Division of Labour: January 2007 Archives
January 31, 2007
Great Moment in Biofuels

This NYTimes article should (but probably won't) serve as a cautionary tale.

Just a few years ago, politicians and environmental groups in the Netherlands were thrilled by the early and rapid adoption of “sustainable energy,” achieved in part by coaxing electrical plants to use biofuel — in particular, palm oil from Southeast Asia.But last year, when scientists studied practices at palm plantations in Indonesia and Malaysia, this green fairy tale began to look more like an environmental nightmare.

Rising demand for palm oil in Europe brought about the clearing of huge tracts of Southeast Asian rainforest and the overuse of chemical fertilizer there. ... The increasing demand has created damage far away. Friends of the Earth estimates that 87 percent of the deforestation in Malaysia from 1985 to 2000 was caused by new palm oil plantations. In Indonesia, the amount of land devoted to palm oil has increased 118 percent in the last eight years.

Peat is an organic sponge that stores huge amounts of carbon, helping balance global emissions. Peatland is 90 percent water. But when it is drained, the Wetlands International scientists say, the stored carbon gases are released into the atmosphere.To makes matters worse, once dried, peatland is often burned to clear ground for plantations. The Dutch study estimated that the draining of peatland in Indonesia releases 660 million ton of carbon a year into the atmosphere and that fires contributed 1.5 billion tons annually. The total is equivalent to 8 percent of all global emissions caused annually by burning fossil fuels, the researchers said.

But, as with all socialist enterprises, they'll get it right next time:

“Yes, there have been bad examples in the palm oil industry,” said Arjen Brinkman, a company official at Biox, a young company that plans to build three palm oil electrical plants in Holland, using oil from palms grown on its own plantations in a manner that it says is responsible. “But it is now clear,” he said, “that to serve Europe’s markets for biofuel and bioenergy, you will have to prove that you produce it sustainably — that you are producing less, not more CO2.”

Remember the success of synfuels? Me, neither. Neither, it appears does Time Magazine; here's a follow-up article.

Posted by Wilson Mixon at 04:48 PM in Economics

What's all the Caracas?

Well, this one should be fun, if predictable, to watch.

Hundreds of [Hugo] Chavez supporters wearing red -- the color of Venezuela's ruling party -- gathered in the plaza, waving signs reading "Socialism is democracy" as lawmakers read out passages of the law giving Chavez special powers for 18 months to transform 11 broadly defined areas, including the economy, energy and defense.

Chavez, a former paratroop commander who easily won re-election in December, has said he will use the law to decree nationalizations of Venezuela's largest telecommunications company and the electricity sector, slap new taxes on the rich and impose greater state control over the oil and natural gas industries.

The law also allows Chavez to dictate unspecified measures to transform state institutions; reform banking, tax, insurance and financial regulations; decide on security and defense matters such as gun regulations and military organization; and "adapt" legislation to ensure "the equal distribution of wealth" as part of a new "social and economic model."

Yeah, "new;" no one's ever tried that before. At least Hillary will be provided with a model upon which to base her Presidential platform.

"Viva President Hugo Chavez, long live socialism!" National Assembly President Cilia Flores said as she proclaimed the law approved. "Fatherland, socialism or death!"

If history is any guide, she'll at least get the latter two.

Posted by Tim Shaughnessy at 03:08 PM in Politics

Economic Freedom of the World: An Interactive Map

The Cato Institute has created a nifty interactive map using the Economic Freedom of the World index.

Posted by Robert Lawson at 01:51 PM in Economics


Michael Medved does the best he can to make a logical argument. But then, his best is none too good.

When Reagan won the Presidency in 1980, crushing the incumbent Jimmy Carter 51% to 41%, he not only overcame a third party vanity race by a former Republican Congressman named John Anderson (his “Independent” Party drew 6.6% of the vote), but he also triumphed over by far the strongest Libertarian Party candidate in Presidential history.
Amazingly enough, Ed Clark, the Libertarian standard bearer, won almost a million votes (921,188) for 1.06% of the total.
To rational observers, a national campaign that wins only 1% of the vote looks pointless and pathetic, but by Libertarian standards the Clark campaign represented a veritable juggernaut, and the party’s breathtaking summit of achievement. Clark’s performance more than doubled all subsequent Libertarian nominees, even though some of them (like two time loser Harry Browne) raised and spent far more money for their sad little races. In terms of their percentage of the popular vote, Libertarian presidential candidates since the high-water mark of 1980 have drawn between 0.24% (David Bergland in 1984) and 0.5 (Harry Browne in his first race of 1996). Most recently, that burning hunk of unstoppable charisma Michael Bednarik earned a paltry 0.3% of the popular vote – less than one-third the showing that Ed Clark managed 24 years earlier.
The point isn’t merely that the Loser-tarian Party has moved decisively in the wrong direction (you don’t build majorities by losing two-thirds of your voters), it’s that they happened to succeed best against the finest conservative candidate in recent history.
In other words, the Libertarians lie or at least delude themselves when they claim that they will win votes by drawing people who are disillusioned with both big government Democrats and me-too Republicans. They drew more votes when running against the unequivocally conservative Ronald Reagan than they did against the likes of Bob Dole, either President Bush, or Gerald Ford for that matter.
Thus, the argument that they are pushing the Republican Party in a more conservative direction by taking away votes of die-hard conservatives is, like so much else about the Libertarian Party, a complete fraud.

Three facts the inexplicable Medved might want to consider:

1. Reagan had for years taken a strong "Government isn't the solution, government is the PROBLEM" line. He was not unequivocally conservative. I myself worked in the Reagan administration, for the Federal Trade Commission, precisely because he had strong libertarian sentiments in regulation and tax policy. These came to little, I agree, but Reagan was more complex than GW Bush, who is "unequivocally conservative," all right. And you can HAVE Mr. Bush; I don't want him anymore.

2. Reagan was running against JIMMY CARTER. This was Carter after the rabbit attack, after the flaccid reaction to the storming of our embassy in Tehran and the taking of hostages. That's not exactly the Dems' first team. And the Carter monetary policy and regulatory policy (Remember Michael Pertschuk?) had a big role in expanding the Libertarian vote. So, the reasons Clark did well were (1) He was a pretty good candidate, and (2) he was running against Carter, a "Let's Mate with the State!" guy from way back. Carter sent folks running to Reagan if they were gullible, and to Clark if they saw things clearly. That there are more gullible people than clear-thinking ones is not exactly front-page news.

3. In a dozen ways, "Loser-tarians" have already won. The CATO Institute, REASON mag, and a lot of other libertarian perspective are given respect and credence in DC policy debates and in the state houses.

Our candidates, perhaps, have not been competitive in national races, but that is just Duverger's Law in action. It's not as if any OTHER third party has made any inroads, either. The state-sponsored parties don't make it very easy. Imagine that Coke and Pepsi go to write their own antitrust laws; there wouldn't be any 7-Up on the shelves. "Shelf crowding, confuses the customers!"

And it may be true that Libertarians wouldn't be very good in office if we got there. But if we can reduce the power, scope, and intrusiveness of government by making persuasive arguments, who cares if we actually serve in office? The law, and lots of regulations, have come a long way toward what libertarians advocate in the last 25 years.

Posted by Michael Munger at 01:40 PM in Politics

Is there dead weight loss from Valentine's Day?

Unlike the spending at Christmas, Valentine's Day spending might be more akin to an insurance payment. My Financial Adviser long ago suggested that we table V-day spending - whew! The National Retail Federation anticipates the average expenditure to be a bit more than $110!

More here

Posted by Craig Depken at 10:39 AM in Economics

Draft Walter Williams

Bruce Tinsley writes in his comic strip yesterday (1/30/07), Mallard Filmore:

Dear Walter Williams, Economist, Columnist, Bon Vivant, and Frequent 'Guest Host' of the Rush Limbaugh Show...I think it's high time you were reviled, vilified, slurred, demonized, and discriminated against by the media. I DEMAND that you run for PRESIDENT!!

Hear, hear!

UPDATE: Alex at MR is less concerned about copyright than I am. He posted the comic here.

Posted by Robert Lawson at 08:59 AM in Economics

Questions about the Bush Medical Insurance Proposal

Arnold Kling writes:

Ramesh Ponnuru writes,

What they're saying is that, yes, expensive health plans would be taxed more [under the recent Bush health proposal]. But people would respond to the new policy by scaling back their health plans. Thus they’d avoid the tax.

...Snow and Baicker are right to say that if the proposal becomes law, compensation packages will adjust, with expensive plans being scaled back and the savings passed on in higher wages. But those higher wages will be taxed. No matter how the compensation package is rearranged, the percentage of compensation that is taxed will go up for these people.

Ponnuru is correct, as far as I can see. I wonder what Ms. Baicker will say here. Personally, I would make 100 percent of employer-paid health care benefits subject to tax, and then cut tax rates. That is known as tax reform.

Kling's post reminded me of a couple of questions I've been pondering since hearing about the Bush plan:

1. While much attention (e.g., Kling's post) has been paid to people with so-called gold plated insurance policies, how does the Bush plan affect people with less expensive health insurance plans? Under the Bush policy, every family gets a $15,000 tax deduction as long as they have any sort of medical insurance policy. It seems, therefore, that not only does the Bush policy make the marginal tax effect of another dollar of cash/noncash compensation equal for people with policies costing more than $15k, but that it does the same for people having policies costing less than $15k. Hence, all consumers, not just consumers with expensive medical insurance policies, will become more careful shoppers for medical insurance policies.

