangered Species -- trade-offs in everything

Take a look at this article by Leslie Kaufman for the New York Times, "Zoos’ Bitter Choice: To Save Some Species, Letting Others Die." An excerpt:
As the number of species at risk of extinction soars, zoos are increasingly being called upon to rescue and sustain animals, and not just for marquee breeds like pandas and rhinos but also for all manner of mammals, frogs, birds and insects whose populations are suddenly crashing.
To conserve animals effectively, however, zoo officials have concluded that they must winnow species in their care and devote more resources to a chosen few. The result is that zookeepers, usually animal lovers to the core, are increasingly being pressed into making cold calculations about which animals are the most crucial to save. Some days, the burden feels less like Noah building an ark and more like Schindler making a list.
A core dilemma is whether zoos should be more focused on entertainment, which people are more willing to pay for, or on preserving biological diversity for the "public good."

In some cases, it seems like advocates in the latter camp are more concerned with shaping public preferences than responding to them. The article continues:
Zoos are essentially given a menu of endangered species that the association is trying to maintain and can then choose according to their particular needs. But final decisions are often as much about heart as logic.
St. Louis, for example, has committed $20 million — or the equivalent of 40 percent of its annual operating budget — to building an enormous exhibit for polar bears — complete with a fake ice floe — even though its last polar bear died in 2009 and the Marine Mammal Protection Act makes it illegal to remove or rescue the bears from the wild. The zoo hopes that in the five years needed to open the exhibit, it can argue for an exemption, import orphaned bears from Canada or perhaps secure the cubs of captive bears.
Dr. Bonner acknowledges that the polar bear project runs counter to many of his more practical convictions on the role of the modern zoo. He has insisted that his keepers spend what limited field conservation dollars they raise on threatened animals that are most likely to make a comeback in the wild. With sea ice disappearing at an alarming rate, polar bears do not fit the profile.
But he justifies the exemption as a lesson for zoo visitors: “I want people to see this beautiful creature and ask, ‘How could we have let this happen?’ ”
Personally, if I went to a public zoo and saw nearly half of its operating budget spent on an object lesson in how difficult it is to preserve polar bears, collective guilt over habitat loss would not be the first thought to cross my mind.

There is a valid argument to be made for preserving biological diversity. Fear of a catastrophic breakdown, expressed through a variety of vivid analogies, is one of the more popular arguments, although perhaps one of the less valid. This "invisible threshold" argument has become a rationale for preserving species within even the most marginal ecological niches.
Several large buckets of dirt are now home to the threatened American burying beetle, so named because it buries the corpses of small animals, like birds and squirrels, and lays its eggs around them. Once, the beetles, with their brilliant red markings, ranged over 35 states. By the time the United States Fish and Wildlife Service listed them as endangered in 1989, there was one known population left, in Rhode Island.
At the government’s behest, the St. Louis Zoo, in conjunction with a zoo in Rhode Island, has been successfully breeding them and returning them to the wild.
Mr. Merz says the effort was worthwhile because the beetle might play an irreplaceable role in the ecological web. He considers picking species worth saving akin to life-or-death gambling. “It is like looking out the window of an airplane and seeing the rivets in the wing,” he said. “You can probably lose a few, but you don’t know how many, and you really don’t want to find out.”
One has to wonder, if burying beetles and partula snails are so crucial to the ecosystem, why are they only surviving in the back closet of a zoo? The burying beetle has functionally vanished from the North American ecosystem for over twenty years. Why haven't we seen any consequences yet?

Of course maybe this is just one more "rivet in the airplane's wing", the loss of which pushes us imperceptibly closer to global disaster. But, when you have to compare the costs of saving potentially millions of different endangered species, it helps to have an idea of the probabilities, rather than saying they are all equally unknown and potentially deadly.

What is the chance that any one particular species is completely irreplaceable? It is incumbent on the defenders of biodiversity to make these estimations, instead of demanding that every species must be saved, regardless of the cost. Even zoo-keepers can't live up to such an unattainable goal.

Friday, May 25, 2012

Twitter List Networks, Part 2: Spammers

As a point of comparison with my last post, here's another network of Twitter lists.

Instead of using my main account, this was built from a separate "follow-back" account I check on occasionally, which posts no genuine content whatsoever. All the accounts listing it are themselves follow-back bots or promotional accounts (lots of rappers and penny stock experts represented).

The "follow back" hairball.

I'm going to guess this is what happens when there are lots of accounts using some auto-listing utility. When compared to a network structure based on actual common interests instead of strategic Twitter-usage, the difference is striking.

Thursday, May 24, 2012

Are Twitter Lists another social network?

Twitter has a "List" feature, which allows users to organize their followers, or view tweets from only a select group. Until recently, the number of lists following each Twitter account was visible on that person's homepage, but that changed in the most recent overhaul of the Twitter interface.

Lists are now much less visible in the average Twitter user's experience. This leads me to wonder, do Twitter lists follow the pattern of other social networks? Did the change even make any difference? With NetworkX and some fiddling around on the Twitter API, I was able to answer that question.

Diablo III and the Newsvendor Model

How does a long-awaited sequel, which became the fastest selling PC game of all time, still end up with a 2-star rating on Amazon? Probably because so many people were excited to play it and then couldn't, due to Blizzard's "always online" anti-piracy strategy combined with shaky server support.

Diablo III has made tons of money, but still turned into a PR nightmare for its parent company. From an economic perspective, however, these two things are not necessarily in opposition.

The newsvendor (or 'newsboy') problem, popular in the operations management literature, gives some insight into this apparent contradiction. It models a retailer who doesn't know exactly how much demand there will be for his/her product in the next period, and has to decide on inventory levels now. The vendor knows quantity demanded will be pulled from some statistical distribution, and wants to maximize expected profits.

