Monthly Archives: July 2015

Paul Romer on Physics and Information

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He writes,

There is a crucial distinction between human capital (stored in neurons), and codified information (stored in some external form, such as printed text or bits on a hard drive.)

Anything stored in neurons is a rival good.

A person’s human capital is fully excludable as long as people have legal control over their own bodies. So there are no human capital “spillovers” and no human capital “externalities.”

As the cost of copying codified information goes to zero, it becomes a pure nonrival good.

Pointer from Mark Thoma. Read the whole thing. It relates to my bumper-sticker saying: Information wants to be free, but people need to get paid.

Housing Demand and Down Payment Requirements

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Andreas Fuster and Basit Zafar write (note: WTP – “willingness to pay”),

we find that on average, WTP increases by about 15 percent when households can make a down payment as low as 5 percent of the purchase price instead of having to put down 20 percent. However, this average masks large differences in sensitivity across households. In fact, almost half the respondents do not change their WTP at all when the required down payment is lowered. On the other hand, many respondents increase their WTP very strongly in the second scenario with the lower down payment requirement. This is particularly true for respondents who are current renters (and often relatively less wealthy): their WTP on average increases by more than 40 percent. They also tend to choose lower down payment fractions than current owners; for instance, 59 percent of renters but only 36 percent of owners choose a down payment fraction of 10 percent or lower.

As Mark Thoma says, this is not a surprise. The question is whether this means that government policies to encourage lower down payments are a good idea. I think not, since it encourages a lot of speculative purchases of houses and makes house prices more volatile.

If you want periods in which people over-pay for housing to alternate with periods of retrenchment, then letting people buy with little or no money down is the way to go. If you want sensible policies to build wealth among households below the top of the income ladder, then you would subsidize saving. But that idea goes nowhere with the real estate lobby, which dictates policy in this area.

The Virtual Library

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Tyler Cowen writes,

as a very frequent user, I say libraries are getting worse. Much worse.

I say libraries should be obsolete. Much obsolete.

Imagine the set of books that people have in their homes as an enormous virtual library, with all books registered in a central registry and available to be borrowed. All we need is an app that makes it work that way.

At any one time, more than 99 percent of the books in my home should be lent out. That would be a win-win. I would have more space, and the people with the books would be reading them–or at least there is a non-zero probability that they would be reading them, which is not true for me. And if I get a sudden urge to read something I have lent out, I can borrow a copy from someone else.

Note that there could be opportunities for charging rent for books, for entrepreneurial book ownership, etc.

Greece and Representative Negotiation

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John Cochrane writes,

So, the Drachmaized Greece that I see is not the cleanly devalued newly competitive powerhouse that some on the left seem to envision. Instead I see a two-currency economy. Pensioners and government workers and anyone unlucky enough to still have a Greek bank account get Drachmas. Hotel owners, restaurant owners, and exporters get euros, above or under the table.

My comments:

1. I agree with John that nothing real changes with a new currency. Instead, it is a way of arranging the government’s default. In addition to defaulting to bondholders, the government will default to other claimants, including pensioners. But the way it will default to the latter is by paying them in lower-valued currency.

2. I continue to believe that we will see an opaque bailout. What is happening now is pre-concession posturing on the part of the other European nations.

The classic example of pre-concession posturing is the labor union strike. One theory of strikes is that they take place because the union leaders are ready to make a deal, but they need to convince their membership that the union leaders bargained really hard. Going out on strike sends that message. Similarly, for the European leaders, engaging in table-pounding and other theatrics will help convince their constituents that they were really tough on the Greeks. Meanwhile, in the background, an opaque bailout will be arranged.

This theory of representative negotiation also holds for the nuclear negotiations with Iran. The theory predicts that there will be a deal, but in the meantime the negotiators will posture to indicate that they are being very tough with their opponents.

Speaking of Iran nuclear issues, I read Michael Oren’s new book about being Israel’s ambassador to the U.S. I found Oren credible, although for my taste he squeezes too much melodrama out of his experience. One of Oren’s points about the Obama Administration is that it has very tight message discipline, and I believe that we can see that in some of the negative reviews of Oren coming from Obama-linked writers.

Oren’s description of Obama amounts to saying that he operates using the oppressor-oppressed axis, which strikes me as accurate. Even so, it still requires some mental contortions to treat the leadership in Iran as oppressed, rather than as oppressors.

Tariffs vs. Quotas

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Greg Mankiw writes,

rationing under price controls is never perfect. Under rent control, for example, apartments do not automatically go to those who value the apartments the most. The misallocation due to imperfect rationing makes the actual welfare cost of price controls much higher than the standard deadweight loss triangle.

Suppose that the minimum wage is $10. You have one worker who would be happy to work for $8 and another worker who would be happy to work for $10. If the second worker is the one who happens to get the job, you lose $2 of surplus due to what Greg is calling “imperfect rationing.”

I remember being taught the equivalence between tariffs and quotas. But it seems to me that such an equivalence fails by the same reasoning. The quota may be imperfectly rationed, unless rights to sell within the quota are tradable.

North, Wallis, and Weingast

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It is not a new book, but still I wanted to review it.