2. Are flexible spending accounts a loophole that could be exploited to have medical spending be tax preferred (at the margin)? I haven't seen anyone address this question, but I think so. I skimmed a White House briefing with CEA member Katherine Baicker and saw no mention of FSAs.

Posted by E. Frank Stephenson at 08:46 AM in Economics

January 30, 2007
Going green means less green

It always seemed to me that writing a dissertation was like working in a restaurant: after it's over, you never want the experience again. But, maybe things change because I still like pizza, and I still found interesting this article on benefits being capitalized into house prices, like my dissertation.

"if home owners invest in solar panels, wind turbines or energy efficiency measures, this is likely to increase the value of their properties and result in higher council tax bills," says a British House of Commons trade and industry committee report. "Given the potential climate change and security benefits of such investments, homeowners should not be penalised in this way."

The way the story reads, it sounds like Brits might consider high taxes to be a bad thing, not sure why. If it's a wash financially, we'll see if Brits invest more or less in these green gadgets. Though I suppose there are the nonpecuniary benefits of feeling like you're doing something for the planet (like chopping up birds in your wind turbines, oh wait...)

Posted by Tim Shaughnessy at 06:22 PM in Economics

A war on drugs c. 1907

The Jan. 30, 1907 NYT reports on the bizarre incentives (and extremely wishful thinking) embodied in the "War on Cocaine" in India:

Consul General William H. Michael of Calcutta advises the Bureau of Commerce and Labor that the Government of India has prohibited the bringing in of cocaine by means fo the post, and has restricted its importation by any other means to cases in which it is imported by persons, or by their authorized agents, who have been especially permitted to import the drug by a local Government or administration. In consequence of this order the Government has also empowered certain postal officials to search for any cocaine in course of transmission by post and to deliver all such to the nearest excise officer.
At least India singled out a particular drug with which to go to war. However, the particular form of warfare would seem ripe for corruption and one wonders how long before it was "reformed."

Posted by Craig Depken at 10:27 AM in Culture

January 29, 2007
Two New Papers Out

I am currently reading papers from the January 2007 issue of Public Choice, which is fantastic. I hope to blog more details soon. For now, a blug on two new papers.

First, my eminent domain paper with Sasha Totah in The Independent Review. We examine the Kelo backlash and evaluate whether state laws in response tend to strengthen property rights. Where state lawmakers eschew symbolic politics and resist rent protection by those with interests in strong eminent domain powers, property rights will be better enforced after Kelo.

Second, "Strategic Institutional Choice: Voters, States and Congressional Term Limits," with Todd Jewell in a forthcoming issue of Public Choice. Paper here (subscription required) Abstract:

States’ choices on term limits are quantified as a multiple-categorical variable capturing variation in the type of limits passed. Measures of relative political influence in Congress explain much of this variation. Using 1992 data on the American states, the model controls for unobserved heterogeneity due to voter access to direct democracy in some states. At 2002 values for congressional tenure and federal spending, the model predicts approximately eight to ten additional states would choose to limit their own members’ terms but cannot under a Supreme Court ruling. We discuss implications for institutional federalism and the potential passage of similar political institutions across the states.
Posted by Edward J. Lopez at 04:34 PM

Huerta de Soto's view of banking history

The second installment of my review of Jesus Huerta de Soto’s book, Money, Bank Credit, and Economic Cycles, appears today on the Free Market News Network. According to Huerta de Soto’s reading of history, medieval banks that provided fractional-reserve demand accounts were "legally corrupt" and "disgraceful". I suggest an alternative view:

[M]edieval banks specialized in providing payment services by account transfer. If a customer's purpose was to use bank payment services, that purpose did not require 100-percent reserves. Payment services could in fact be more economically provided by a demand account against which the bank held fractional reserves.
Posted by Lawrence H. White at 01:40 PM in Economics

On disaster damages c. 1907

From the Jan. 29, 1907 NYT:

J. H. Howells, one of the leading buyers of cattle and sheep in the West, said to-day that cattelmen would lose more than $1,000,000 because of the severe weather.

From EH.net, that's about $22 million in 2005 dollars.

Posted by Craig Depken at 01:09 PM in Economics

How Times have changed c. 1907

From the editorial page of the January 29, 1907 NYT:

The number of cigars smoked is an index of the Nation's prosperity. The cigar manufactories have doubled their output in eight years, the number for the fiscal year 1905-1906 being 8,070,672,649, as compared with 4,063,169,097 for the year ended June 30, 1898. The United States Tobacco Journal says that the greatest expansion of the cigar industry has taken place in the past two years. Its figures for the increase by States since 1898 range from 16 per cent. in Missouri to 2,000 per cent. in South Carolina.

U.S. population in 1905? 83,822,000 with 42,965,000 males. This would imply per-capita cigar consumption of 96 cigars - for every man, woman, and child!! If we take out those who were less than 16 in 1905, the number of cigars per-person increases to 153 per person. If we imagine that, say, 90% of all cigars were smoked by men over the age of 16, this takes the per-person cigar consumption to 267.

The 1900 census indicated 76,094,000 individuals in the United States. This would imply per-capita consumption of cigars in 1898 of approximately 54 cigars per year. Indeed, cigar consumption was dramatically on the increase. While this did correspond with an increase in national income and wealth, it is more likely that smoking follows a Kuznitz-type curve: smoking is a normal good at lower ranges of income but at some level of income/wealth becomes an inferior good.

We shouldn't blame the NYT editorial page in 1907, however. It has taken us the better part of the past 100 years to become wealthy nd interdependent enough to condemn smoking - both in public and, increasingly, in private.

Posted by Craig Depken at 01:06 PM in Economics

On the price of street sweepers c. 1907

From the Jan. 29, 1907 NYT:

Assemblyman Hackett of New York introduced a bill in the House to-night which increases the salary of the drivers, hostlers, and sweepers of the New York Street Cleaning Department from $720 to $820 a year.
In 2005 dollars, that's $15,435.35 to $17,579.14.

Today, an entry-level position with the New York Department of Sanitation carries a wage of...$26,000 per year.

Posted by Craig Depken at 12:51 PM in Economics

Self-awareness can be an elusive thing

Back last February, George Will wrote a column noting that survey data tended to show that self-identified conservatives are more likely than liberals or moderates to describe themselves as "very happy." Will then speculated as to why this is the case.

Following common practice among college teachers, I post cartoons and other op-ed-type materials on my office door and on the bulletin board space next to my class notices, etc. I enjoyed this particular Will column, and posted the Birmingham News version of it, titled "Conservatives happier; maybe they expect less", on my bulletin board.

Well, last week someone decided to respond to Will by defacing the column, drawing an arrow from the word "Conservatives" in the title and appending the word "Bullsh!t." In addition, someone (probably the same person?) stuck a push-pin into the little photo of Will's head that accompanied the column.

I plan to leave this on the bulletin board until I retire.

Coincidentally, this minor act of know-nothing vandalism came to my attention the same day Steven Hayward posted this related item on No Left Turns.

Posted by Mike DeBow at 12:47 PM in Misc.

The Power of Choice -- Tonight

Please join us for the WOSU broadcast of:

The Power of Choice:
The Life and Ideas of Milton Friedman

Monday, January 29th
10:00 – 11:30 p.m.
LC 202
Capital University

Refreshments will be served!

The amazing life story of Nobel Prize winning economist Milton Friedman told with stories of the impact of his ideas in the United States and throughout the world. No one person in the 20th century had such an impact on economic thinking worldwide as Milton Friedman. This university professor from the American Midwest became a vocal champion of our freedom to choose, unashamedly engaged in the public debate on the role of government in a free society. This biography of Milton Friedman explores both his scientific contributions and the impact of his ideas on the world stage. To this end, the producers traveled to Estonia, Chile, England, and throughout the United States to tell his story.

Posted by Robert Lawson at 09:13 AM

January 28, 2007
Big CarbonCap and Other Pigs at the Trough

Kimberly Strassel nails the rent seeking companies ("Big CarbonCap" in her words) who came out last week for a cap-and-trade carbon reduction program:

And it happens that the cap-and-trade climate program these 10 jolly green giants are now calling for is a regulatory device designed to financially reward companies that reduce CO2 emissions, and punish those that don't.

Four of the affiliates--Duke, PG&E, FPL and PNM Resources--are utilities that have made big bets on wind, hydroelectric and nuclear power. So a Kyoto program would reward them for simply enacting their business plan, and simultaneously sock it to their competitors. Duke also owns Cinergy, which relies heavily on dirty, CO2-emitting coal plants. But Cinergy will soon have to replace those plants with cleaner equipment. Under a Kyoto, it'll get paid for its trouble.

DuPont has been plunging into biofuels, the use of which would soar under a cap. Somebody has to cobble together all these complex trading deals, so say hello to Lehman Brothers. Caterpillar has invested heavily in new engines that generate "clean energy." British Petroleum is mostly doing public penance for its dirty oil habit, but also gets a plug for its own biofuels venture.

Finally, there's General Electric, whose CEO Jeffrey Immelt these days spends as much time in Washington as Connecticut. GE makes all the solar equipment and wind turbines (at $2 million a pop) that utilities would have to buy under a climate regime. GE's revenue from environmental products long ago passed the $10 billion mark, and it doesn't take much "ecomagination" to see why Mr. Immelt is leading the pack of climate profiteers.

The next little rent seeking piggy is Philip Morris. From Thursday's WSJ:

From the point of view of the nation's largest cigarette maker, Philip Morris, the shift in power could be a blessing in disguise. That's because it could help ease the way for legislation to give the Food and Drug Administration new powers to control how cigarettes are made and marketed. That, ironically, could help Philip Morris maintain its current market domination.

