Monthly Archives: September 2016

Self-driving Cars and Car Ownership

Posted on by

Joshua Gans writes,

It seems that the sharing economy was a transitional state from private ownership to corporate ownership. The point is that if the technology that allows sharing is good enough, the incentive to own a car — even to rent it out — goes down. And it goes down potentially all the way to zero.

Here is how I look at it:

1. What you want is car rides on demand. A few years ago, you needed to own a car in order to get that, because taxis can take a long time to show up and they are expensive.

2. If Uber and Lyft are reliable and affordable, then you do not need to own a car. The drivers own the cars. But in theory Uber and Lyft could own the cars–if they want to put up with the hassle of figuring out how to make sure drivers do not abuse the vehicles.

3. If autonomous vehicles are possible, then Uber and Lyft do not have to worry about what the driver might do to abuse the car, so it makes sense for the corporation to own the cars.

Status Games

Posted on by

Tyler Cowen writes,

In essence, (some) media is insulting your own personal status rankings all the time. You might even say the media is insulting you. Indeed that is why other people enjoy those media sources, because they take pleasure in your status, and the status of your allies, being lowered. It’s like they get to throw a media pie in your face.

With material goods, we can play a positive-sum game. With status goods, the game is zero-sum. In a footrace, someone finishes first, someone finishes second, and so on. If I move up, someone else must move down.

Political power tends to act like a positional good.

Explaining Preferences for Redistribution

Posted on by

The paper is called Crowding Out Culture: Scandinavians and Americans Agree on Social Welfare in the Face of Deservingness Cues, by Danish researchers Lene Aaroe and Michael Bang Petersen.

Suppose that you survey people’s opinions about redistribution without saying anything about whether welfare recipients are not working because they are unwilling or because they are unable. Then Danes are more favorable to redistribution than Americans. However, if the people surveyed are given information that indicates whether or not the welfare recipients are unwilling to work or unable to work, average opinion among Americans and Danes is indistinguishable. This suggests that Americans do not have (relative to Danes) a cultural aversion to redistribution. Instead, they are more likely to believe that welfare recipients are unwilling to work rather than unable to work.

Pointer from Leda Cosmides in her presentation at this panel, which I again strongly recommend–the video is now up at the link.

Larry Summers Should Read This

Posted on by

Edward L. Glaeser writes,

While infrastructure investment is often needed when cities or regions are already expanding, too often it goes to declining areas that don’t require it and winds up having little long-term economic benefit. As for fighting recessions, which require rapid response, it’s dauntingly hard in today’s regulatory environment to get infrastructure projects under way quickly and wisely. Centralized federal tax funding of these projects makes inefficiencies and waste even likelier, as Washington, driven by political calculations, gives the green light to bridges to nowhere, ill-considered high-speed rail projects, and other boondoggles. America needs an infrastructure renaissance, but we won’t get it by the federal government simply writing big checks. A far better model would be for infrastructure to be managed by independent but focused local public and private entities and funded primarily by user fees, not federal tax dollars.

Alex Tabarrok calls the entire article excellent.

UPDATE: Although John Cochrane agrees with Glaeser, but he is more charitable to Summers than I would be.

How to Change Minds

Posted on by

Maria Popova writes,

Nearly half a millennium before modern psychologists identified the three elements of persuasion — attunement, buoyancy, and clarity — French physicist, philosopher, inventor, and mathematician Blaise Pascal (June 19, 1623–August 19, 1662) intuited this mechanism as he arrived at a great truth about the secret of persuasion: Pascal came to see that the surest way of defeating the erroneous views of others is not by bombarding the bastion of their self-righteousness but by slipping in through the backdoor of their beliefs.

Pointer from Olivia Goldhill.

Borrowing a Hansonian locution, I would say that argument is not about changing minds. Instead, it is about playing status games. You make points that lower the status of those with whom you disagree, and this in turn raises your status among those with whom you agree.

As Popova’s article explains, if your goal is to change someone’s mind, then the best approach is to start by talking about what seems right about the person’s beliefs. Then allow the person to come around to the problems with their thinking and, ultimately, to the better alternative.

Perhaps my Three Languages of Politics can be useful in this regard.

Price Discrimination Explains Everything

Posted on by

A commenter writes,

Standard economics that is taught in intro economics says that higher prices induces greater supply. Under certain restrictive assumptions that is generally true.

But there are exceptions. One is when the bulk of the firms costs are fixed and variable costs are a minor cost of bring the product to market

I tend to think of this as the rule rather than the exception, and I agree that introductory economics classes should give it more attention. I would say to my high school econ students that price discrimination explains everything. By that, I mean that in real-world business, the challenge is often recovering fixed cost. Marginal cost is often low, so you want to charge a low price for use on the margin. But you want to try to extract a high price from people willing to pay.

For one example among money, if you are a cell phone service provider, rather than charge the same price per unit of data for all customers, you try pricing tiers. $X per month for 0-2 gigs, $Y a month for 2-4 gigs, etc. You are trying to recover more of your fixed costs from the big users, and at the same time your users feel that the marginal cost is zero, at least until they bump up against the next tier of usage.

Cable company bundling is another classic example of price discrimination explains everything. So are store coupons. So is the price of popcorn at movies.

Evidenced-Based Policy

Posted on by

Robert Doar writes,

Momentum for evidence-based policymaking is building at all levels of government, from federal legislation funding rigorous evaluations to the bipartisan Commission on Evidence-Based Policymaking to counties looking to make funding decisions based on results.

I am afraid that my reaction is to be cynical. When you make funding decisions for programs based on evidence, what will change will be the reported evidence, not the programs.