This situation isn't too different from a video game company trying to decide how much to invest in server capacity. Blizzard doesn't know exactly how many people will buy the game on its release date, although they probably have some estimate (based on pre-purchases or past sales totals for their games, for example). They ideally want to have just enough server capacity to let everyone play, and no more. Given uncertainty, however, that goal is hard to accomplish.

The newsvendor model would advise a firm to purchase the average quantity demanded, assuming the costs of over- and under-purchase are exactly equal. For Diablo III, costs aren't exactly equal: once someone has bought, they won't be able to return the game if servers are overloaded -- at worst, maybe they tell friends not to buy it. But, if Blizzard over-purchases in server capacity, they're stuck with those costs.

In this case, over-purchase costs are higher than under-purchase costs, so it's rational for Blizzard to buy less than the average expected demand for their server capacity... Much to the chagrin of their loyal fans.

Consumers have a right to be annoyed, but these opening-day server issues shouldn't be much of a surprise. Counter-intuitively, if everyone could play without any interruptions at all, that outcome would probably be even more inefficient, at least from Blizzard's perspective.

Wednesday, May 23, 2012

Don't interact with strangers' children.

The way current law is set up, being a Good Samaritan and trying to rescue someone else's kid can only get you in trouble.

Browsing the Internet, I've found a few anecdotes which support this view. I don't have any verification that they're true, so you'll just have to take my (and their) word for it.

First story: a young woman is waiting at a street corner. She sees a mother, who is not paying attention, whose child wanders out into the street in front of an oncoming bus. The young woman jumps out and pulls the child back onto the sidewalk. Her reward? The mother yelling "how dare you touch my kid!!" and our would-be hero is treated as a villain, and forced to flee the scene.

Second story: a young man is on the beach. He observes a small male child falling off his surf board a long distance from land. The young man swims out and rescues the child from drowning. On returning to shore, he's greeted by an irate mother who calls the police and wants to press charges for child molestation. Luckily, witnesses confirm the man's story and the cops let him go.

Following this second anecdote a (self-proclaimed) lawyer comments, describing how this situation could have led directly to the young man being registered as a sex offender. By the time police would have questioned the child, his head would be full of misinformation from the angry mom, causing him to tell the police what they "want to hear", possibly putting the Samaritan behind bars or at least requiring a costly and life-disruptive legal defense.

Now, I'm not blaming either the moms in this situation (they are probably freaked out and will naturally accuse the first person they see who might be responsible for their child's endangerment) or the harsh treatment of sex offenders (children should obviously be protected from predators). But it's worth noting the incentive effects that these sort of stories have on potential Good Samaritans.

My personal stance is to never interact with a stranger's child no matter what the circumstances are. I won't engage in conversation, nod, smile, or hold a door open. I was about to say that the most proactive thing I'd do if I saw a child in danger would be to record the incident on video to give to YouTube the authorities later, but even taking pictures of kids can get a guy in trouble... So I probably wouldn't even do that.

Being a Good Samaritan is really a lose-lose proposition. If I succeeded in saving the child, best-case scenario I get a pat on the back, worst-case is a sex-crimes trial that will haunt me for the rest of my life. If I fail to save the child (it still falls under the bus) then maybe I get accused of murder or assault because the angry parent saw me "push" the kid instead of trying to rescue it!

There is absolutely no upside to helping or interacting with a stranger's kid. Perversely, this fact makes being a Good Samaritan far worse: because rational people know it's a bad idea to help a kid, the people who do try to help are even more likely to be creeps or labeled as such (the selection effect).

In its efforts to prevent strangers from harming vulnerable children, society has also unintentionally deterred strangers from assisting vulnerable children. It's hard to say which impact is more important, but given the relative magnitudes (there are lots more healthy, well-intentioned people out there than sex offenders) it's very possible the overall effect has been negative for child safety.

Tuesday, May 22, 2012

Promoted Accounts on Twitter, the Great Enigma

For a class project (CSS692/ECO895, Social Network Analysis) my group - Kevin May, Echo Keif and I - took on a project a almost bigger than we could chew: identifying astroturf on Twitter. It turned out to be more ambitious than we realized, but even starting with a low level of technical sophistication we were able to find some interesting results.

What is astroturf? While most social movements are said to resemble a "grassroots", sometimes wealthy organizations will attempt a "cashroots" strategy instead - paying for people to spread a pre-chosen message. This has been a problem since the dawn of democracy, but social media has given many more opportunities for astroturfing.

The Truthy Project is one attempt to track how online memes spread, and distinguish authentic movements from fabricated ones. However, there still isn't much agreement on what an astroturfer looks like, compared to a genuine grassroots movement.

We focused on Twitter for our project. The recently unveiled Promoted Accounts feature, used by Twitter to generate revenue, might uncharitably be described as a tool for astroturfing. Promoted Accounts are put at the top of the "Who To Follow" list shown to each Twitter user, but otherwise not tracked or recorded in a publicly accessible way. Our goal was to identify common characteristics of Promoted Twitter accounts, and thereby develop a profile of what an astroturfer might look like.

Saturday, May 12, 2012

Fun with Twitter Metrics

Using tweepy I've been looking at the characteristics of my Twitter following. I found these histograms pretty interesting.

The first shows how many people my followers are following and followed by. (The x-axis is the relevant number, the y-axis shows how many incidences of that number of friends/followers occur).

Followers (Blue) and Following (Green).

Next is the number of status updates posted. Looks like lots of my followers haven't tweeted much at all! It's a dilemma: do I unfollow them for being inactive? But, because the inactives aren't tweeting, they aren't flooding my timeline with stuff I don't want to read, either... Twitter-vanity might make me keep them, just so that whatever bot is running those accounts doesn't unfollow me.

Status Count.