Most tobacco companies are opposed to FDA regulation of cigarettes...

Philip Morris, however, has embraced the idea that the FDA should have broad powers over tobacco...

The company's rivals contend that new restrictions would hurt them more because their brands are much less known than the famous Philip Morris Marlboro brand. With marketing potentially dramatically curtailed by FDA regulation, they would have fewer ways to promote themselves. The result, they say, would be that Marlboro would keep its market share. Philip Morris USA's share of the retail cigarette market was 50.4% as of the third quarter of 2006. Competitors such as Reynolds American Inc.'s R.J. Reynolds Tobacco Co., which markets Camel and Kool cigarettes, gripe that FDA regulation is the "Marlboro Monopoly Act."

And then we have the Bush energy proposal tilted toward the Big Three automakers. From Thursday's WSJ (sub req):

President Bush's broad new proposals to change the nation's health-care and energy policies have an important but little-noticed common thread: White House aides hope they will boost the ailing American auto industry, whose pleas for help have largely been ignored by Washington in recent years.

The energy proposals -- crafted in a way that would erase some of the advantages enjoyed by the U.S. industry's Japanese competitors ...

Posted by E. Frank Stephenson at 03:38 PM

Best Line I Read in Friday's WSJ

Cameron Stracher, publisher of New York Law School Law Review, in Friday's WSJ (p. W11; sorry no link):

"The hordes of English majors who fill [law school] classes might think twice if they knew that economics and mathematics--with their emphasis on problem-solving--are the best preparation for a career in law."

Posted by E. Frank Stephenson at 03:16 PM in Economics

January 27, 2007
Chip Blips

Moore's Law fights the heat on several fronts.

Intel announces processors built with hafnium in substitution/addition to silicon, touting it as the biggest breakthrough in 40 years. It'll be on their new "Penryn" chips this year.

IBM said it's doing something similar. From this macdailynews.com story:

"The work by Intel overcomes a potentially crippling technical obstacle that has arisen as a transistor’s tiny switches are made ever smaller: their tendency to leak current as the insulating material gets thinner. The Intel advance uses new metallic alloys in the insulation itself and in adjacent components," Markoff reports. "Word of the announcement, which is planned for Monday, touched off a war of dueling statements as I.B.M. rushed to announce that it was on the verge of a similar advance."

Cool and the gang. But "Hafnium Valley" just doesn't have the same ring to it.

Menawhile, HP wants to pack more transistors on a chip using nano tech.

Posted by Edward J. Lopez at 12:38 PM in Economics

Future known via CBO

The CBO recently released its latest "forecast" on what our economy will be doing in 10 years. Take it for what it's worth:


Full document here

Posted by Craig Depken at 11:35 AM in Economics

January 25, 2007
Milton Friedman Day

Thanks very much to Lawson for posting Jim Gwartney's essay on Milton Friedman. As far as I can tell, DOL has been silent on the imminent Milton Friedman Day, Monday January 29.

Sponsored by Free to Choose Media, among others, the day's events will include a "day of national debate," a YouTube video contest, heavy hitters blogging on The Economist (starting today), and the premier of the much anticipated documentary "The Power of Choice: The Life and Ideas of Milton Friedman," by the creator of the Free to Choose series, Bob Chitester.

There is much, much more to be found at the Milton Friedman Day website (www.miltonfriedmanday.org), where it's not too late to enter your own event. The Atlas Foundation has a lot on their website as well. Enjoy.

Posted by Edward J. Lopez at 02:46 PM in Economics

Crowding Out Private Medical Insurance

With much attention focused on universal medical insurance, the abstract of a new NBER Working Paper reminds us that government insurance often crowds out private insurance:

The continued interest in public insurance expansions as a means of covering the uninsured highlights the importance of estimates of "crowd-out", or the extent to which such expansions reduce private insurance coverage. Ten years ago, Cutler and Gruber (1996) suggested that such crowd-out might be quite large, but much subsequent research has questioned this conclusion. We revisit this issue by using improved data and incorporating the research approaches that have led to varying estimates. We focus in particular on the public insurance expansions of the 1996-2002 period. Our results clearly show that crowd-out is significant; the central tendency in our results is a crowd-out rate of about 60%. This finding emerges most strongly when we consider family-level measures of public insurance eligibility. We also find that recent anti-crowd-out provisions in public expansions may have had the opposite effect, lowering take-up by the uninsured faster than they lower crowd-out of private insurance.

A 60% crowd out rate is quite large--for every 5 people taking up government medical insurance, 3 drop private insurance. This is an awfully expensive price for covering 2 additional people.

Posted by E. Frank Stephenson at 01:32 PM in Economics

The smoking gun?

I have little to stay about the Scooter Libby case. It all seems a bit of an overkill. But then there are certain principles that our Democracy must not sacrifice, such as lying to a grand jury....er, wait a second.

Anyway, the DOJ has posted some of its "smoking gun evidence" here. I use the term loosely because with all the blacked-out information on the Schmall notes it is hard for us mere mortals to tell what is going on.


Posted by Craig Depken at 11:28 AM in Politics

January 24, 2007
On the nature of conflict

The Human Security Centre has released it's updated report on the number of pending conflicts. They also report a time series of the number of conflicts over time (among other things). The data are interesting, although difficult for me to confirm at times.

Here's a time plot of the post-WWII period (the vertical line is at 1989 - the end of the Soviet Union)


It is interesting how the nature of war has changed. Is this the result of the credible threat of WMDs? Is world-wide bloodshed worse under a regime of MAD (mutually assured destruction)? Perhaps smaller conflicts are allowed to simmer because the bigger players are reluctant to get involved for fear of the bigger toys coming into play?

Posted by Craig Depken at 05:38 PM in Politics

Berndt Coffee: Why Fair Trade Fails

Coffee is grown mostly in LDCs but consumed mostly in high income countries. In coffee countries, the economic rents created by free trade are distributed unequally among distributors, plantation owners, growers, and harvest workers. But risk in this volatile industry is spread around pretty evenly. There is rightfully much concern for the economic welfare of the poorest, most economically vulnerable segments of the supply chain (viz. pickers, especially migrants).

Advocates of fair trade (I'll skip the scare quotes; HT McCloskey) promote their cause on the seemingly unobjectionable premise that consumers in rich countries ought voluntarily to pay a small premium for their coffee, which, when passed on to coffee workers in poor countries, will make a huge difference in their well being. An administrative process identifies worthy populations in coffee countries and arranges to target the surplus from your over-priced latte toward the poor folks we all want to help. Sounds great. Problem is you have political institutions allocating rents.

This is the message delivered in a new Mercatus Center working paper by Colleen Berndt, ABD in economics at GMU and my colleague at San Jose State. The paper, "Is Fair Trade Fair? Evidence from Costa Rican Coffee Farms," is the product of extensive field research supported by Mercatus Center's Global Prosperity Initiative. (Summary here.)

First, on what is fair trade:

Fair Trade covers artisans and farmers with goods which include coffee, tea, cocoa, bananas, sugar, honey, rice, flowers, cotton, even sports balls. Items become Fair Trade items through a certification process. The Fairtrade Labeling Organization (FLO), based in Germany, certifies producing organizations that comply with a "set of minimum standards for socially responsible production and trade." These standards...detail member farm size, electoral processes and democratic organization, contractual transparency and reporting, environmental standards, to name only a few. FLO is the only organization which certifies the producers. Other supporting organizations, such as TransFair USA, uphold the standards, certifying the products themselves, and the intervening organizations which bring the product from the producer to the consumer. TransFair USA's label allows the US consumer to identify goods produced under FLO's Fair Trade Standards.

Next, on why fair trade doesn't achieve the seemingly onobjectionable. The FLO business model relegates both membership decisions and rent distribution to a committee decision process.

Fair Trade regulations specify that individual farmers sell their beans to a Fair Trade cooperative. No other purchaser, such as a multinational corporation, is eligible for certification as a Fair Trade organization—only cooperatives are. The cooperative must employ democratic procedures to determine how the Fair Trade premium is distributed and to determine leadership. Members may opt to use the funds to build schools, medical clinics, to hold emergency funds to which members can apply in times of needs, or may disburse the funds to the member farmers.

Individual farms cannot be certified. Nor can farm workers. Only cooperatives. And joining a coop requires sinking substantial costs. Much of the rents created by the fair trade premium are absorbed by the coop's certification costs, standards enforcement, and administrative overhead. Even under ideal circumstances free from corruption and rent dissipation, the remaining rents accrue to coop members, who are overwhelmingly small landowners. Not the poorest and most vulnerable, e.g. migrant farm workers.

There's more to it than just a bad business model, of course. See the paper for yourself. Fun and very informative.

See also Ben Powell and David Skarbek on sweatshops.

Why do I care? It is difficult to find a good cup of non-fair trade coffee in my neighborhood.

Posted by Edward J. Lopez at 04:58 PM in Economics

Appeals for help c. 1907

Over the past two years of reading the NYT from 100 years ago, I have mentioned multiple instances in which disasters struck and there was little inclination for the Federal government to provide extraordinary aid nor was there an expectation for the government to do so. Admittedly, this was pre-income tax, pre-New Deal, and I am sure there was a much different attitude between the citizenry and their governments.

Because of this general attitude, the following article in the Jan. 24, 1907 NYT caught my eye:


WASHINGTON, Jan. 23 - This telegram was received by the Inter-State Commerce Commission to-day from R. M. Kennedy at New Rockford, N.D., a town of about 700 inhabitants on a branch line of the Northern Pacific Railroad:

"Must have aid at once. No fuel for ten days; no groceries for three weeks. Cars of fuel on road for six weeks not received. People are suffering."

