Marginal Revolution

Two perspectives on the American dollar

Tyler Cowen

Shortly I am headed back from Poland to France, for one more day in Europe. I cannot help but wince at the especially high prices in France, compared to the United States. You may recall my mention of the five dollar chocolate bar; at home I could get the same for less than three dollars.

So a microeconomist might conclude that the U.S. dollar should rise over time. Arbitrage will cause people to buy more in the United States, helping out the dollar.

Or look at interest rates. You can pick and choose various comparisons, but overall they are not bearish for the dollar. That is investors do not expect the dollar to fall. Nominal interest rates on the dollar are low, but people are still holding dollars. So those investors presumably expect the dollar to appreciate.

Let's bring the macroeconomist into the picture. He tells us that the United States has unsustainably high trade and budget deficits. The only way to clear these deficits, he says, is for the dollar to fall at least thirty percent. We will sell more exports, our trade balance will be restored, and our consumption binge will be checked. Long-run accounts will balance.

Could the macroeconomist be wrong? After all, someone has to be wrong.

If we are comparing the dollar and the Euro, I wonder whether the U.S. is really in a deficit position, all things considered. Even if our measured fiscal position is poorer (this depends who you compare us to), isn't the American economic future brighter? We have better demographics, a more entrepreneurial culture, and arguably a more robust ability to reform and regenerate ourselves. The optimism of a population counts, though it doesn't fully reveal itself on this year's balance sheets.

So will the dollar rise or fall? Should we believe the microeconomists or the macroeconomists?

The nice thing about economics, of course, is that someday we will know. The problem with economics, of course, is that we don't know now.

For an overview, here is a simple essay by Hal Varian on exchange rates.

I am indebted to conversations with John Nye for some of the ideas in this post.

Average vs. marginal tax rates

Tyler Cowen

Not long ago I asked whether the marginal or the average tax rate had more influence on economic behavior. Too often economists take the measured marginal rate as the true trade-offs faced by the individual.

The ever-insightful Randall Parker recently emailed me the following, in support of the point:

1) People in conventional regular jobs do not have total control over how many hours they work or their income. For lots of jobs it is all or nothing. Either you work full time or you don't work at all. You are on a salary. What you make is what you make. The marginal tax rate for the next dollar doesn't matter to you since you don't have much control over whether you get a raise. You can't boost or lower your income much in a given year. The alternatives that would give you more control are too risky or lower in income per hour worked or unappealing in some other way.

2) People in entrepreneurial pursuits often have far less predictability of income. It is hard to work harder or less hard in a given year as a reaction to marginal tax rates because you just do not know how many of the deals you are working on will close by the end of the year or when various billables out there will generate a check in your in-box. Believe me on this one if you haven't been in this position. It is a real situation for lots of people.

3) You can't predict in advance what your tax burden will be. Hey, only the tax expert can figure it out. How much will you get to keep? You'll find out when he tells you. Kinda hard to behave during the work year as if you are responding to a known marginal tax rate at any given point.

4) Customers won't let you respond to a known marginal tax rate. Again, this is a variation on the theme of a lack of control. You make deals early in the tax year and earn income at a low marginal tax rate. Then as the year goes along you keep a smaller fraction of what you earn. What to do about it? Laze off. Take a trip. Oh wait, your customers won't let you. Still want them to be there in January when the marginal tax rate drops again? Well, you have to work hard to service their needs in the last 6 months of one year to get the lower tax rate income of the first six months of the following year. This means you have to work at a high marginal rate to get the low marginal rate income. Thinking of your tax rate as an average then makes more sense, doesn't it?

5) On an even longer time scale people choose their careers at the beginning in part based on what they will make. If an economy has a high marginal tax rate then that can be an incentive to choose a less demanding and lower income career path. In that scenario it may make more sense to go for high job security since you could be faced with a tax schedule where you get more after-tax income making say, $50,000 for two years in a row than making $200,000 one year and $0 the next year.
I'd expect a shift toward lower marginal tax rates to most heavily impact career choices. So the impact would gradually increase as more people managed to retrain for higher income careers.

The bottom line: If you want to encourage private economic activity, don't focus obsessively on measured marginal tax rates. True marginal rates tend to move closely with the size of government more generally. I've said it before and I'll say it again: government spending is a better measure of our fiscal burden than marginal tax rates.