During the Vietnam War, Secretary of Defense Robert McNamara was famous for demanding statistical evidence that strategies were working. He got what he was asking for, but the statistical evidence did not capture what was really happening.

To cite another example, the Stiglitz-Orszag paper on Fannie Mae and Freddie Mac appeared to be evidence-based. Recall that they wrote,

This analysis shows that, based on historical data, the probability of a shock as severe as embodied in the risk-based capital standard is substantially less than one in 500,000 – and may be smaller than one in three million. Given the low probability of the stress test shock occurring, and assuming that Fannie Mae and Freddie Mac hold sufficient capital to withstand that shock, the exposure of the government to the risk that the GSEs will become insolvent appears quite low.

Within any organization, including a profit-seeking business, one has to be cynical about “evidence.” Show me a CEO who always believes every report he or she receives from middle management, and I will show you a company that is at high risk for going bankrupt very soon. I have never been a large-company CEO, but if I were I would make a point of setting up internal checks and balances so that I did not have to rely on any one set of carefully crafted reports.

You are entitled to ask, “How can you be against evidence? Evidence is bound to make policies better than if evidence is ignored.”

My response is that I am afraid that evidence will be distorted to make spending programs and regulations appear better than they really are. I will take public choice theory over misleading evidence, any day.

A Searle Thought to Ponder

Posted on by

In Making the Social World, John R. Searle writes,

If we assume that democracies are defined in part by majority rule as expressed in elections, then another feature of successful stable democracies is that few, if any, of the important problems of life are determined by elections. Such questions as who will live and who will die, who will be rich and who will be poor, cannot be decided by elections if the country is to be stable. Why not? Elections are too unpredictable for people to be able to plan and live their lives based on the outcome of elections. If you knew that if your opponents won the next election, you were likely to be thrown into a concentration camp, or executed, or have all your property confiscated, you could not make stable and enduring life plans. In successful democracies, it does not matter who gets elected. . .I have noticed that life pretty much goes on after the election as it did before, regardless of who gets elected.

Some thoughts.

1. It is of course in the interest of political activists and journalists to argue otherwise–that “this is the most important election in history,” that the wrong choice will lead to disaster, etc. Their warnings typically do not turn out to be valid, although some day that could change.

2. This is an argument for keeping the stakes in politics low, and thus the argument tends to weigh in on the libertarian side of things. However, I doubt that those who favor activist government will think much of the point that “elections are too unpredictable.”

What I’m Reading

Posted on by

1. Philosopher John R. Searle’s The Making of the Social World, published in 2010. One excerpt:

How do governments, so to speak, get away with it? That is, how does the government manage to be accepted as a system of status functions superior to other status functions?. . .governmental power is a system of status functions and thus rests on collective recognition or acceptance, but the collective recognition or acceptance, though typically not itself based on violence, can continue to function only if there is a permanent threat of violence

…All political power is a matter of status functions, and for that reason all political power is deontic power.

For some reason, my brain keeps wanting to read “deontic” as “demonic.”

Anyway, I think of a status function as a social convention that assigns people or objects certain properties. I think of a deontic power as a right or obligation.

So, imagine a busy intersection. We could put up a traffic light and by general consent give it a status function to regulate traffic flow. Or we could let an individual direct traffic. For the status function to work, we need to be willing to follow the social convention of obeying the signals, either from the stoplight or from the individual.

Next, suppose that we recognize that the individual wears a uniform and a badge, and we recognize that the individual is permitted to impose fines on people who do not obey. These are stronger deontic powers, and they will deter drivers from trying to cheat the system. We can think of that move as a metaphor for government by consent (although the consent may not be explicit or universal).

As of this writing, I have yet to finish the book. By the time this post goes up, I may have finished a first read, but the book will require some re-reading. It seems to me that Searle is likely to turn out to be on my side of a disagreement with Michael Huemer.

2. Ryan Avent’s new book (not yet out) The Wealth of Humans. I attended a discussion of the book the other night. As the conversation jumped around, I found myself frequently thinking, “Show me the model.” That is out of character for me, because I have spent a lot of the last few years criticizing economists’ use of formal models. But as people tried to speculate about capital accumulation, wealth distribution, and productivity differentials, I found that I could not follow what was being said. I needed to think in terms of supply and demand curves crossing, income adding up to output, and output equal to labor input times output-per-worker. It was hard to get that in a purely verbal discussion, particularly when people were speaking extemporaneously.

James Tobin’s Presidential Address

Posted on by

Robert Waldmann brings it up. Tobin delivered it in 1971, and it was published in 1972.

Pointer from Mark Thoma.

As I remember it, Tobin suggested thinking of an economy with two industries and wages rigid downwards. Suppose that demand shifts away from industry X to industry Y. Because wages do not fall in industry X, you get unemployment there. Because wages do rise in industry Y, the overall rate of inflation goes up. Note, however, that with more inflation, the real wage in X falls, which means less unemployment there than otherwise.

This simple story gives you an explanation for both stagflation and the Phillips Curve. The point that Waldmann is making is that macroeconomists did not need to take the detour that they took in the 1970s. They could have stayed on the path that Tobin laid out for them. My thoughts:

1. It is amazing how much better you can do if you break up the GDP factory into two industries. I think you can do even better with more disaggregation, but the modeling would be much hairier.

2. I agree that macro would have done better to follow this path. However, macro still would not be very good. The problem of too many plausible causal factors chasing too little data is insurmountable. See my science of hubris paper, as well as the recent Paul Romer screed.

3. The sociology-of-economists question of how macro remained (and continues to be) stuck for so long is quite interesting. See Daniel Drezner’s piece (for which I also thank Thoma). As you know, my explanation is that Stan Fischer became the Genghis Khan of macro.