An effort will be made to get fuel and food to the town.

Granted this is the telegraph age, and telegraphing words was (marginally?) more expensive at that time. Yet, how austere is the appeal. The lack of emotion and exported guilt is striking.

Given recent events in the Dakotas, and the lack of cries for help, demands for FEMA directors to step down, and for Pres. Bush to "do something," perhaps the reputation for heartiness among the people of that region is well deserved.

Today, the web-site for New Rockford proclaims the city is up to 1,600 inhabitants. If I have worked my solar calculator correctly, that implies an annual population growth rate of 0.0083.

Posted by Craig Depken at 12:41 PM in Culture

Oh really, George?

President Bush last night said, “it would not be like us to leave our promises unkept, our friends abandoned, and our own security at risk.”

Actually, it would be like us...

Posted by Robert Lawson at 11:30 AM in Politics

The scourge of immigrant labor

When are our political leaders going to wake up and recognize the scourge of immigrant sheep taking our jobs!?

Some California wine-makers have hired a new kind of work force that is cost-effective and easy to please. Better still, they will never ask for a raise. John Blackstone visits one such wine-maker.

Video here.

UPDATE: And now "future people" are taking our jobs too! Stop the insanity! Video here. [HT: Brandon L.]

Posted by Robert Lawson at 10:05 AM in Economics

January 23, 2007
Remembering Milton Friedman (1912-2006)

By James Gwartney

Milton Friedman, who passed away at age 94 this November, was awarded the Nobel Prize in 1976, but as high an honor as that is, it does not begin to illustrate the magnitude of his contribution to the world. Friedman was the supreme spokesman for free markets, limited government, and a free society. He was a scholar’s scholar, but capable of explaining complex ideas to the common man. In my judgment, he was the greatest economist of the 20th century—perhaps the greatest ever.

Read More »

Posted by Robert Lawson at 01:47 PM in Economics

Eiffel Tower decision c. 1907

From the Jan. 23, 1907 NYT:

The Eiffel Tower, one of the marvels of the Paris Expositions of 1889 and 1900, will become a permanent institution as a result of the decision of the Government to use it as part of the army wireless telegraph system. From its great height, 900 feet, the War Department, during the Fall army manoeuvres was able to maintain communication with the eastern frontier along the Vosges, and since then the Eiffel Tower station has communicated with Berlin and London. New installations are being made by which regular communication with Algeria and Tunis, the French African colonies, is expected to be assured.
There was actually a movement to take down the Eiffel Tower? Aesthetics might gasp at the idea that a primary reason the Tower was saved was its ability to help the military (which tends to destroy great architectural monuments, either on purpose or by accident) communicate with far-flung reaches of the French "empire."

Posted by Craig Depken at 12:47 PM in Culture

Marriage counseling c. 1907

From the Jan. 23, 1907 NYT:

A young couple who gave their names of John C. Rea of Bloomfield and Miss Katheryn Ready of Glen Ridge appeared at the office of Justice of the Peace George W. Cadmus of Bloomfield [New Jersey] about ten day s ago and asked to be married. The Justice quickly tied the knot, and they went away happy.

Their happiness was short, however, for to-day the bride appeared before Justice Cadmus and asked for a warrant for her husband's arrest.

"He didn't like my cooking, Judge," she said, "and then he threatened to strike me, so I want him arrested."

Rea was arrested. He told the Justice that he had only been joking with his wife. In court the couple made up their differences, and Justice Cadmus advised them to try and live peacefully together hereafter, and they promised to do so. Mrs. Rea left the courtroom arm in arm with her husband.

And we wonder about television shows with Judge X or Judge Y offering advice. Perhaps our society has been seeking guidance from the bench for longer than most of us realize?

Posted by Craig Depken at 12:40 PM in Culture

Markets in Everything: Illinois and Indiana May Sell Their Lotteries

From the NYT:

The state of Illinois yesterday took the first steps in selling its state lottery system, hoping to attract as much as $10 billion from investors who, in return, would own a monopoly that could turn out to be the biggest jackpot yet.

The sale, which may occur as early as the spring, would not be the first privatization of public property — both Chicago and Indiana have recently earned billions of dollars by signing long-term leases with private companies to run toll roads. But the proposed lottery sale is almost certain be one of the largest privatizations of a state-run program, and it raises concerns that states, some of them critically short of cash, are selling valuable assets that could otherwise provide consistent streams of revenue.

Under the proposed sale, Illinois would receive a multibillion-dollar one-time payment, and the lottery’s new owners would receive all revenue and profit for 75 years.

Indiana is also considering selling its lottery, and bids are due later this month. That sale is expected to raise more than $1 billion upfront and annual payments of $200 million. Midway Airport in Chicago, toll roads in Pennsylvania and the New Jersey Turnpike are all potentially on the block.

HT: Paul Chessor of The Locker Room and MR for the Markets in Everything concept.

Posted by E. Frank Stephenson at 09:39 AM

January 22, 2007
Did Huey Long read Bastiat?

My wife has been after me for weeks (months?) to clean up my home "office" and so, over this past weekend, I began going through stacks of books and papers I had not looked at, to be honest, in years. Like, for example, the Spring 1985 issue of The Southern Review. This was one of three special issues celebrating that journal's 50th anniversary and it is chock full of interesting stuff -- such as, Huey Long's thoughts on taxpayer funding of higher education. According to the introductory note, Long spoke in 1935 to a gathering at LSU honoring the Italian ambassador to the US, who had been invited to visit the university as part of the celebration of its 75th anniversary. Long's remarks, as "reported the same day in the Baton Rouge State-Times," included the following gems:

I want to give some advice to the colleges. I'm the worst politician in the Untied States. The way I get along with the people of this state is not by answering criticisms. I know that there are so many more that know something about themselves that they don't want told I at least get the sympathy of a large number. You will find out that you cannot do without politicians. They are a necessary evil in this day and time. You may not like getting money from one source and spending it for another. But the thing for the school people to do is that if the politicians are going to steal, make them steal for the schools.
. . .
Let me assure all you good people that we have received some lessons from you and you can learn from us. I say the school teacher should get into politics. The school teacher who doesn't get into politics is standing in his own light and in the light of others.
. . .
Whenever school people take up the fight, to fight for the principles that the man who teaches gets as much as the man who operates a slot machine and that every boy regardless of whether he is born of wealthy or poor parents has the right for education, whenever the teachers and professors have made the politicians yield the various sources of plunder, then they will have done their share in the training of youth.

What more is there to say? The citation is Huey P. Long, Politics and Education, Southern Review, 21:257-259 (1985). No link; sorry.

Posted by Mike DeBow at 05:51 PM in Politics

Asking the wrong question?

The Chronicle of Higher Education reports on a pending auction of a year's tuition, room, and board at Oklahoma Wesleyan University. The auction will be hosted on e-bay.

Theoretically, the bid should not exceed the normal cost of attending OWU but one wonders if there will be a winner's curse.

More here at the OWU website

Posted by Craig Depken at 03:53 PM in Economics

Incentives Matter, Once Again

No surprises in this AP report:

New York and other U.S. cities are falling behind in financial services while cities including London, Dubai, Hong Kong and Tokyo are surging ahead. ...
  • The American regulatory framework, particularly Sarbanes-Oxley, is "a thicket of complicated rules, rather than a streamlined set of commonly understood principles, as is the case in the United Kingdom and elsewhere."
  • While New York offers a promising talent pool for its financial services work force, "we are at risk of falling behind in attracting qualified American and foreign workers."
  • The legal environments in other nations "far more effectively discourage frivolous litigation."
Posted by Wilson Mixon at 01:23 PM in Economics

Markets in everything c. 1907

In the early 1900s, social drinking by women was still a bit frowned upon. Regardless of social mores, there were obviously those who wanted nip from time to time.

From the Jan. 22, 1907 NYT:

The cocktail bracelet is the latest for women. There are fashionable women of this city who wear circlets on their wrists which sometimes contain a Martini dry or a Manhattan. The bracelets have one drawback, it is said, and this is they will not accommodate the cherry that goes with the fairy cocktail. The other night a Pittsburg attorney observed a woman of fashion place her lips to her bracelet. He thought that she was paying tribute to her own loveliness, but learned later she was merely refreshing her inner self with a mixture of cordials....With one of those graceful movements which appear to be natural with a woman the drink may be imbibed without fear of detection...A Broadway goldsmith sells numbers of the bracelets every week, and as most of the purchasers prefer secrecy in connection with the transaction they pay a pretty penny for the dubiously useful trinkets.

Posted by Craig Depken at 01:16 PM in Culture

January 20, 2007
Guru review

Guru could have been Bollywood’s The Aviator. It tries. But writer / director Mani Ratnam, although he’s not bad, is no Martin Scorsese (nor writer John Logan). And star Abhishek Bachchan, although he’s not bad, is no Leonardo DiCaprio. Aishwarya Rai as Guru’s wife is, no doubt, prettier than Cate Blanchett made up as Katherine Hepburn.

Like The Aviator, Guru is the story of an industrialist from the 1950s through to the 1980s. The fictional Gurukant Desai (everyone calls him Gurubhai, Brother Guru) becomes the biggest maker of polyester in India. We see him rise to the top through grit and hard work, defying the obstacles placed in his path by rent-seekers. Instead of being gradually overtaken by mental illness like Howard Hughes, Guru is suddenly felled by a stroke. He recovers to deliver an impassioned speech before an investigating commission – much like Hughes before the Congressional committee in The Aviator or even Howard Roark at his trial in The Fountainhead. But Guru's speech isn’t nearly as eloquent as those models (granted, I was reading the English subtitles).