My thanks again to Randall for writing. And while you are at it, read Randall's post on how trade protectionism makes us fatter and less healthy.

Ronald Reagan the Libertarian

Alex Tabarrok

Here's a wonderful quote from Reagan in 1975 from Reason magazine.

If you analyze it I believe the very heart and soul of conservatism is libertarianism. I think conservatism is really a misnomer just as liberalism is a misnomer for the liberals–if we were back in the days of the Revolution, so-called conservatives today would be the Liberals and the liberals would be the Tories. The basis of conservatism is a desire for less government interference or less centralized authority or more individual freedom and this is a pretty general description also of what libertarianism is.

Now, I can’t say that I will agree with all the things that the present group who call themselves Libertarians in the sense of a party say, because I think that like in any political movement there are shades, and there are libertarians who are almost over at the point of wanting no government at all or anarchy. I believe there are legitimate government functions. There is a legitimate need in an orderly society for some government to maintain freedom or we will have tyranny by individuals. The strongest man on the block will run the neighborhood. We have government to insure that we don’t each one of us have to carry a club to defend ourselves. But again, I stand on my statement that I think that libertarianism and conservatism are travelling the same path.

I found the above quote from a nice roundup on Reagan by Pejmanesque. See also my earlier commentary (below) Mourning in America and Fabio's Reagan's Message to the World.

Sand dreams and spontaneous order

Tyler Cowen

One of my dreams is to go to Niger. In the meantime I will have to be satisfied reading the excellent Sahara: A Natural History, by Marq de Villiers and Sheila Hirtle. No student of spontaneous orders can ignore the following passage:

Obviously [sic], dunes are formed because jumping sand bounces more easily off hard surfaces than off soft ones, so that more sand can be moved over a pebbly desert surface than over a smooth or soft one. Even a slight hollow, though, or a rock, will reduce the amount of sand that the wind can carry, and a small sand patch begins. Very quickly, this patch will trap more sand. When the patch is big enough, it begins to change the wind velocity about it. The winds decrease near the surface and deposit more sand on the patch. Quickly, the dune is built up.

If the conditions are right, the dune will grow rapidly: In days it will be taller than a man, and in just a few weeksit can reach sixty-five or one hundred feet, and keep growing. Over time, the windward slope eventually adjusts itself, and the wind velocity close to the sand increases to compensate for the drag imposed by the sandy surface. The smooth leeward slope steepens until the wind can't be deflected down sharply enough to follow it, leaving a "dead zone" into which the sand falls. When this so-called dispositional slope reaches the natural slope angel of dry sand (about thirty-two degrees), the added sand cascades down the slope, now called the "slip face." The dune has stopped growing -- there is no gain or loss of sand -- though it continues to move forward as a whole, slowly, ponderously, relentlessly.

It turns out that driving on sand is an art, and no one can avoid getting stuck in the long run. Fortunately (to my surprise) most of the surface of the Sahara is rock rather than sand.

Here is a lecture on spontaneous order and sand. Here is advice on how to build a better sand castle.

Every now and then someone is inclined to think that this kind of analysis holds the key to either business cycles or stock market crashes. It has yet to come through, but in the meantime I will keep dreaming of Niger.

Markets in everything, for the newspaper fanatic

Tyler Cowen

I usually read six newspapers a day, and enjoy every one of them (can you guess which six?). But what to do on vacation, especially when traveling abroad? I hate reading papers on-line, plus I left all my passwords at home. And Polish newsstands are of varying quality.

Try NewspaperDirect.com, which delivers print-on-demand copies of your favorite paper directly to your hotel. Here is Poland I am enjoying the American edition of USA Today, and reading about the NBA Playoffs in depth. But hey, if the Lichtensteiner Volksblatt is your thing, you can get that too.

Reagan's Message to the World

Fabio Rojas

There will be much debate on Reagan's legacy in the following weeks. I think friends of limited government and individual liberty can have honest disagreements about Reagan's accomplishments, but there is one achievement that is undisputable - Reagan sent a clear message to the world that Communism was evil.