Finally, number of favorite tweets by user. Lots of people don't seem to use the "Favorite" function of Twitter at all. I probably have less than 10 tweets I've marked as "Favorite" (it seems like such a commitment). It's nice to be able to tag a link or something worth going back to later, so I'm glad Twitter has this feature... even though it is, apparently, hardly used.

Favorite Tweets.

Then there are a few accounts at the far right of the distribution with lots of favorites. What's going on here?

Generally the distributions resemble a power law, which is not surprising when looking at social networks.

Twitter metrics will be an ongoing project, so this is just the beginning. If you find this stuff interesting, check back in a few days.

Tuesday, May 8, 2012

Farm Subsidies: A Picture Worth 1,000 Words

Who ever said there's no skiing in Iowa? Source.
In other news, the Institute of Medicine is advising the government to adopt a series of policies to control the American "obesity epidemic." One such policy is a proposed "soda tax."

I have a better idea. Instead of taxing soda, why don't we repeal the subsidies which makes the primary ingredient, high-fructose corn syrup, so dirt cheap to produce?

Friday, May 4, 2012

New Blog Section

I added another section to the blog, titled "Other Writings." It contains links to my (currently sparse) published works, as well as other papers I've written over the last two years that haven't been published yet. Comments welcome.

Tuesday, March 27, 2012

Fish and Game Dept. targets Asian Supermarket - Flawed Economics in Action

A daring sting operation has brought down another set of dangerous criminals in our midst. The proprietors of Great Wall supermarket (located about 20 minutes from where I live) have been arrested for selling "wild" sea animals including live frogs, crayfish, turtles, eels, and more. The store owners say that all of their stock comes from farmed sources, but that does not appear to be convincing the crusading Commonwealth bureaucrats.

Officer Rich Landers, of the Virginia Department of Game and Inland Fisheries, had this to say:
“History has show when wildlife becomes commercialized, the population dwindles,” Landers said. “Whether it’s elephant tusks or whales, we are trying to reduce the chances that wildlife becomes commercialized.”
Lets take a moment and think of a heavily commercialized animal population, like cows. We may have another disaster on our hands: the cow population is down to the lowest level since 1958, with only 92.6 million in the United States! An estimated 25 million cows are slaughtered each year. That means that in less than four years, there won't be any cows left in the United States. Savor your steaks while you can!

See what's wrong with this story? While commercialization allows animals to be consumed, it also creates strong incentives to rebuild the population for future consumption as well. That's why the decline in the cow population has been in response to reduced profitability of cattle ranching... not an ecological shortfall. Why would this be any different for farmed eels, turtles, or fish?

The historical examples that Landers uses are all cases where no one had ownership rights over the stock of animals being hunted, and therefore no reason to maintain sustainable population levels. That is clearly not the case here when we are discussing farmed seafood.

If anything, the proprietors of Great Wall should be applauded, for meeting consumer demand for uncommon (by American standards) foodstuffs. That way, Asian families can eat farmed eels etc. and do not have to catch them wild or import from abroad, potentially bringing exotic animal diseases to afflict U.S. ecosystems.

I won't go so far as to accuse the Department of Game and Inland Fisheries of racism or xenophobia, as I'm sure they'd be just as happy to apply their short-sighted and fallacious brand of reasoning to a predominantly-American grocery store as well. But, charging honest business owners with felonies, for selling live turtles and bass, does not inspire much confidence in either the agency's competence or its underlying motives.

Thursday, March 22, 2012

First Textbook in Social Media Marketing

Blatant self-promotion, but I can't resist.

(c) Cengage Learning 2013.
The book that I helped write is now in print. Find it here. Many thanks to my co-authors as well as the professionals at Cengage Learning for making this possible.

While intended to accompany a college- or graduate-level marketing course, I think this text does a pretty good job of encapsulating the advice that can be found in other prominent trade books, in addition to presenting some original and innovative material (I'm especially proud of Chapter 3). As far as I know, it's the most thorough treatment of social media marketing that can be found in one place. A boon to students and aspiring professionals alike. A magnum opus indeed.

Hyperbole aside, I'm very pleased with how the book turned out. I hope that some other people are able to derive utility from it as well.

Tuesday, March 6, 2012

The Durable Goods Problem in Software

Being a monopolist isn't all it's cracked up to be. Produce a durable good, and you're functionally competing against yourself.

For a Durable Goods Producer with Market Power:
Problem 1: durable goods can be re-sold. If re-sale purchases are cheap and reliable, why buy new?
Problem 2: after selling at high price, the firm wants to reduce price to get more customers. So, if you're a customer, you shound wait for the lower price to purchase... If you're the firm, how can you ever manage to sell at the high price?

Software is perhaps the ultimate in durable products. Once you have the program installed, it never wears out. Resale is prohibited by license agreements and made impractical by other technical means, but the second problem remains. How can software companies prevent consumers for holding out and demanding cheaper prices?

Big players in the software industry have found various ways to overcome this durable goods problem.

1) Bundling. Most famously, Microsoft got its big start by combining the Windows operating system with IBM machines. While the software may be durable, the computer most definitely is not. Replacement of consumer products guarantees repeat customers for their OS. Waiting doesn't help the consumer, because they retailer they purchase from will have to get a copy of Windows regardless.

2) Ongoing payment schemes. Subscription fees, downloadable content, and micro-payments have been used successfully by companies from Blizzard to Zynga. In addition to providing a check against piracy, each of these pricing methods ensure the up-front cost is only a small part of what the consumer pays for that software. Holding out for a lower price on the base product doesn't exempt someone from paying for the extras.

3) Build price discounts into the sales model. Some video game marketing tools (I'm thinking of Steam, from Valve software) build semi-frequent sales into their distribution channel. Users can buy a new game when it comes out at full price; wait a few months for the game to go on sale at 33% or 50% off; or wait several years to get it at deep discount. The amount paid depends on the gamer's urgency in wanting the game. It's temporal price discrimination which separates out high- and low-demanding users.