Where The Aviator personified rent-seeking in the persons of Pan Am’s Juan Trippe (played by Alec Baldwin) and Senator Owen Brewster (played by Alan Alda), Guru has a character curiously named Arzaan Contractor who initially blocks Guru’s entry into the guild of fabric traders. But Contractor disappears before the intermission. Thereafter the antagonists are two muckraking newspapermen who, for no well-explained reason (is it really that they favor Ghandian homespun over polyester?), are out to expose Guru as an evader of the licensing restrictions and taxes of the Permit Raj. I wish the script had found room for a pro-market journalist – or even an economist, modeled after B. R. Shenoy -- to explain why India would be better off with fewer restrictions and more entrepreneurs. Guru’s speech alludes to such an argument, but doesn’t really deliver it.

Still, not a bad film. If I were designing an essay contest for my friends at India's free-market think tank The Centre for Civil Society, I would suggest the topic: "What should Guru have said to the Investigating Commission as a moral defense of his business practices?"

Posted by Lawrence H. White at 01:33 PM in Economics

Fine Stuff on Mark Perry's Blog

While spending a few minutes surfing (ok procrastinating) I came across Mark Perry's blog Carpe Diem. It's well worth a regular read; I especially liked his posts on public school teachers sending their kids to private schools and on the Dems attempt to exempt American Samoa from the minimum wage hike (the Hypocrite-of-the-Sea cartoon in the post is funny).

Posted by E. Frank Stephenson at 01:05 PM

Global Warming Tempest

A few months back I noted that The Weather Channel was starting a global warming show. The show's host, Heidi Cullen, has now caused an uproar by suggesting that the American Meteorological Society should deny "Seals of Approval" to meteorologists who are global warming skeptics. One columnist says TWC is offering up a "con job" and accuses Cullen of advocating an Orwellian form of thought control. That characterization may well be accurate, but I'm wondering if a more fundamental motive than politically correct dogma might be a work here--namely, an effort to build ratings for Cullen's show.

Posted by E. Frank Stephenson at 11:14 AM in Misc.

Incentives matter

Bloomberg news reports:

New Jersey towns have figured out a way to sidestep the highest property taxes in the U.S.: Keep children out.

Educating a child in New Jersey costs an average of $12,567 a year, the most in the nation and more than double the property tax parents typically pay. So local governments have hit upon a way to expand the tax base without the expense of higher enrollment: age-restricted housing.

New Jersey developers have responded by building an estimated one-fifth of the country's adults-only housing, making the state the leader in a national trend spurred by baby boomers seeking new homes after their children move out.

Posted by Wilson Mixon at 10:40 AM in Economics

Marginal Deterrence at the Movies

One of the examples I use in my principles courses to illustrate the concept of "thinking at the margin" is a TCS article on marginal deterrence by Benjamin Zycher. An excerpt:

In August 2000, Nicholas Markowitz, 15, was kidnapped in a Los Angeles suburb, held for several days, and then murdered by a group of men ....

After one of alleged killers, Jesse James Hollywood -- no, I am not making that up -- "called his lawyer and learned the severe penalty for kidnapping, police say, the young men decided they had to kill Nicholas" (Los Angeles Times, August 26, 2001). In other words, since the penalty for kidnapping effectively was a life sentence or something close to it, and since the perceived probability that the kidnappers would be apprehended and convicted was high, the marginal (or "extra") penalty for murdering Markowitz was perceived to be low or zero, in that the likelihood of actual subjection to capital punishment in California is trivial -- California has executed ten individuals since 1976. And it's a punishment that, in any event, is delayed one or two decades by the appeals process. Accordingly, the prospective act of murder, even upon arrest and conviction, would yield the same life sentence already looming. So why not get rid of the central witness to the kidnapping?

Well, Wednesday was "thinking at the margin" day and, as usual, I handed out copies of the first page of the article. I got about 30 seconds into explaining the article when one of my students raised his hand. He then explained that the Markowitz murder has been turned into the movie "Alpha Dog." A few seconds with Mr. Google after class confirmed the student's claim.

The movie's website is here. It stars Justin Timberlake, Bruce Willis, and Sharon Stone. For what it's worth, the film has gotten some positive reviews. An interesting side note: Jessie James Hollywood awaits trial for the murder of Nicholas Markowitz; his lawyers tried unsuccessfully to block the film's release.

Economists who have written on marginal deterrence include David Friedman (JSTOR sub req) and George Stigler (JPE 1970).

Posted by E. Frank Stephenson at 12:03 AM in Economics

January 19, 2007
India poised

Bollywood’s all-time movie megastar, Amitabh Bachchan, plugs (in his trademark baritone voice, in English) for economic dynamism and against protectionism in this remarkable public-service clip. Hat tip: Neera.

In other Bollywood news:

●Amitabh’s son, the popular actor Abhishek Bachchan, has announced his engagement to popular actress / beauty Aishwarya Rai. The Indian media are in a frenzy: think of Brad +Angelina to the power of three. Rai is best known in the West for her starring role in Bride & Predjudice.

●The Wall St. Journal is reporting that Abhishek’s and Aishwarya's new movie, Guru, is a paean to free trade:

Who would ever have thought that one of the villains of a Bollywood film could be import duty? "Guru," the latest Bollywood blockbuster by the respected director Mani Ratnam, is that rare film -- perhaps Bollywood's first -- in which free markets are lauded as a force for good. Aliens emerging from the Taj Mahal would be less surprising.

Yeah, back in the '70s when Amitabh was the "angry young man" of Bollywood, the hero he played was always fighting against the smugglers who were evading the stifiling restrictions of the Permit Raj. Mani Ratnam previously directed the highly recommended Bombay.

ADDENDUM: Hey, Guru is showing in St. Louis tonight! I'll provide a review tomorrow.

Posted by Lawrence H. White at 03:52 PM in Economics

Henry Payne on the Minimum Wage


Thanks to Henry Payne for permission to post; HT Wilson Mixon and Don Boudreaux.

Posted by E. Frank Stephenson at 02:59 PM in Economics

Congresswoman Pelosi needs a lesson in supply and demand

As Nancy Pelosi’s hometown paper, the San Francisco Chronicle, reports,

The House overwhelmingly approved a bill Wednesday to cut interest rates on federally subsidized college loans

To an economist, this looks like a subsidy from other taxpayers to the buyers of college education. The demand curve for college education will shift out, resulting in an increase in quantity and an increase in price. College tuition rates will rise. The less elastic the supply of college education (the steeper the supply curve), the bigger the boost to price (and the bigger the transfer to existing colleges).

To Pelosi, the rationale is to lower the price of a college education:

"At a time when college tuition continues to skyrocket, this crucial legislation will help remove some of the barriers to a higher education," Pelosi said.

Next up, will the House will vote a larger subsidy to home mortgage borrowers in order to battle the skyrocketing cost of real estate?

Posted by Lawrence H. White at 11:10 AM in Economics

Profiles in Courage

Rep. Jack Kingston, R-GA, withstood the pressure from his colleagues to go along, and instead cast the lone "nay" vote on House Resolution 39.

The resolution in question was to commend the University of Florida football team on its BCS Championship victory. Kingston is a loyal University of Georgia alumnus (1978, economics). Kingston explained his vote to the UGA student newspaper The Red and Black:

"I thought that with all the serious issues facing our country such as Iraq and terrorism, voting on Florida seemed kind of silly; but if we're going to vote on silly stuff, I might as well remind people there are a few Bulldog fans in Congress," Kingston said.
Posted by Lawrence H. White at 10:31 AM in Politics

January 18, 2007
Two Items on the Duke Lax Case

DOL has barely mentioned the Duke lacrosse case, and I don't really plan to break our silence. With apologies to our Duke co-blogger, I direct interested readers to a couple of opinions on Duke's role in the scandal:

1. K.C. Johnson's account of a lacrosse player (not one of the three facing charges) of a student suing a professor for allegedly giving him a failing grade merely for being on the lacrosse team.

2. Yesterday's offering from Rome News-Tribune cartoonist Mike Lester pokes Duke for its treatment of the lax players.

Posted by E. Frank Stephenson at 10:29 PM in Misc.

The Economist: Compulsion and Fuzzy Health Care Statistics

The Jan 13-19 issue of The Economist writes (p. 15) that the U.S. "spends 16% of its GDP on health ... [y]et a sixth of the population lack medical coverage." The Economist seems to be suggesting that we spend 16% of GDP to provide medical services for 5/6 of the population while providing no medical services for the other sixth. This is misleading--the sixth of the population that lacks medical insurance still receives medical services, and these services are included in the 16% of GDP figure. How does the uninsured sixth obtain medical services? Some of the ways include paying out of pocket, visiting government or charitable clinics, and (as the The Economist acknowledges later in the article) showing up at hospitals which are required by law to treat all comers.

An aside: Later in the article appears this frightening sentence--"The most promising idea [for covering the uninsured] is compulsion."

Posted by E. Frank Stephenson at 10:11 PM in Economics

January 17, 2007
On the income tax c. 1907

A letter to the editor in the Jan. 17, 1907 NYT discusses the "inconsistency of the income tax." The letter-writer, one Alex Doyle, had this to say:

Admitting the advisability of an income tax at all, it should not be overlooked that no impost can ever be equitably based on yearly income derived from commerce. Many businesses largely profitable one year suffer actual losses the next.

Compare A, with a steady annual income for two years of $40,000, to B, whose income, derived from business investments, is $100,000 the first year against a loss of $40,000 the second year.