It's hard for Westerners to believe this, but the clarity of Reagan's message had a profound effect on those behind the Iron Curtain. People will notice when an American president unapologetically calls the Soviet Union what it was - an evil empire. This is a simple moral judgment that was lost on so many intellectuals in the West. To hear this message must have been inspiring to those who experienced the Soviet invasion of Czechoslovakia and Hungary and other Soviet crimes. To this day, many in Eastern Europe are grateful that Reagan was not afraid to say something that was so obvious and so important.

Mourning in America

Alex Tabarrok

Reagan was the first, and so far the only, politician who I have ever found inspiring. I came of political age during the Reagan years when I was a high school student in Canada. In political science class we learned that the essence of the Canadian philosophy of government could be remembered with the mnemonic POGG - peace, order, and good government. I preferred life, liberty, and the pursuit of happiness and hearing Reagan speak was always a thrill for me.

The record, of course, is never as glorious as the rhetoric but a number of important accomplishments occured under Reagan's watch. In the economic sphere, the reduction in marginal tax rates was a great and lasting achievement. It's hard to believe today that top marginal rates used to approach 70%.

Reagan also deserves great credit for standing up to the air traffic controllers thereby sending a strong signal that the country would not be taken hostage by the labor unions as had happened and continues to happen in much of Europe.

Inflation was also brought under control under Reagan - the 1982 recession was second only to that of the Great Depression but it's hard to see how that pain could have been avoided. Reagan had the fortitude to take the political heat of the downturn and stay the course thereby laying the groundwork for growth in the following decades.

Deregulation began under Carter but continued under Reagan, leading to innovation in previously moribund industries.

In foreign policy of course, Reagan saw further than anyone else. Only Reagan predicted that communism would end up on the dustbin of history and at critical moments he took the actions necessary to make it happen.

Not all was positive of course but the rest can wait for another day.

Lawsuits in everything

Tyler Cowen

Get this one: a guy blames his school for not catching his plagiarism sooner.

An argument for genetic engineering

Tyler Cowen

Soon we will have cows that are immune to mad cow disease. We're not about to engineer cows on a large scale, and probably we don't need to; my interest is in how this upsets the usual spectrum of ecological worries. I've found that people who fear mad cow disease also tend to fear genetic engineering of animals. But now, which way to turn? It reminds me of those reports saying we need not fear global warming, because we will run out of oil in the meantime!

Eggers vs. Supply and Demand

Fabio Rojas

Dave Eggers, accalimed author of works of genius, has written an article in Mother Jones bemoaning the relatively low pay of teachers (click here). Here's a representative excerpt:

The first step to creating an education system full of the best teachers we can find is to pay them in line with their importance to their communities. We pay orthodontists an average of $350,000, and no one would say that their impact on the lives of kids is greater than a teacher's. But it seems difficult for everyone, from parents to politicians, to shake free of a tradition in which teaching was seen as something of a volunteer project for women whose husbands brought home the real money. Today's teachers need to, but very often can't, support a family on their salaries. They find it difficult or impossible to buy homes, to save money, to live comfortably, and, in wealthier areas, to live in or near the towns where they teach.

Eggers misses a basic point about work: The salary one makes is determined by supply and demand. A price doesn't indicate how important the job is, or even if people think it is important. Take a simple example: water - it's cheap because there is plenty of it, not because we don't think it is important!

Same goes for work - the price of someone's labor - their salary - is the result of how badly people want the labor and how many other people do the job. People want education for their kids - they pay thousands of dollars in locals taxes, have significant college savings accounts and the most prestigious colleges can harge over $30,000/year. Seems like the demand is there.

So why the low pay? Teacher's low pay is due mainly to the fact that there are tons and tons of teachers! There is a huge supply of teachers. Education schools have huge enrollments - and surveys routinely report that education is one of the most popular majors in the country. Click here for a short Yahoo article reporting the most popular intended majors among incoming freshmen in 2002.

Some solutions for low teacher pay are non-starters. For example, simply demanding higher pay for public school teachers isn't going to cut it because that means shifting money from other public services. There is a political solution - limit by fiat the number of teaching certificates awarded each year. That's why the orthodontist makes a lot of money - there are few orthodontists relative to the demand for nice teeth. This might have undesirable consequences. Wealthier school districts might employ all the teachers. Perhaps the best response to low teacher pay is to realize that it's a signal that fewer people should go into teaching. Next time you see someone express a desire to be a teacher, just tell them that we have too many!