Software companies still end up competing against themselves to some degree, but with these sorts of pricing mechanics they're able to keep revenue higher than it would be otherwise.

Wednesday, February 15, 2012

Light bulbs and implied discount rates

What does your choice in light bulbs say about your attitude toward the future? In terms of discount rates, quite a lot.

An incandescent 60W bulb costs around 50 cents to buy, while a 15W CFL costs about $9. The government estimates that an incandescent bulb will cost $4.80 in electricity annually, while the CFL will cost $1.20 if used an equal amount.

Assuming a five year time span - roughly how long a CFL bulb is expected to last, and during which a new incandescent bulb will have to be purchased every year - if you just add up the costs, the incandescent will cost $12 more. Why would anyone buy an incandescent bulb? The answer is time preference.

Plugging the numbers above into Excel and using "Goal Seek" finds an implied discount rate of 39%. That is, someone would have to value one dollar a year from now 39 cents less than a dollar today in order to be indifferent between an incandescent and CFL light bulb.

People discount the future when making decisions, and the discount rate is not always consistent between all activities. Few people would want to pay a 39% rate on a credit card, but some are willing to do the equivalent when the cost is on the electric bill instead of the credit report.

There are a number of other potential explanations: maybe some renters don't expect to stay a full five years or have electricity included with the rent; some consumers might be cash-constrained and can't afford the pricey bulbs; or there could be some cognitive bias or plain lack of information about electricity costs. But, given the plenitude of "green" or energy conservation campaigns and general worry about global warming, behavioral factors might also push in the other direction.

If varying discount rates are distributed throughout the population, there may be enough people in the "tail" - with extremely high discount rates - to keep incandescent bulbs on the shelves for some time to come.

Monday, February 13, 2012

What is law?

Early in my Law & Economics course, taught by Don Boudreaux (professor and former chair of the economics department at GMU, blogger at Cafe Hayek) he made a controversial point about the nature of law. While most of us associate "law" with legislation, handed down by Congress or other governing bodies, Dr. Boudreaux argues that we should see law as an emergent phenomenon, developed by the public's expectations for social behavior. For the curious, a similar lecture he gave can be found here.

To borrow his example: if I set down my books at a table in the cafeteria and go to get food, I have a reasonable expectation that when I return, no one will have taken the seat where those books were placed. It's generally accepted that a book (or coat, or other personal item) can act as a stand-in for a person's presence in reserving a space. Someone who took that spot would be breaking a law, even though that standard has never been written down or codified anywhere.

Sometimes law and legislation can be synonymous (e.g. people understand murder is wrong, and it also carries criminal penalties) and in other cases they are contradictory (e.g. speed limits that no one follows, or underage drinking at college that is illegal but generally tolerated). Legislation on the books has no power except to the degree that people will accept it, or the powers of government are willing to use force in order to apply it.

Generally, this makes a lot of sense to me: the Federal Register, which added over 75,000 pages in 2010 that probably less than a dozen people have actually read, probably plays less of a role in public daily life than seat-saving etiquette for restaurants, even though each part of the Register could (theoretically) be enforced with the full power of the United States Federal Government.

My only complaint is a semantic one. This conception of law subsumes and replaces the role of customs, norms, and social mores; those become redundant terms given this definition of "law." This is not necessarily a bad thing - it may even be good, if as Boudreaux argues, we should reframe the public understanding of law as being opposed to legislation - but the loss of precision from duplicating "norms" and "mores" bothers me. (Maybe my attachment to those terms is just the sociology minor talking.)

If I were starting this issue afresh, I'd propose a definition of law as the intersection of legislation and publicly accepted norms. This is much narrower (it includes the prohibition on theft and murder, but excludes unwritten social rules) and arguably has greater analytic power, because it creates a new category for what is both expected by society and enforced by the powers that be.

Of course this issue isn't being started afresh, and any new definition of law has to battle a centuries old Anglo-American tradition of treating legislation as identical to law. Changing that entrenched belief will be a challenge, no matter what theoretical or practical merits a new conception of law might bring.

Friday, February 10, 2012

Cigarettes, a case study in price discrimination (China vs. U.S.)

Economists predict there will be price discrimination when there is a monopolist supplier (or at least some degree of market power) and arbitrage between different groups of customers is costly. The United States tobacco market meets one of the two conditions - re-selling cigarettes without a license is barred by law - but the industry is still competitive between the large tobacco companies. In China, by contrast, both conditions are met because the China National Tobacco Company has a de facto monopoly on all cigarettes sold.

There is strong evidence of price differences between types of cigarettes sold in China. This paper by Li, et al, finds
...the price differential among brands is large. The self-reported cigarette price ranged from 0.70¥/pack to 100¥/pack, which gives smokers more choices in the price of cigarettes. In other words, Chinese smokers have more flexibility in choosing different prices of cigarettes than most Western smokers.
There are two, potentially complimentary stories to explain the wide difference in price of Chinese cigarettes. First is price discrimination to take advantage of different elasticities of demand between smokers; one person may value the marginal pack of cigarettes less than another. Charging lower prices for "inferior" brands of cigarettes will enhance monopoly profits, by selling a higher quantity at a lower price.

This type of price discrimination doesn't rely on direct knowledge about consumer preferences; the tobacco company can set a variety of prices, then smokers self-segregate according to their willingness to pay. Such a strategy would be less effective in the U.S. because cigarette taxes are so high, the relative price difference between brands is always comparatively small.

Another possibility is social signaling. In the United States, smoking is not a symbol of high status, in fact quite the opposite: it's more common that poor and uneducated people will be the ones who smoke. In China, gifts of tobacco are common and socially accepted, and expensive cigarettes are used to demonstrate affluence. By offering a wide range of prices for cigarettes, more different levels of social status can be signaled. One might expect that as general affluence in China increases, new forms of social signaling will become more popular instead.