B's average income for the two years is $30,000, against A's $40,000. Yet under any income tax law based on yearly results B, with the smaller income, would pay the greater tax. Under the Sutherland saturnalia he would be taxed $10,000 for the two years, while A., with an income 25 per cent. greater, would pay but $4,000.

Can there be greater mental degeneracy than that involved in this proposition?

Posted by Craig Depken at 02:05 PM in Economics

January 16, 2007
On My Radar

1. The dean of Chicago's business school calls the "students as customers" model "corrupt and corrupting."

2. I read Kotlikoff and Burn's "The Coming Generational Storm" over Christmas break and am using it in my public econ course this semester. I have some minor quibbles about hyperbole and snarkiness in the writing, but K&B do a fantastic job explaining the unstainable entitlement programs for seniors. Robert Samuelson's article in the WaPo makes the same point.

3. James Feyrer and Bruce Sacerdote of Dartmouth have an interesting paper on the role of institutions in economic development. They find that the number of years islands spent as European colonies is positively related to growth. James Hamilton discusses the paper here.

4. Arthur Laffer paid a visit to GA; from the AJC:

Under the proposal, all existing property taxes — including those on real estate — would be eliminated. Georgians would instead pay a 5 percent state income tax, with some exceptions for the poor, and a 5 percent consumption tax on goods and services. Local governments and school boards would not lose any money under the new system, Richardson said.

The idea comes from a former economic policy adviser to President Reagan whom Richardson recently hired to study overhauling Georgia’s tax system. Richardson has started working with Arthur B. Laffer , an economist considered by many as the “father of supply-side economics.” Along with Laffer, the speaker has hired Donna Arduin, a former fiscal advisor to several governors, including Arnold Schwarzenegger of California and Jeb Bush of Florida.

GA's income tax code is already relatively flat (the top mtr kicks in at something like $20k of taxable income) so I see only modest potential for efficiency gains. By contrast, I see lots of room for harm if the legislature starts carving out special interest provisions.

5. NPR ran an interview with Johns Hopkins economic geographer Roger Stone. An excerpt (via Lex Nex):

Prof. STERN: Well, I was studying another topic, frankly, when I began to hear the Bush administration claims that Iran had so much natural gas and oil it couldn't possibly need nuclear energy for electric power. And it turned out, as I looked closer and closer at the issue, I began to discover what appeared to me to be severe structural policy-based weaknesses in the Irani petroleum sector.

[NPR Host] INSKEEP: How could that possibly be, when Iran is said to have some of the richest petroleum resources in the world?

Prof. STERN: Well, keep in mind that the Soviet Union also has some of the richest petroleum resources in the world, and it went bust. So it's really not to do with the physical resource under the ground. There's lots and lots of oil and gas under Iran. It's the government's policies towards that resource that are really the problem.

INSKEEP: What do you mean?

Prof. STERN: Well, first they have failed to reinvest in their industry, so both the well infrastructure as well as the refineries are old and decrepit. Second, they've subsidized domestic demand. So there's no revenue from that. And that cheap oil fuels explosive demand growth. So Iran has the highest demand growth in the world.

6. Some folks in the Chapel Hill-Carrboro region of North Carolina have started an alternative currency, the PLENTY (Piedmont Local Economy Tender). A comparison of the PLENTY's ostensible advantages over the US dollar is here. The anti-globalization bent of the PLENTY movement reminds me of one of the most spectacularly wrong-headed things I've ever read: A local environmental activist opined that we should live only on goods and services produced in this county.

Posted by E. Frank Stephenson at 12:57 PM in Misc.

GSP of state i = GDP of country j

The Big Picture, via Carl Størmer, via who knows, points to a map that depicts the various U.S. state economies as their analogue amongst the world's economies.

If accurate it is a powerful image.

Posted by Craig Depken at 12:06 PM in Economics

Excuses, excuses, excuses...

Today's Chronicle of Higher Education includes an article concerning student excuses. Sometimes I wonder how much though the student actually applied to their particular excuse. Often I suggest recording the excuse before bringing it to my attention. The student can then listen to themselves, or better yet have someone else listen to them, to determine if the excuse has any plausibility. A lot of headaches on both sides of the desk could be avoided with this self-check.

The article points to this blog concerning both sides of the excuse market.

Posted by Craig Depken at 11:36 AM in Culture

Anti-scalping legislation c. 1907

With the Super Bowl in a few weeks, there will be any number of "just print" stories concerning ticket scalping and the "price gouging" it entails. Economists tend to scratch their heads on ticket scalping, for any number of reasons, but primarily it seems odd that buying an asset (however artificially or naturally limited in availability it is), and hoping to sell that asset for a profit could be illegal. It is an unfortunate human trait to look for the most obvious example of any sort of "bad behavior" and assume that laws must be passed against that particular behavior and all behavior remotely close to it. However likely it is that purchasing a Super Bowl ticket for face value and being able to sell it for a profit, it is highly unlikely that you can purchase a regular ticket for a Tuesday evening game between the Rangers and the Royals and successfully sell that ticket for a profit.

As I mentioned a few weeks ago, my contribution to the anti-scalping law literature is here. Basically, I claim that it is entirely possible, if not likely, that when scalping is banned prices at the ticket window increase.

The topic is of interest to economists because it is a topic of interest to the general public, albeit perhaps not a huge slice of society. Yet, the "problem" of what is more appropriately termed "ticket speculating" has been a problem for quite some time.

From the Jan. 16, 1907 NYT:

Assemblyman Wagner of New York will introduce his anti-ticket speculators bill to-morrow. It provides that ticket speculators who sell tickets above the regular price or persons who purchase such tickets or persons who establish agencies for the sale of tickets at an advance over the regular rates are guilty of a misdemeanor. The penalty is a fine of not more than $500 and imprisonment for not more than one year or both fine and imprisonment.
We don't know if the bill actually passes, but it is worded much like anti-ticket scalping legislation written today. I am still wrestling with what this says about these particular laws.

Posted by Craig Depken at 10:42 AM

Google's Gapminder

Wow, how cool is this map making tool?


Posted by Robert Lawson at 10:34 AM in Economics

January 15, 2007
Dollarization versus Ecuador’s new leftist president

“Is dollarization threatened by Ecuador's radical new president, Rafael Correa — or is Correa threatened by dollarization?” The story here.

Hat tip to Dora de Ampuero, quoted in the article, who is an external student of mine via ESEADE, the Buenos Aires business school.

Posted by Lawrence H. White at 06:54 PM in Economics

Digital gold and a flawed global order

One of the most pleasant surprises of the last Cato monetary conference was the talk by Benn Steil, Director of International Economics at the Council on Foreign Relations. The CFR has not previously been known for supporting hard money, to put it mildly. In an op-ed from last week, Steil channels the pro-gold message of Hayek’s Monetary Nationalism and International Stability:

Monetary nationalists, who believe it natural that every country should have its own paper currency and not waste resources hoarding gold or hard currency reserves, must eventually demand capital controls—as the most noted economist critic of globalization, Joseph Stiglitz, has done—in order to stop the people from disturbing the government’s control of national credit conditions. But the government cannot stop there, Hayek reasoned, as “exchange control designed to prevent effectively the outflow of capital would really have to involve a complete control of foreign trade, since of course any variation in the terms of credit on exports or imports means an international capital movement”.

Indeed, this is precisely the path the Argentine government has been following since abandoning its dollar currency board in 2002.

Steil’s bottom line:

As radical and implausible as it may sound, digitizing the earth’s 2,500-year experiment with commodity money may ultimately prove far more sustainable than our recent 35-year experiment with monetary sovereignty.

Read the whole thing here.

ADDENDUM: See also this critical comment.

Posted by Lawrence H. White at 12:23 PM in Economics

Georgia's Gubernatorial Race c. 1907

For those of us from or living in Georgia, some of these names will ring familiar:

SAVANNAH - Col. John Holbrook Estill, editor of the Morning News, yesterday announced his candidacy for the Democratic nomination for Governor. This makes five entries, the others being Clark Howell and Hoke Smith of Atlanta, James M. Smith of Oglethorpe County, and Judge Richard B. Russell of Winder. The primary will be held next Summer.

Posted by Craig Depken at 10:54 AM in Politics

January 14, 2007
Home Depot

In "No Place Like Home Depot," Debra Saunders characterized the Home Depot situation nicely: "The big irony is that, as The New York Times revealed, the contract Nardelli signed with Home Depot when the company recruited him in 2000 is the reason he walked away with a $210 million goodbye kiss. The CEO cut a good deal when he was hot, and cashed in when he was not."

If hard pressed, one might find a case or two in which a pro athlete did the same thing. This implies nothing about the process for determining athletes' salaries.

Posted by Wilson Mixon at 04:56 PM in Economics

January 13, 2007
Right place, right time

The Jan. 13, 1907 NYT reports on the upcoming 100 year anniversary of the laying down the grid of Manhattan roads and streets. An interesting tidbit was that there was a proposal to do away with Broadway. Luckily the proposal was turned down. In 1807 the proposed road grids were made "public" and several enterprising individuals went and purchased land (from whom?) in anticipation of future growth on Manhattan Island. The article prints an overlay of the farms (with owner names) and the street grid:


The article states:

The famous Astor farm, on Times Square, offers one of the best illustrations of his foresight and the subsequent growth of the city. Many are curious to know the exact location of this property; few can identify it. Let the curious go to the narrow northern end of the Times Building and look toward the northwest. The ground on which they stand will be in one corner of the Astor farm site. The old lines extend through the block between Forty-third and Forty-fourth Streets, include all of the Hotel Astor site, and pass near the northern wall of the Astor Theatre. Between those lines the farm extended northwest to the North River, fronting on the water from Forty-eighth to Fifty-First Street.