My favorite Polish things

Tyler Cowen

My favorite Polish novel: Solaris, by Stanislaw Lem. Don't worry if you hate science fiction, this is possibly the best novel ever penned about erotic guilt and the nature of personal identity.

My favorite Polish music: My traditional favorites have been the Chopin Etudes and the Polonaise Op.40. But arguably the Mazurkas hold up best over time. Here is a recent Chopin CD that will blow you away.

My favorite Polish movie: Kanal, directed by Andrzej Wajda. A European movie of great depth with a plot as gripping as Hollywood.

My favorite Polish TV show: The Decalogue, episode four. This audiovisual classic is now available in its entirety on DVD. In the fourth episode, a daughter receives an envelope from her father, with the written instructions: "Don't Open This Until I Die." I leave the rest up to your imagination.

I'm enjoying my time here very much, soon I will be in Kracow.

Addendum: Let's not forget the goose in cranberry sauce, the pork knuckle pate, the wild boar with dumplings, the sour soup with sausage, the duck with cherry sauce, or the wonderful Brazilian restaurant they have here. Polish food in Brazil is fantastic, so now they are returning the favor, all to the benefit of me.

The benefits of corruption

Alex Tabarrok

Increases in the price of rice are making a bad situation worse in Haiti. The problem, however, is not solely due to increases in the world price but also because, believe it or not, Haiti has customs duties on rice even though most people can afford nothing else for their one meal a day.

[Under Aristide] an Aristide crony received a near exclusive concession on rice imports and evaded customs duties. That evasion allowed the rice concessionaire to cut about $3 a bag off the market price, pass some of the savings on to the market and pocket the rest.

The new government is apparently less corrupt or at least the lines of corruption have not yet been formed, and as a result the price of rice has risen.

Chowhound Hero!

Alex Tabarrok

Here's a profile of Tyler and his wonderful ethnic dining guide. Even if you are not local take a look at the guide - aside from restaurant picks, Tyler also offers a theory of ethnic dining!

Cowen has become a sort of folk hero to an underground group of food adventurers, some of whom call themselves "chowhounds" who are loosely organized around an online message board. The chowhounds keep a close watch on Cowen's list, said Marty Lederman, a chowhound from Montgomery County, Md. "We tend to discuss it whenever he comes out with a new [entry]," he said. "There's usually a short discussion about it. ... Some people don't like the way he does things or disagree with his stuff, but almost everyone appreciates the amazing reference that he creates."

Exchange rates

Alex Tabarrok

Imagine living in a world where you had to have yen to buy a TV, renminbi to buy toys, and dollars to buy food. Think how complicated life would be.

Surprise. That's the world we live in. Most TV's we buy are manufactured in Japan, most toys come from China, and most of our food is produced in the United States. And by and large, the workers who produce those goods want to be paid in their domestic currency.

Luckily, this complexity is hidden from consumers; those nice currency traders handle all the grungy details.

That's the introduction to an admirably clear introduction to exchange rates by Hal Varian writing in the Times.

Econometrics and New Yorker fiction

Tyler Cowen

What kind of stories get published?

Ms. [Katherine] Milkman, who has a minor in American studies, read 442 stories printed in The New Yorker from Oct. 5, 1992, to Sept. 17, 2001, and built a substantial database. She then constructed a series of rococo mathematical tests to discern, among other things, whether certain fiction editors at the magazine had a specific impact on the type of fiction that was published, the sex of authors and the race of characters. The study was long on statistics...the thesis segues to the "Kolmogorov-Smirnov Two-Sample Goodness of Fit Test" and the "Pearson Correlation Coefficient Test."

And what is the main conclusion?

...male editors generally publish male authors who write about male characters who are supported by female characters

More generally:

Under both [fiction] editors the fiction in the magazine took as its major preoccupations sex, relationships, death, family and travel.

Are you surprised? And what does the magazine say?

"I was personally riveted by the whole thing," said Roger Angell, a writer at The New Yorker who worked as a fiction editor during part of the period scrutinized by Ms. Milkman. He spent a significant amount of time talking to Ms. Milkman and helped connect her with other people at the magazine. He was charmed by the results but worries they may sow confusion.

"Some unpublished writers are going to read this and say, `I now know what I have to do to get published in The New Yorker,' and it's not helpful in that way," he said. "In the end we published what we liked."

Here is the New York Times story.