Open-access orders are likely to be highly stable. Everyone who is ambitious and able to organize others is free to attempt to earn a profit or address a political problem. This gives citizens a feeling of having a stake in the system. Moreover, the layers of beliefs, norms, and institutions that precede the open-access order all serve to reinforce the order once it is in place. For example, Americans are culturally committed to free speech, disdain for corruption, and obedience to the Constitution.

This leads one to be relatively optimistic about the prospects for the United States, regardless of how one feels about recent political and economic trends.

Capitalism Bee Sustainable

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Shawn Regan writes,

Last year, riding the buzz over dying bees, the Obama administration announced the creation of a pollinator-health task force to develop a “federal strategy” to promote honeybees and other pollinators. Last month the task force unveiled its long-awaited plan, the National Strategy to Promote the Health of Honey Bees and Other Pollinators. The plan aims to reduce honeybee-colony losses to “sustainable” levels and create 7 million acres of pollinator-friendly habitat. It also calls for more than $82 million in federal funding to address pollinator health.

But here’s something you probably haven’t heard: There are more honeybee colonies in the United States today than there were when colony collapse disorder began in 2006. In fact, according to data released in March by the Department of Agriculture, U.S. honeybee-colony numbers are now at a 20-year high. And those colonies are producing plenty of honey. U.S. honey production is also at a 10-year high.

He goes on to describe how market forces cause beekeepers to enhance the bee population, in spite of other forces that cause decline.

Note that the title of this post is supposed to be (bee?) a pun.

Medicaid, Obamacare, and Bootleggers

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The abstract of a paper by Amy Finkelstein, Nathaniel Hendren, and Erzo F.P. Luttmer reads,

We develop a set of frameworks for valuing Medicaid and apply them to welfare analysis of the Oregon Health Insurance Experiment, a Medicaid expansion for low-income, uninsured adults that occurred via random assignment. Our baseline estimates of Medicaid’s welfare benefit to recipients per dollar of government spending range from about $0.2 to $0.4, depending on the framework, with at least two-fifths – and as much as four-fifths – of the value of Medicaid coming from a transfer component, as opposed to its ability to move resources across states of the world. In addition, we estimate that Medicaid generates a substantial transfer, of about $0.6 per dollar of government spending, to the providers of implicit insurance for the low-income uninsured. The economic incidence of these transfers is critical for assessing the social value of providing Medicaid to low-income adults relative to alternative redistributive policies.

In plain English, this says that most of the benefit in Medicaid goes to the supply side, not to the recipients. The recipients would be better off with cash. I am sure that the same holds true for food stamps, housing subsidies, mortgage subsidies, and so on.

In the Public Choice theory of regulation, the theory of Bootleggers and Baptists holds that regulation is supported by naive do-gooders (the Baptists) and private interests (the Bootleggers). But non-cash assistance programs also fit that model. The naive do-gooders want to subsidize food or health insurance or housing for the poor. These Baptists are cheerfully joined (and ultimately the policies are dominated) by the Bootleggeres, which in this case are the suppliers of food or health insurance or what have you.

Did you see how much the stock prices of health insurance companies and hospitals shot up after the Supreme Court refused to strike down the Obamacare subsidies for states without exchanges?

Yankee Scandinavian Dandy

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Nima Sanandaji writes,

The descendants of Scandinavian migrants on the other side of the Atlantic live in a very different policy environment compared with the residents of the Scandinavian countries. The former live in an environment with less welfare, lower taxes and (in general) freer markets. Interestingly, the social and economic success of the descendants of Scandinavian migrants in the US is on a par with or even better than their cousins in Scandinavia

Pointer from Tyler Cowen. This is political incorrectness, squared. It argues that the Scandinavian welfare state is not the success that its reputation advertises. And it implicitly assumes that some groups enjoy genetic and/or cultural advantages relative to others.

My guess is that few progressives would accept the factual claims and analysis of the author. But if they did, and they wanted to maintain the oppressor-oppressed axis, might they argue that moving to America enables Scandinavians to profit more from being an oppressor class than they are able to profit from remaining in Scandinavia?

The Trade Slowdown

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Bernard Hoekman writes,

Slow trade growth has led to worries that the world economy has run into a ‘peak trade’ constraint, i.e. the ratio of global trade to GDP has reached a limit (Economist 2014). Global trade increased 27-fold between 1950 and 2008, three times more than the growth in global GDP. As a result, according to the World Bank’s World Development Indicators database, the trade-to-GDP ratio for the world as a whole rose from roughly 25% in the 1960s to 60% today. The slow (absence of) growth in trade since 2009 has meant no change in this ratio since 2008. If the recent decline in trade is sustained, this 60% may turn out to be a peak for the world as a whole.

Pointer from Tyler Cowen.

To be clear, “trade” is not slowing down. All economic activity is trade. The ratio of “trade to GDP” is the ratio of trade across borders to total trade, which includes trade that takes place inside national borders. Some thoughts:

1. As the share of GDP devoted to the New Commanding Heights (education and health care) increases, we might see a slowdown in cross-border trade. Note, however, that cross-border trade could pick up if distance learning and distance health care catch on.

2. As incomes rise in China and India, the “Samuelson effect” starts to kick in. That is, the comparative advantage of cross-border trade is reduced. That is, you do more production in China when American wages are 10 times Chinese wages than when they are only 4 times Chinese wages (using made-up numbers here).

3. As the cost of robots comes down, they displace workers in all countries, and this also reduces the comparative advantage of cross-border trade.