At the close of the last century this farm belonged to the Eden family and bore their name. It faced Bloomingdale Road and contained about seventy acres. The farm sold at Sheriff's sale in 1801 to Tunis Wortman for $39,000. He gave a mortgage for $32,000 on it, and in this obligation John Jacob Astor acquired a one third interest. The mortgage was foreclosed, and Mr. Astor and William Cutting bought the property. The Sheriff's deed is dated June 13, 1807, and the purchase price was $25,000. A thousand times that sum would not buy the real estate to-day

A hundred thousand times that today?

Posted by Craig Depken at 08:13 PM in Economics

On Christmas debt c. 1907

One thing you learn from reading the paper from 100 years ago is that our modern-day problems are, for the most part, not new problems they are simply our problems.

The Jan. 13, 1907 NYT has the following ditty:

He steals away at early dusk,
A bundle 'neath his coat,
And both his pockets bulging, too,
As all the neighbors note.

With furtive looks on every side
He dodges down the street,
And starts and pales at every step,
Afraid his friends to meet.

He disappears within a shop
Above whose dingy door
Three tarnished golden balls display
The Mecca of the poor -

And now we know the cause of
His secrecy and thrills,
He's had to pawn his Christmas gifts
To pay his New Year bills.

Posted by Craig Depken at 07:52 PM in Culture

Maringal income tax rates c. 1907

The Jan. 13, 1907 NYT reports proceedings considering the implementation of the income tax in the State of New York. The commission's recommendation is, at the time, thought to be leaning towards the implementation of an income tax applied to both wages and investment income and an overhaul of the inheritance tax. The commission's counsel assures everyone that an income tax is perfectly constitution in the State of New York.

Here are the recommended marginal income tax rates in the proposed "progressive" system:

1 per cent upon all income exceeding $500
2 per cent for incomes between $10,000-$25,000
5 per cent for incomes between $25,000-$50,000
10 percent for incomes between $50,000-$100,000
15 per cent for incomes between $100,000-$200,000
20 per cent for incomes over $200,000

To put things in perspective, although it is somewhat like comparing apples to orangutans as we have so much more government today than one hundred years ago, in 2005 dollars, we would see the following ranges:

1 per cent upon all income exceeding $10,700
2 per cent for incomes between $214,000-$535,000
5 per cent for incomes between $535,000-$1,071,899
10 percent for incomes between $1,071,899-$2,143,798
15 per cent for incomes between $2,143,798-$4,287,596
20 per cent for incomes over $4,287,596

Granted this is just the state's income tax, and doesn't include the yet to be hatched federal income tax, but what a sweet pipe dream to have. It's almost like imagining what you would do if you won the lottery.

Posted by Craig Depken at 07:21 PM in Economics

Climate change c. 1907

From the Jan. 13, 1906 NYT:

Everyone knows that this has been a mild Winter, but just what has made it so is a problem about which the weather experts are divided. A few days ago Capt. Chaplin of the British steamer Shimosa reached the Port of New York after a long and decidedly foggy voyage from China. The weather was so remarkably unseasonable that Capt. Chaplin took some observations that revealed the fact, not noticed as yet by other mariners, that the Gulf Stream has been undergoing certain deviations from its normal course which are of a sufficiently radical nature, according to the theories of some meteorologists, to account for the extreme climactic changes which have taken place this winter.
File in the TNC drawer? Hmmm....

Posted by Craig Depken at 07:06 PM in Science

The Gentle Cynic c. 1907

From the Jan. 13, 1906 NYT:

  • The lofty ideals of some men are restricted to high living.
  • Contentment is merely dividing what you have with what you want.
  • There is plenty of room at the top without pushing anyone else off.
  • Some men look so far ahead that they lose sight of the opportunities under their very noses.
  • When the parlor gas is turned down its a pretty good sign that the young fellow calling there isn't.
  • Posted by Craig Depken at 07:01 PM in Culture

    January 12, 2007
    Shocked! Shocked!

    From the Washington Times:

    On Wednesday, the House voted to raise the minimum wage from $5.15 to $7.25 per hour.

    The bill also extends for the first time the federal minimum wage to the U.S. territory of the Northern Mariana Islands. However, it exempts American Samoa, another Pacific island territory that would become the only U.S. territory not subject to federal minimum-wage laws.

    One of the biggest opponents of the federal minimum wage in Samoa is StarKist Tuna, which owns one of the two packing plants that together employ more than 5,000 Samoans, or nearly 75 percent of the island's work force. StarKist's parent company, Del Monte Corp., has headquarters in San Francisco, which is represented by Mrs. Pelosi. The other plant belongs to California-based Chicken of the Sea.

    "I am shocked," said Rep. Eric Cantor, Virginia Republican and his party's chief deputy whip....

    Update, from the New York Times (1/13/07):

    Fending off charges of favoritism, House Democrats say a just-passed minimum wage bill will be changed to cover all U.S. territories -- including American Samoa -- before it reaches President Bush's desk.

    House Speaker Nancy Pelosi, D-Calif., told reporters she has instructed the House Education and Labor Committee to help get the bill changed to ''make sure that all of the territories have to comply with the U.S. law on minimum wage.''

    Posted by Wilson Mixon at 08:35 PM in Politics

    Civil War defined c. 1907

    As we seem to have trouble defining "civil war" today, it seems that in 1907 there was a similar problem in the U.S. Senate. Ostensibly, the Senate determined that the conflict that stretched from 1861-1865 was actually a "civil war" not a "War of Rebellion" or a "War of Yankee Aggression," or even a "War Between the States."

    Why all the hubub?

    When Senator McCumber of North Dakota, who for nearly forty years has labored under the impression that there was a War of the Rebellion, admitted in the Senate today that he might be in error and was willing to accept the statement that there was a civil war, and so provide for service pensions, the terminology of the greatest event in the history of the States was determined.

    In other words, including the term 'War of the Rebellion' in a Service Pension Bill was deemed complicated. The story goes on:
    The North Dakota Senator was proceeding in the dispassionate and expressionless way which always empties the galleries, when an expression dropped by him was caught by the acute ear of Carmack of Tennessee.
    In pre-C-SPAN days there were dry and boring Senators?
    Money of Mississippi was promptly on his feet, clamoring to be heard. An accommodating Vice President recognized him, whereupon the Mississippian asserted that neither McCumber nor Carmack knew just what to call the occurrences of 1861-5. There might have been a rebellion and there certainly was civil war, but historically and legally the events within the period named should be classified as "a War Between States."
    As this debate was surely spinning out of control, a voice of reason contributes:
    The meek-appearing but bellicose Teller could no longer refrain from joining in the melee. He delivered himself in sarcastic tone of this dictum: "The facts of history cannot be altered by splitting hairs over terminology."

    After a few more rounds of squabbling and one side-story about a father buried in the Confederate flag and a son being buried in the U.S. flag, the story ends by stating:
    Thereupon the Service Pension bill was amended so as to recognize as having earned a pension those soldiers who served in the Union Army in "the Civil War."

    The bill grants the pension of $12 a month to survivors of the civil and Mexican wars who have reached the age of 62; $15 to those who are 70 years of age, and $20 to those who are 75 or over.

    As one who grew up on a Civil War battlefield, such stories are of interest. If there had been no Pension Bill would the accepted terminology considering the conflict be different? If so, who would have determined the terminology - the population, the media, or the academics? Perhaps the politicians might have grabbed first-mover-advantage.

    Posted by Craig Depken at 09:32 AM in Politics

    January 11, 2007

    My baby boy Shane (baby: He's 6' 7" & weighs 240 or so) is co-owner of Saba restaurant in Atlanta. Saba was recently named best new pasta restaurant in Atlanta. Link here.

    Posted by Wilson Mixon at 07:28 PM in Personal

    Deadline extended...

    The deadline for APEE's Economic Communicators Contest has been extended to Feb 21.

    Posted by Robert Lawson at 02:30 PM in Economics

    They Also Gouge, Who Stand on (Price) Floors

    Over on EconTalk, my podcast with Russ Roberts about price-gouging has been posted. Including a song, by me. Mercifully short, but a song nonetheless.

    A commenter, Pascal Bernhard, raises an interesting point about price floors. What is the deal? Should we think of these as "anti-bargain" laws?

    As readers of DoL will know, these laws are usually justified by a desire to assure that markets are orderly, and that "unfair" competition can be prevented. (Unfair competition is when my competitors are more efficient than I am. Not much I can do about that. How unfair!)

    The difference is that, unlike laws against price-gouging, I understand the benefits of these laws, or at least their appeal. It is akin to the "monopolistic competition" you get from slight product differentiation in (for example) restaurants. Zero profits, but optimal prices are still greater than marginal cost.

    In the case of French stores, this would mean that the price floor law has these effects (a) prices are too high, (b) poor people pay more than their fair share, but (c) there are more stores than there would be without the law. This increases (d) convenience for rich people, more stores, don't have to stand in line with dirty poor people. THe strange thing is (e) the stores don't actually benefit from the higher prices. Prevented from competing on price, they compete by having increased entry and convenience. The only people who benefit from this law are the rich people who support it out of "concern" for the poor!

    In the U.S., this idiocy mostly takes the form of criticizing WalMart. The rich progressives who hate WalMart would never shop there; too many smelly poor people. But if you go to WalMart in mid-December, it is full of poor people trying to buy presents for their children.

    Would a law that kept WalMart from charging low prices hurt rich progressives? Nope. But it would sure hurt poor people.