Monday, February 6, 2012

Netflix original programming: trying to stay ahead of the competition?

Netflix has been through some hard times lately, and the industry is evolving in ways that will continue to challenge their core business model. A combined deal between Redbox and Verizon has been struck in order to offer streaming video. Redbox is also buying out DVD kiosks owned by Netflix' old rival, Blockbuster, to expand their on-the-ground presence.

Netflix is already in a market with big-name competitors for streaming video - Hulu, Apple, Amazon and Walmart, to name a few - as well new outfits such as Zediva (which offered rock-bottom prices, but ran into legal troubles due to avoidance of content licensing fees). Netflix sets itself apart with the DVD mailing program, but Redbox is now well-positioned to compete on that front as well.

How to stay ahead of the curve? Netflix just introduced their first offering of original programming, Lillyhammer, with more shows planned in the next year.  Now, with Netflix moving toward an "HBO model" of producing and distributing their own content, their core business will be changing.

There is some clear logic to this decision: instead of paying extravagant licensing fees to stream content (the deal with DreamWorks is estimated to place a $30 million price tag on each film) new shows can be produced internally. New exclusive content could also pull in subscribers drawn to a particular actor or show; this may explain why Netflix is rumored to be producing Arrested Development Season 4.

During the short-lived introduction of 'Qwikster', some speculated that Netflix was drifting away from its core expertise. It's not immediately clear how DVD mailing translates to streaming content. Now, the company is shifting its role once more, and one is left to ask whether film production is also part of the Netflix tool kit.

Vertical integration in the entertainment industry is hardly a new phenomenon. But, most television networks started off producing content, and then acquired more means for distributing it. Netflix got into the distribution business first, and now is trying to backpedal into producing as well.

It's unclear whether the few big-name offerings which Netflix will produce are enough to distinguish them from the other streaming services. But, facing stiff competition in both physical and online distribution channels, moving up the content production chain may be the only choice they have in order to stay relevant.

Sunday, February 5, 2012

The value of flexible labor markets

Three stories in the news today highlight the importance of labor market mobility.

The United States has had some good news lately. With job spurt, US economy races ahead of Europe:
Some 1.9 million US jobs have been created in the past five months, bringing the number of people working nearly back to the levels of late 2008.
Jacob Kirkegaard, economist at the Peterson Institute for International Economics, said the latest developments in the labor market show the resilience of the US economic model.
"When you're a US employer, you barely hesitate to hire because you know if you take a worker for a peak in business, you can easily lay off that person if it doesn't turn out as planned," he said.
"In Italy, in Spain, in France, in Greece, the costs for that are high." 
Those high costs are creating problems in Greece. Employed But Not Paid, Some Greeks Voice Protest:
If ALTER TV laid off these workers, the owner would have to pay millions in compensation. Under Greek law, white-collar workers, for example, with 24 years on the job are entitled to 28 months of severance pay.
These days, few employers can afford that, says Vassilis Masselos, a shop owner who has been pressing the government on business reforms.
"It's not a matter of choice, it's a matter of necessity," Masselos says. "They can't find the money to pay employees. They cannot fire them. So they are locked into a sort of limbo that nobody can get out of."
Inflexible labor markets make economic contractions worse, and also slow the pace of recovery. Meanwhile, Canada is offering visas to Indian professionals as their economy improves. Human capital is the largest resource in any economy, so allowing movement toward higher-valued uses is essential for productivity and growth.

Saturday, February 4, 2012

Komen Foundation Pilloried for Planned Parenthood Policy - and Rightly So

Earlier this week the Susan G. Komen for the Cure Foundation said they'd be eliminating their grants to Planned Parenthood for breast cancer screenings. The resulting social media uproar, however, quickly caused them to reverse that decision and issue a sickly-sweet apology press release.

I know blood in the water when I see it; my duty to the blogosphere wouldn't be met without helping to smear Komen's momentarily-vulnerable public image further. After all, it's not every day you can feel righteous while slinging mud on a charity.

The recent furor raises a broader question: how much of what the Komen Foundation does is actually getting us closer to a cure for breast cancer? According to their website, 84% is spent "on our mission." But, that "mission" is defined pretty broadly.

From Komen's donation page.

The screenings, research, and treatment services that Komen provides are definitely valuable, but those only make up 46% of the overall budget. That leaves 54% percent taken up by administration, fundraising and "education" (a.k.a. advertisements). Basically, for every dollar that Komen takes in, a little over half of it goes out toward seeking another dollar. It's inefficient.

Maybe "education" about the risk of breast cancer is important, and causes some people to get treatment who otherwise would not. But, there are obviously some diminishing returns to awareness. Breast and prostate cancer are the number two causes of cancer-related deaths for women and men, respectively, but breast cancer receives much more public money and attention.

Data source: Aminou R, Altekruse SF, Edwards BK, et al. SEER Cancer Statistics Review: 1975-2006. Cancer Statistics, National Cancer Institute. May 29, 2009

A cynic would say that it's more fun to talk about breasts than the inside of men's asses, and probably be right. Some recent "sexy" breast cancer awareness campaigns help to reinforce that cynical view. While the incidence of prostate cancer has risen rapidly over the last 20 years, much faster than the rate of breast cancer, the National Cancer Institute spent twice as much on breast cancer as it did on prostate cancer in 2008.

There shouldn't have to be a fight between different anti-cancer organizations for funding. All of these diseases deserve serious study and research toward a cure. But, there also shouldn't be pseudo-political organizations like the Komen Foundation sucking up resources for runs, pink ribbons, Facebook campaigns, "awareness", and other things commonly known to not stop cancer. If you want your donation to make a difference, write a check to a research lab, not a lobbying group. With their stance on Planned Parenthood, the Komen Foundation has revealed itself to be much closer to the latter.