The bottom line: Expect to see more of this kind of analysis in the future. In the longer run I expect all of the humanities disciplines to have a quantitative branch.

College Admissions in California

Fabio Rojas

A few months ago, administrators at the University of California asked about 7,000 students who had been admitted to the prestigious UC Berkeley and UCLA campuses to defer enrollment. To save money, students were asked to enroll at a California community college for 2 years and then apply for a guaranteed transfer to the Berkeley or UCLA campuses.

The San Francisco Gate news site reports (click here) that only about 1,000 students took the offer. I don't know whether this is good or bad, except to note that the students are probably the best judges of whether it's better to immediately attend another college or take the UC offer. The Gate article notes that many went to very expensive private schools, suggesting that budget shortfalls could have been recouped with a price increase.

The problem this incident highlights is how the political process interferes with market mechanisms. Once the political decision to educate a certain segment of the population has been made, administrators should view a surplus of customers as a signal that the market can bear some price increases. Instead, California legislators tend to fight tuition increases because they might exclude low income students. This is truly a bad tactic because one can simply lower the price for low income students through grants and financial aid, which is what happens at many universities. Price hikes for the wealthy and subsidies for the needy is surely a better policy than arbitrary price ceilings and the exclusion of many who are able and willing to pay.

Starting out as a Professor

Fabio Rojas

Alex and Tyler like to post advice to graduate students (click here), which is usually on the mark. Here are some reflections from someone who has just finished the first year as a professor. I hope non-academic readers will enjoy knowing what this job is about.

1. Being a professor is all about time management. It's important to spend time preparing classes and completing research but you have to be efficient. Unlike graduate school, you can't spend years on a single dissertation chapter. It has to go to review soon, so you had better learn to write well and quickly.

2. This is really a cool job, but it is not for everybody. Although I am at a research university, I am expected to teach a fair amount - large undergraduate classes and doctoral students - and I must do a fair amount of administrative work. Anybody who is allergic to either activity should seek other employment. But if you like teaching, and you can thrive when you are expected to produce a lot in an unstructured environment, then it can be very satisfying.

3. Success in the academy is about writing skill - even in technical areas. Tyler might be interested in knowing that I learned this from him. Having brilliant ideas and doing the research to prove you are right is only half the battle. You must work very, very hard to clearly express your ideas and persuade skeptical readers.

While I consider myself to be a happy person, I still advise people not to go into academia - it is very competitive, smart people can make much more money elsewhere, there is little security pre-tenure and you can enjoy great ideas without getting a Ph.D. by reading Marginal Revolution every day.

A serious health care proposal

Tyler Cowen

Brad DeLong argues that the government should pick up all health care costs above $50,000. Among other things, this would diminish the incentive for HMOs to neglect sick patients or try to push them off the books. It also would provide comprehensive catastrophic insurance. By lowering the cost of private insurance, it will lead more people to be insured, which will lower governmental costs elsewhere in the system. Being on the run in Poland, I don't have the ability to offer a full analysis. But it's one of the best economics posts I've read in the blogosphere in a long time.

One question I have is how many of these expenditures are worth subsidizing at all. A big chunk of our health care bill is spent in the last year or two of life, without always bringing much of a payoff. A second question is what would happen to cost control at these higher levels of expenditure. In particular what would happen to cost care as we approached the $50,000 threshold?

The proposal can be viewed in one of two lights. From one perspective, it will bring catastrophic care to many who are otherwise uninsured. From another perspective, we already have too much catastrophic care, at the expense of prevention and healthy lifestyle habits. Government catastrophic insurance will lead to price controls, either explicit or implicit, and rationing. Catastrophic care will decline, but in a way that might be beneficial. This latter alternative is not politically appealing, but we cannot rule it out as the relevant scenario.

But read Brad's post and make up your own mind. Health care reform is an area where no one (i.e., you, the reader, and me, the writer) should feel they already have a pat or satisfactory answer.

Academic Freedom

Alex Tabarrok

Earlier Tyler posted the story of Daniel Sumner, the agricultural economist at the University of California at Davis who has been accused of "treason" for analyzing US cotton subsidies for Brazil in a WTO case. One of the most troubling aspects of the case is that instead of backing him to the hilt, Sumner's dean bowed to King Cotton and questioned his judgment.