Thursday, February 2, 2012

Productivity is bad for job growth?

Scanning the news feed for something worthy of being shared with Twitter, I happened across this good news/bad news article from USA Today: Unemployment benefit claims, worker productivity fall. Less benefit claims is a sign that more people are going back to work, although drops in productivity temper optimism about the speed of economic recovery.

Instead, apparently the author of this piece took it be good news/good news, claiming
Weaker productivity growth can help boost hiring if economic growth picks up.
This argument is motivated by the lump of labor fallacy (the idea that there are only so many jobs to be done, so higher productivity will leave more out of work) and a preoccupation with firms as purveyors of jobs rather than producers of products. Both of these ideas are largely discredited among economists.

In reality, productivity growth is the driving factor behind economic expansion. For economic growth to pick up, we need the inputs of production (labor, capital, etc.) to become more productive, not slow down! This allows us to both become richer and create more jobs as a society.

At the micro-level, theory predicts that a firm will not pay a worker more than their marginal product; i.e. if a machinist can produce $50 worth of goods in an hour, a company that pays him/her $51 per hour will be losing money. USA Today misses the irony when going on to claim
consumers have been weighed down by wages that haven't kept pace with inflation.
If that is occurring, it's because worker productivity hasn't kept pace with other factors in the economy. This argument is made in more detail by several recent books: Race Against the Machine by Erik Brynjolfsson and Andrew McAfee, and The Great Stagnation by Tyler Cowen both explore the phenomenon of declining worker productivity, and neither are excited about that decline as a source of new jobs.

Lower productivity means reduced living standards for future Americans. It doesn't even rise to the level of a placebo for our current unemployment woes; generally, placebos are expected to do nothing, not make the problem worse.

Saturday, January 28, 2012

Collective Action Solutions for Libertarian Politics

The biggest problem for an individualistic, freedom-oriented political movement is getting each of those individuals to join any sort of movement in the first place.

Many economists wonder why anyone votes at all  -- the chance of any one ballot changing the outcome is statistically zero and the cost of voting is small but positive (e.g. risk of dying in a car accident on the way to the polls), so rationally it would be better to stay home on election day. Most people vote out of a feeling of moral obligation or civic duty.

The low impact of voting helps to explain why barely more than half of the American electorate usually shows up to vote. That problem is magnified for a political party whose "base" has a strong individualist leaning; they are less likely to feel the civic obligation which pushes others to the polls.

Enter the Free State Project. Goal: collect signatures from libertarians, who will move to New Hampshire when total signatures reach 20,000. Why New Hampshire? It has low tax rates, little dependence on federal spending, and a small enough electorate that 20,000 people might be able to sway its political orientation.

In economic jargon, the Free State Project uses a pre-commitment device to solve a collective action problem. No one is asked to move to New Hampshire until sufficient signatures are obtained (as of this writing there are 11,578 participants; 8,422 to go). Any one person moving to New Hampshire in order to change its politics would bear a large cost, with uncertain chance of success. Assuming people stick to their word, the Free State Project allows each person more confidence that their action will make a difference.

Agree or disagree with the libertarian political platform, it's hard to argue about because there are few real examples of libertarian societies to reference. I hope the libertarians do succeed in taking over New Hampshire, because it will be an interesting test case for a liberty-motivated legislative majority. Even if the result is a total disaster the impact will be negligible, and the advance in knowledge for political science / public choice well worth it.

Monday, January 23, 2012

One small victory for Privacy vs. GPS Trackers

The Supreme Court ruled today that a warrant is required for police to attach a GPS tracking device to a suspect's car. Previously, officers could use GPS to track a car's movements for suspicious activity, and then substantiate criminal charges using those findings.

Prosecutors justified this practice by saying it was no different from tailing or following a suspect. The Supreme Court disagreed, holding that
The Government’s attachment of the GPS device to the vehicle, and its use of that device to monitor the vehicle’s movements, constitutes a search under the Fourth Amendment.
It's a welcome victory for privacy rights advocates. After the controversial passage of the NDAA on Dec. 31, civil libertarians must have been hoping for some good news.

How much tangible impact will this decision have on criminal investigations? Probably a very small one. Police departments will have to pay more overtime for old-fashioned surveillance on suspects, instead of using a fancy GPS unit.

Alternately, wireless technology and smart-phones have provided even better ways for law enforcement to establish location. As the BBC article on this case concludes,
...the ruling is unlikely to have an impact on the use by law enforcement agencies of another surveillance method, mobile phone tracking software.
 Police, and executive agencies with support of the Obama Administration, have had no trouble requesting location data from iPhone or iPad services to aid in criminal prosecution. I'm no legal expert, but this Supreme Court decision might establish precedent for that practice to be challenged in court as well.

Thursday, January 19, 2012

The American Entertainment Industry's Death Rattle

It's obvious that the circumstances which allowed so much wealth to be accumulated in Hollywood by major record labels have changed, but the people at the top don't want to change with them. The industry's demise (at least in its current form) is evidenced by the great efforts being made to legislate demand for their products - through the SOPA/PIPA legislation in Congress, which led to a blackout of many popular sites yesterday, and today's effort to shut down as a copyright infringer.

Piracy is not really the problem here, but a symptom of a larger issue: the entertainment industry wants to charge more for their products than people are willing to pay. Maybe people used to be willing to pay $15-20 for a CD, but no more. With digital distribution, artists can sell their music to fans directly, without the entertainment edifice standing in between. This is a better deal for both musicians and fans, but makes most of the music industry obsolete. The same is not exactly true in Hollywood - someone has to finance big-budget action flicks - but digital services such as Netflix Watch Instantly are changing the game there too. Why would I go pay $12 to see a movie in a theater, when I can pay $8 per month for more streaming content than I can watch in a lifetime?

Even if online piracy were eliminated completely, it wouldn't address the bigger issue facing the entertainment industry: substitution. Consumers have an increasing variety of entertainment options to choose from, many of which are free or extremely cheap. Now that online distribution is easy, there's really no need for the big industry surrounding content distribution. They can kick and scream all they want, but the entertainment industry as we know it is functionally doomed. It just doesn't realize that yet (or is trying desperately to deny the obvious).

Friday, January 13, 2012

Paper books are a depreciating asset least for a grad student.

Why? Any time I move, I have to pay to transport them. Shipping fees aren't cheap, plus packing and carrying books is a lot of work. Given that I will definitely be leaving Fairfax after graduating (cost of living is too high to stay permanently) and will likely end up moving several times after that before settling down, that's a lot of money and effort that might go into lugging paper around with me.

At first, I was hesitant about e-books. The feel of a good book in the hands is hard to replace. But, a Kindle (or other e-reader) with a cheap cover is a decent imitation, and a lot more convenient. The only real downside is inability to re-sell the book when I'm done reading.

Basically, it's time to go digital.

My new policy is to only buy paper books when (a) there's a chance I might be able to sell it later for a decent amount of cash, as is the case with a textbook or (b) the paper copy is much, much cheaper than the electronic version.

It'll be a few years before I'm moving again, but there's no time like the present to start downsizing (just don't take me out of context on that line). Right now I have around a hundred books and several years worth of National Geographic magazine. It's a paltry collection compared to some of my professors, but still more than the average person needs.

The punchline: if you want any of my books, I'll sell them cheap. Check out My Bookcase and make an offer. Even if it's low, I won't be insulted - cover the cost of shipping plus a little bit more and I'm satisfied. If you're already settled in and won't be moving soon, or don't find hauling paper to be as much of a hassle as me, then an exchange can make us both happy!

Thursday, January 12, 2012

Liberal Arts Degrees as Social Signaling

The model of education as signaling for the labor marketing has been thoroughly developed by Bryan Caplan; for some examples, see here, here, and here. I think the argument is pretty convincing, but it leaves a few details unexplained. Namely, some majors - especially liberal arts - are not even very good as signals!

The highest unemployment rates for college graduates are found among architecture, art, and humanities majors. Especially given the relatively low salaries for jobs in these "industries" why go into serious debt to get a degree, when the signal is likely to be weak or even totally ineffective? While the number of liberal arts colleges has been declining over the last 20 years and business is the most popular major for under-graduates (chosen by 20% of students) the liberal arts curriculum is far from disappearing.

It could be that these students are maximizing with regard to something other than wealth, such as social status. This may accrue to either the college student or that student's parents, who get to brag about how their son/daughter will be a progressive hero and "save the world one day." Parents have incomplete control over what major their child picks, but at least some power to encourage or discourage certain fields of study.

Thinking of education as a status symbol helps to explain variation in choice of majors across countries. In the United States, the poor and middle-class can get luxury items like fancy cars, jewelry, nice TVs, smartphones etc. by using credit (Robert Kiyosaki's "Rich Dad Poor Dad" observes that this is a big reason why they do not ascend to the capitalist upper-class). Seeing someone with nice jewelry or the latest tech is no longer a good indicator of high status in America; in fact, it is often a signal of the opposite! A liberal arts degree then becomes a new status symbol, a way of displaying "yes I can spend four years doing nothing productive, and rack up debts while doing it, because money isn't important to me."

In China, by comparison, most of the affluent or middle-class people have attained that status within the last one or two generations. The rich in China display their wealth through luxury items, but parents still often discourage or frown upon liberal arts degrees (or so I'm told by someone with personal experience). Based on the social signaling theory sketched out above, one would expect that as the middle-class in China grows and expensive items are no longer limited to the nouveau riche, more will go get liberal arts degrees, instead of the focus on STEM (science, technology, engineering, and math) which is the stereotypical image of Chinese students currently.

If this model is accurate, it just further reinforces Dr. Caplan's point that we should not be subsidizing higher education as much as we are now.

Wednesday, January 11, 2012

Female Infanticide Isn't a Women's Issue. It's a Human Issue.

A news article today, Female Heads of State Discuss How 'Climate Change'--But Not Sex-Selective Abortions--Hurt Women, highlights how female leaders are declining to discuss the issue of female infanticide in a current summit. When asked for a comment on the issue by CNS News, they were told
“I think the council is unlikely to take that kind of a stand,” Mary Robinson, former president of Ireland and president of the Mary Robinson Foundation – Climate Justice, responded.” It’s not that kind of a body.”

‘Women who have joined the council because they qualify as a former president, prime minister, or the ministerial level that Margot (Wallstrom, special representative to the United Nations Secretary General on sexual violence) chairs to empower, to support, to make visible and to listen to the voices of women.”

“And so that issue [abortion of female babies] would be more appropriate to some other kind of activist group,” Robinson said.

Robinson also said “the nearest I can come to it” is her work to combat child marriage, including the fact that “religion and tradition are often distorted to subjugate women.”

According to an Oct. 4, 2011 report by CQ Global Researcher, an estimated 160 million female babies have been killed by abortion or were killed or left to die after they were born in India, China and other Asian countries in the past 30 years.
Some feminists are probably outraged by this omission, but I am actually sympathetic to Mrs. Robinson's view here. While sex-selective abortion is targeted at young girls in China and India, it may be the men of those societies who are losing the most, not the women.

Putting aside the ethical issues surrounding abortion (I don't plan to open that can of worms) an undeniable effect is that the fetus never experiences life outside the womb. The "victims" of female infanticide never see the male-dominated world which they would be born into, so they really can't be said to suffer as a result of it. The group who really loses out are young men, many of whom by sheer arithmetic certainty will never be able to marry or start a family of their own.