Michael Ward a professor of economics at the University of Texas at Arlington (and a regular MR reader, I might add) has authored a Petition in Support of Academic Freedom stating in part:

To the extent that it is within their expertise and terms of employment:

1. It is appropriate for scholars to engage in public policy debates regardless of the comments’ effects on US producers or consumers.
2. It is appropriate for scholars to consult with interested parties in policy-making or judicial matters even when the adversary is the US government or US interests.

You can express your support here.

The myth of free trade Britain?

Tyler Cowen

Was nineteenth century Britain really a free trade wonder? Just how entrenched is protectionism in French national history?

John Nye offers some provocative answers:

Britain preached the gospel of free trade and France was cast in the role of the sinner, but there was little truth in this stereotype. France did have more protected products than England did but the average level of French tariffs (measured as total value of duties divided by total value of imports, cf. Figure 1) was actually lower than in Britain for three-quarters of the nineteenth century.2 In other words, tariffs had a smaller impact on French trade than British duties had on Britain's trade. The French, while eschewing free trade, and openly rejecting the Anglo doctrine of open markets, actually succeeded in making their trade more liberal and more open than that of the more vocal British. The master of this was Napoleon III—Bonaparte's nephew—who throughout the 1850s promoted the most radical liberalizing reforms of the French economy, all the while insisting that France was only interested in moderate reform.

The revisionism continues:

Indeed, it was not British unilateral tariff reduction that moved the world to freer trade. Despite the belief that is still common today that British exhortation opened the doors to European free trade in the late 19th century, it was the 1860 Treaty of Commerce, promoted by the Napoleon III and concluded between Britain and France, that really ushered in the age of nineteenth century "globalization". British demands for unilateral tariff reduction usually fell on deaf ears.

Might this advantage of bilateralism be true more generally? If so, it would mean that a serious U.S. free trade agreement with Japan would be the best outcome imaginable for promoting free trade.

Read the whole thing, and don't miss the illustrative chart.

Beauty and Brains

Tyler Cowen

Last week, Alex wrote about how smart people live longer. Today, we learn that smart people may be better looking too!

Satoshi Kanazawa of the London School of Economics and his colleague, Jody L. Kovar, assert that beautiful people also tend to be smart people -- and vice versa.

In the July issue of Intelligence, the sociologists offer a theory to explain the confluence of beauty and brains. Their argument, in a nutshell: Intelligent men achieve higher status and marry beautiful women, who pass their genes on to their disproportionately attractive and smart kids, who win mates who are good-looking or brainy, and so on. Or at least that's what they put forth in the journal article, "Why Beautiful People are More Intelligent."

Here is the full story. Here is a home page for one of the researchers. But wait...he's the same guy who says that marriage ruins male productivity.

Addendum: I just stumbled upon Randall Parker's treatment of the same study.

Retail gas pricing

Alex Tabarrok

“Zone pricing,’’ is what the gasoline industry calls price discrimination – wholesalers charge less to stations in zones with many stations and more to stations in zones with few stations. Legislators take one look at “zone pricing” and assume that they can lower prices by requiring wholesalers to sell to everyone at the same, “non-discriminatory,” price.

Let’s assume that the legislators are succesful in lowering prices in high-price zones. Do you think that the retailers in these zones will pass the price reductions on to their customers? Of course, not. The reason prices are high in zones with few stations is that stations in these zones have greater market power. It’s this fundamental fact that makes prices higher in these zones – all price discrimination at the wholesale level does is change who gets the profits. With price discrimination the wholesalers get the profits, with uniform pricing the retailers get the profits.

So consumers in high-price zones don't benefit from ending zone pricing but what about consumers in the low-price areas? If forced to charge a single price do you think that wholesalers will charge the lowest of their zone prices? Of course not – they will charge an average of their zone prices. As a result, consumers in highly competitive zones will face higher prices under uniform pricing.

Thus uniform pricing makes retailers better off at the expense of wholesalers and consumers.

Not sure if the analysis is right? Our colleague, Bart Wilson, is the author (with Cary Deck) of an excellent new paper on retail gasoline pricing. Wilson and Deck setup an experimental market with retailers, refiners and gasoline customers (the latter are computer agents) and find exactly these results. The Wilson and Deck paper is powerful evidence because an experimental market is a real market – it just happens to be a real market under the careful control of an experimenter.

Wilson and Deck also analyze divorcement (requiring wholesalers to divest themselves of retail stations – very bad for consumers because of the double monopoly problem) and the puzzling phenomena called “rockets and feathers” – the tendency of prices to rise faster with costs than to fall with costs. The full paper is here but they have also published a very good “executive summary” in Regulation, one of my favourite journals.

The largest known prime number

Tyler Cowen

We just found a new one, and it has seven million digits. Here is the bottom line:

Mersenne primes are an especially rare type that take the form 2^p-1, where p is also a prime number. They are named after a 17th Century French monk who first came up with an important conjecture about which values of p would yield a prime. The new number can be represented as 2^(24,036,583)-1. It is the 41st Mersenne prime to have been found.

Here is the full story.

Note also that the number was found by a consortium of private computers, designed to exchange spare computing power:

GIMPS volunteers download a piece of software that runs in the background on their computer. A central server distributes different prime number candidates to each machine, which use spare processing power to test whether it is a genuine prime or not.

Here is more information, plus how to volunteer. Or perhaps you would prefer to search for alien lifeforms.

Blogging from Poland

Tyler Cowen

My time in Paris is over and I've arrived safely in Poland. I've found exactly what I'd expected. It is a modestly bustling economy, but not setting the world on fire. The slowdown of the last two years appears to be over. Corruption is low for a transition economy, social capital appears to be high, and there is an emerging middle class. The government has serious fiscal problems, but then again they probably should be running deficits, though not at 51 percent of gdp as they are doing. Overall it is hard to see them not turning the corner. If you would like an illustrative lesson as to how the world is a better place than it was twenty years ago, Poland is exhibit B after China as exhibit A.

I might add that Warsaw has excellent food, arguably the best in Eastern Europe after Budapest.

I'm blogging just across from the famous statue of Copernicus. Did you know that he offered one of the earliest statements of the Quantity Theory of Money?

Media Bias

Fabio Rojas

Discussions of media bias are a sort of political Rorschach test - what you see depends on what you already believe. Despite this, I think the evidence is consistent on a few points.

1. Journalists tend to be more liberal than the average American. A recent Pew poll confirms previous studies of journalists. In this study, journalists did not describe themselves as liberal (which previous studies did find to be very common) but their attitudes tended to be very liberal. For example, 51% of Americans thought homosexuality should be accepted, while 88% of journalists in the national media thought so.

2. Very few journalists describe themselves as conservative. In the same Pew poll, 33% of Americans described themselves as conservative while 7% of journalists said they were conservative. Previous studies have found that journalists overwhelmingly vote for Democrats, except during the 1950's - probably because Eisenhower was the most liberal of recent GOP presidents, when compared to the competition.

3. Analysis of American news consistently shows biases. In the 1990's, for example, numerous studies found that it was relatively rare for ex-GOP leader Newt Gingrich to get positive press coverage. I found it interesting that one study found Bob Dole's coverage was about 50% positive/50% negative. I wonder what it was about the future Viagra spokesman that made him lovable by the media?

Those who see the media as dominated by conservatives probably focus on Rush Limbaugh, the Fox network and some other high profile conservatives. They could also justly point out that media is big business, and owners probably favor legislation that benefits them (a la Rupert Murdoch), even though some media entrepreneurs such as Ted Turner are quite liberal.

So here's my analysis of media bias: the journalism profession, on the average, is quite liberal and they also believe in the ethic of objective reporting. This creates a situation where much reporting is probably informed by liberal values, but presented in a "manner of fact" way. As a result, there are a lot of angry conservative readers and viewers who are flustered by this type of reporting.

Since the whole journalism profession is pretty much liberal, it's probably hard for more conservative owners to impose their will on the newsroom - although they try quite hard sometimes. The end result - an untapped market of conservative viewers that can be catered to by the likes of Limbaugh and the Fox network. The Al Frankens of the world probably focus on the high-profile conservatives (like Rush) and ignore the average news reporter, while the Limbaugh's obsess over the New York Times - a model for much of the journalism profession - and ignore successful niche players such as Fox.

How to choose a restaurant

Tyler Cowen

Where oh where should we eat?