In fact, sex-selective abortion may even increase the bargaining power available to women living now or born in the future. When single women become a scarce commodity, their bargaining position relative to men improves. Women can demand better conditions and treatment under marriage, because if the wife leaves her (ex-)husband will have less chance at remarriage. Paradoxically, the female infanticide which occurs under a male-dominated system may actually become that system's undoing!

Some would say that sex-selective abortion causes an increase in prostitution, which may be true. However, one would still expect prostitutes to benefit from increased bargaining power as well, when demand for their services increases. While this is probably less desirable than a world in which no women turn to the sex trade, it is also probably better than sex workers living in desperate poverty.

If CNS News had worked through the economic implications of female infanticide more thoroughly, they might have been less outraged by its omission in favor of discussing climate change. Sex-selective abortion has many negative social effects, but from a purely selfish standpoint it should really be the men who are most concerned about it - not women.

Tuesday, January 3, 2012

Do higher tax rates spur more charity? I doubt it.

A few days ago I was talking with my mother about the state of the economy, income inequality, and social obligations... Typical evening conversation on any New Years, I'm sure. From life experience and observations on a (privileged) extended family, her opinion was that more charity occurred when tax rates were higher. I disagreed, and offered to present a mathematical demonstration on why that was the case. After that effort, I wanted to show the Internets the fruits of my labor.

Charitable giving is a very personal decision and the tax law surrounding it is complicated and arcane, so I start with some simplifying assumptions to make the problem more approachable. These are:
  • Money given to charity is 100% tax-deductible.
  • Each person lives for two periods, then dies, and their entire stock of wealth is donated after death.
  • An individual's money earns 10% interest.
  • To make the problem concrete, I'll imagine a person earning $100,000 in each period, and two different tax regimes: one with a 0% tax rate, and another with 50%. 
Now a quick exercise in arithmetic, starting with a tax rate of 50%. The individual earns $100,000 in the first period, $50,000 of which would go to the government. Instead that $50,000 is given to charity to avoid taxes. At the start of period two, they earn $5,000 in interest and another $50,000 in after-tax income, then die and donate all of it. Total charity given is $205,000.

Now imagine a tax rate of 0% (and if you're a libertarian, try not to faint with excitement). An individual earns $100,000 and keeps all of it, earns $10,000 in interest before the second period, makes another $100,000 then dies and gives all of it away. Total charity given is $210,000.

One could argue that this result emerges just from the assumptions made, which is partially true. However, as long as individuals can earn a higher return on investment than the government (which is not a controversial claim) and all money is transferred upon death (a de facto necessity) then the result, qualitatively, will still be the same. If you make the example more realistic, and envision a person making money then saving and investing it for more than just two years, the difference between the two tax rates becomes even more apparent.

Of course, someone might say there are distributional issues this exercise neglects. Maybe needy recipients of charity are more sympathetic than the undeserving heirs of some wealthy person. Aside from that, the general point still stands: when government takes money through taxes, the overall social "pie" becomes smaller. When individuals can invest it, they put money into productive activities which can generate more wealth, making the "pie" bigger. Even if higher tax rates drive some people to give more money to charity than they otherwise would, society in the aggregate is better off if that money can be productively invested by individuals instead. Charity is then a pleasant side-benefit of greater social wealth.

Sunday, January 1, 2012

I Have No New Years Resolutions.

The New Year is a nice time, symbolically, to make a big change in life but practically it almost never works out that way. From a Boston Globe article, I learned that 80% of New Years resolutions are broken. Frankly, I'm surprised that as many as 20% are accomplished! People don't change much on the eve of December 31 to the morning of January 1 (perhaps except for the addition of a hangover) so I suspect much of the 20% accomplished are trivial ("remember to call my mom on her birthday this year") and require single actions, not sustained effort.

Resolutions are puzzling from both an economic and psychological perspective. To an economist, there's no reason why one day should be intrinsically more favorable than another to make a positive life change. If drinking less or exercising more would be a good idea, why wait until January 1st to start doing it? On the other hand, a psychologist might wonder why people set themselves up for failure so often. If 80% of resolutions ultimately amount to lying to yourself, why persist in encouraging such a mentally unhealthy activity?

The real question: if most resolutions would be good things to accomplish, why are people so bad at keeping them? It's easy to just dismiss New Years resolutions as "cheap talk" which people utter in order to sound socially acceptable and make themselves feel better, with no intent of actually following through. But, I think there's a little bit more to it than that.

In their book, Willpower: Rediscovering the Greatest Human Strength, Roy Baumeister and John Tierney offer a pretty good explanation for why New Years resolutions have such a short shelf-life. When someone creates a list of challenging self-improvement tasks, they are probably very optimistic about their future state of mind. But, realistically, we only have so much willpower to divide between different goals that require self-control. Willpower, in this regard, is somewhat like a muscle: when it is used lots in a short span of time it becomes fatigued, so later acts of self-control are more difficult. Creating a list of resolutions is like weight-lifting beyond the mind's capacity; it can't dedicate enough mental power to accomplish all the goals at once, so in the end none of them are met. As a result, creating a big list of dramatic changes is one of the least effective ways to actually modify your own behavior.

A better strategy is to choose one area that seems most important and focus on moderate improvements. Also like a muscle, willpower can become stronger when exercised. Picking reasonable goals gives a sense of accomplishment when they are completed, making it easier to stick with other changes in the future. In other words, build up capacity slowly to avoid a painful sprain of the willpower muscle (although if I stretch this analogy much further, I might suffer a tear in my credibility). Introducing the concept of willpower to economic thinking means we don't have to dismiss failed self-improvement projects as mere cheap talk, and can instead look more realistically at the human mind and its practical limitations.