Perhaps the common social choice problem that any of us face in practice is when we find ourselves in a group that must choose one restaurant at which all of us will eat. We propose a method where, similar to the I-choose-you-cut rule for dividing a cake, individuals in the group take turns restricting the set of choices for the group. Specifically, under our method the first person restricts the set of restaurants to a certain number the second person restricts the set to a smaller number and so on until the last person in the group selects one restaurant. We derive a formula for choosing these numbers such that — under a natural assumption about individual preferences.the probability that the group will choose any individual's favorite restaurant is equal for each individual.

That's from an interesting recent working paper by Tim Groseclose and Jeff Milyo.

My recipe is simpler: "Go Where I Say," though I am less likely to use it in repeated game settings. And I am willing to defer to Randall Kroszner and John Nye, among others.

I do wonder why collective choices are not made in more efficient ways. Overall there is not enough deference to expertise and too much interest in finding a "lowest common denominator" of taste within the group. The real problem is to allow those who know to exert their influence, but without appearing like bullies. Yes I know the group cares more about harmony but that is precisely the problem: outlier tastes in the group end up frustrated. Maybe we should sever food decisions from all others, if this is possible. Then people could cede to the food expert, but without fear of future bullying in all other areas. As is sometimes the case in politics, the question is not "what is the proper social welfare function?" but rather "how do we get the right thing done?"

Who has the highest tax burden?

Tyler Cowen

Number one is France, Belgium and Sweden are right behind. I am shocked to see China come in fourth, and to see the U.S. (New York State at least) beat out Canada.

The relevant metrics do not measure tax burden fully. Instead the rankings measure a weighted average of various marginal rates; average tax rates do not seem to enter into the calculation. Nor do they seem to consider how much of the tax is actually paid, or what you get for your taxes.

Since 2000, the tax burden, as measured in this fashion, has dropped in 22 countries, risen in 13, and held steady in 15.

The least taxed country is now United Arab Emirates, pushing long-time winner Hong Kong into second place. Next in line for low marginal rates are Singapore, India, South Africa, and Indonesia, an odd mix of countries. Then comes Ireland.

Here are extensive links to the data.

Note that economic theory says that marginal rates should be of primary importance. But often in the data it is the average tax rate that matters. Why is this? Could it be that liquidity effects are paramount? High average rates then suck away cash and end up affecting decisions at the margin. Or consider another channel. The tax system is very complex and full of loopholes and deductions. The average rate might in fact be the best measure of the true marginal rate we have.

Postscript: I know this is a market-oriented economics blog, but hey, I am also a contrarian at heart. I cannot help asking: which countries would you rather live in? Visit?

One view is "France is great, but it would be even better with lower taxes." Another is: "France is great, and for reasons which bring both its wonders and its high taxes." I am perpetually torn between these two views, often co-blogger Alex tries to push me more toward the former.

Punitive damages

Alex Tabarrok

California Governor Arnold Schwarzenegger is proposing to tax punitive awards at a 75% rate. The idea has some merit, punitive awards are intended to punish the defendant but to serve that purpose it is not necessary that they should flow to the plaintiff. Moreover, punitive awards often have more to do with the defendant's deep pockets or other arbitrary factors like whether the plaintiff is headquartered in or out-of-state than with proof of malice. Giving punitive awards to the plaintiff, therefore, may over incentivize plaintiff's and their lawyers (under the plan contingency fees would be calculated on the compensatory portion of the award only).

Schwarzenegger, however, is putting forward the proposal as a revenue source and calculating revenues under the assumption that punitive damages will not decline after the tax. On the contrary, as with any tax we can expect fewer punitive damages after the tax than before. In this case, that's a benefit of the tax.

But tort reformers shouldn't be too happy, however, because there are ways around the tax. In particular, the tax will encourage settlements. Suppose the plaintiff and defendant estimate that there is a good chance of a 10 million dollar punitive award only 2.5 million of which will go the plaintiff. See the gains from trade? The plaintiff and defendant can agree to settle at say $5 million, making both of them better off. In this way, punitive awards decline but "compensatory" awards increase. Increasing the incentive to settle is not necessarily a bad idea but it doesn't help revenues.

Of ocourse, the Governor is being disingenuous when he claims this is tax policy not tort reform. Just like bad ideas, good ideas usually don't get passed on the merits but need some otherwise irrelevant impetus (like a big budget deficit).

Addendum: Glen Whitman says we should burn the money - which is not as crazy as you might think!