    Posted by Michael Munger at 01:04 PM

    On States Rights c. 1907

    The Jan 11, 1907 NYT is full of interesting stories. One reports a quotation/prediction by Chairman Tawney of the House Appropriations Committee:

    The people of the states are rapidly forgetting, or at least ignoring, the fact that the founders of our Federal Government never intended that it should encroach upon the rights of the States in respect to matters which pertain exclusively to them, nor did they intend that the States should surrender the functions of government which they reserved to themselves, and encroach upon the Federal Treasury for the purpose of securing money to perform those functions which they thus reserved and which belong to them.

    If the tendency in this direction, which has grown so enormously during the past eight years, is not checked it will not be long before State lines are obliterated, and practically every right and governmental function about States reserved to themselves will have been surrendered to the Federal Government, and the people of the States will find themselves governed by bureaucracy.

    Posted by Craig Depken at 12:06 PM in Politics

    On technology adoption c. 1907

    The Jan. 11, NYT prints a letter to the editor concerning the upcoming Auto Show in New York City's Madison Square Garden:

    Possibly no invention ever installed itself as a vital institution in the life of the world as quickly and as firmly as the automobile. It is not many years ago that we were wont to stare and gape at it in passing with much the same bewilderment that we now bestow upon a balloon or a submarine boat. The automobile is an absolute fixture. It filled a want, and when that want became evident the development of the automobile was assured. No more striking testimony is needed than the standardization of parts by manufacturers, which goes far to prove the thorough organization of the automobile business.

    The automobile, unlike many inventions, owes its speedy development to the fact that it is the product of many mechanics, engineers, capitalists, and sporting men - all aiming at one central idea, a speedy, strong, and easily controlled road wagon. There have been many ingenious ideas advanced, including not a few madcap theories, but as is the case with every evolution, be it animal or mechanical, there has been a survival of fitness. We see that fitness embodied in the present motor car, which is notable for the absence of freak ideas. It is a sane machine.

    Thank goodness the federal government wasn't involved with the development of the automobile.

    Posted by Craig Depken at 12:02 PM in Science

    Famine Relief c. 1907

    The Jan. 11, 1907 NYT reports:

    Three hundred tons of flour, making 12,000 sacks, were shipped to-day to be loaded on the steamer Coptic in San Francisco for the starving people in China. The shipment constitutes the entire amount purchased for China by the National Red Cross Society.

    Quick - how heavy was a single sack?

    Read More »

    Posted by Craig Depken at 11:54 AM in Economics

    On workplace safety c. 1907

    The Jan. 10, 1907 NYT reports on a devastating explosion at the Jones & Laughlin Steel Works in Pittsburg (no 'h' at this point), Pennsylvania. I missed the opportunity to mention this yesterday, but in the Jan. 11, 1907 NYT a followup was run.

    To recap what the paper reported on Jan. 10:

    Tons of molten metal were showered around the furnace for a radius of forty feet. Out of a force of thirty-five men who were at the furnace, three of them, John Cramer, Andrew Featherka, and Gustave Kessler, were killed, seven are in hospitals fatally injured, and twenty-four others have not been accounted for. While the mill officials are inclined to believe that all of the missing men were not cremated in the molten metal, nothing definite is known.
    The Jan. 10 story goes on to describe some of the spin-off consequences of the explosion throughout Pittsburg:
    Chief Peter Snyder of the Fourth Fire District was seriously injured by a fall while directing the firemen to extinguish the fire which followed the explosion. while responding to the alarm a hose carriage was struck by a street car, two of the firemen being injured and a horse killed. The windows of the street car were shattered and a panic followed among the passengers. Two women were injured by being trampled.

    The graphic description of the immediate aftermath of the explosion is described by two witnesses. Perhaps not much different from today, the graphic seems to draw our attention even as we feel guilty for listening and imagining what was going on:
    Suddenly there was a terrific roar, and immediately I started to run. Molten metal was falling and streaming in all directions. I reached a place of safety not a minute too soon. I don't now what happened to the other men. I did not see any of them after the explosion. If they did not run quickly they are all buried under six feet of molten metal.

    And another description:
    Our train was right near the furnace. When the metal poured out of the furnace over the ground I saw the men making for safety. To the right of the furnace a party of ten men were running wildly, their clothing a mass of flames. Apparently some of them had been injured when the explosion occurred, as they could not go fast, and several of them tripped and fell. The hot metal ran over the poor men in a moment.

    Just at this time a second explosion occurred, and I looked toward the furnace. In a minute I again looked to the right of the furnace for the men, but I could not see any of them, and I believe all of them were burned to death.

    The Jan. 11, 1907 NYT has this followup:

    Partial investigation to ascertain the number of fatalities that occurred at the Eliza Furnaces of the Jones and Laughlin Steel Company, Limited, last night...was completed to-night. It shows that the bodies of twelve men have been recovered, from fifteen to twenty men are missing, it being generally believed that their bodies were consumed by the hot metal, and ten men are in hospitals terribly burned. Four of them are expected to die.

    Deputy Coroner Laidley says one foreigner became crazed by his injuries, and before he could be prevented leaped into a pot of molten metal and was incinerated.


    Posted by Craig Depken at 11:51 AM in Economics

    Nifty Maps

    Countries I've visited:

    create your own visited countries map

    [RL: Ok, I cheated and included Kenya and Tanzania, but that's next month...]

    States I've visited:

    create your own visited states map

    [Via Marginal Revolution via Drezner]

    Posted by Robert Lawson at 11:34 AM in Misc.

    January 10, 2007
    Thank you sir, may I have anouther?

    Interesting comparison of drug prices paid by the VA and Medicare:

    I don't know if the numbers are absolutely correct as they were "obtained" by a health care advocacy group. However, it wouldn't be much of a surprise if what was advertised as a cost-reducing policy turned out to be less successful than advertised.

    Press release here, Report here and tables here

    Posted by Craig Depken at 03:46 PM in Economics

    This says it all

    From Crop News Weekly:

    Already a new ethanol related bill has been introduced and new farm bill discussions are being thrown around the Hill as legislators settle back into their routines.

    The solution to any bad habit is to alter your routine. Perhaps Congress doesn't think it has any bad habits?

    Posted by Craig Depken at 11:05 AM in Politics

    January 09, 2007
    On droughts and the people affected by them

    The Center for the Research of the Epidemiology of Disasters (CRED) recently released their December newsletter (available here), which deals with droughts around the world.

    Here are two telling maps of the world. The upper map color-codes countries by the number of droughts they have experienced while the lower map color-codes countries by the number of people affected by those droughts:

    Those familiar with the Economic Freedom of the World Index will notice the strong inverse relationship between greater economic freedom (which are enhanced by well-behaved markets, well defined property rights, and generally lower levels of government corruption) and the number of people (or percent of population) adversely affected by droughts.

    Posted by Craig Depken at 11:48 AM in Economics

    Discerning voters

    This article suggests that anti-WalMart is not good politics, except maybe for getting nominated as a Democratic candidate.

    Three-in-four voters say attacks by politicians on Wal-Mart won't affect their voting behavior. But among those who say it will, those people are much more likely to vote against a candidate who skewers Wal-Mart than they are to vote for him

    A plurality of voters also believes that Democrats who attack Wal-Mart are doing so to curry favor with organized labor, which is unhappy with the firm because its stores are non-union.

    [N]ot only do these voters shop there, they overwhelmingly see the company as a positive force in their community, and by a solid margin as a good thing for the country.

    Posted by Wilson Mixon at 11:36 AM in Politics

    New uses for Viagra

    It looks like Viagra might be effective against pulmonary edema (fluid leakage in the lungs caused by high blood pressure).

    High Altitude Pulmonary Edema (HAPE) and High Altitude Cerebral Edema (HACE) are serious and potentially lethal risks for mountain climbers at elevations starting above 10,000'.

    I've never had any problems with Acute Mountain Sickness (AMS), much less anything more serious like HAPE or HACE, as high as 13,000', but they say it can strike anyone anytime. (Kilimanjaro, my next mountain, is 19,340'--by far the tallest I've ever attempted.)

    Now the question is this: Do you really want your mountain climbing buddy, sleeping in a two man tent, at high altitude, days away from the nearest female companionship, popping Viagra?

    Posted by Robert Lawson at 10:45 AM in Science

    Markets in Everything: Country Edition

    It's cold but it could be all yours!

    HT: Russ and Marginal Revolution for the MiE concept.

    Posted by Robert Lawson at 10:24 AM in Economics

    January 08, 2007
    An idling engine is an inefficient engine

    Forget motorway congestion - this is a traffic jam

    Posted by Craig Depken at 01:19 PM in Misc.

    Huerta de Soto's case against fractional reserves

    From my latest piece for FMNN:

    Professor Huerta de Soto's argument against fractional-reserve banking, so far as I understand it, boils down the following syllogism:

    1. Warehousing and fixed-term lending are legitimate.
    2. Fractional reserve banking is neither warehousing nor fixed-term lending.
    3. Therefore fractional reserve banking is not legitimate.

    This is an example of what logicians call the fallacy of denying the antecedent.

    If you're an avid follower of the "free banking vs. 100-percent reserves" debate -- and who isn't? -- you'll want to read the whole piece here.

    Posted by Lawrence H. White at 12:50 PM in Economics

    The War on Drugs c. 1907

    I have returned from the AEA's in Chicago where I caught up for a chin-wag with co-blogger Frank Stephenson. It was a long but productive weekend.

    The Jan. 8, 1907 NYT reports on the increasing plague of Cocaine Fiends and society's response:

    [F]ive boys escaped capture last night by plain-clothes policemen sent to the place by Capt. Russell of the West Thirty-seventh Street Station. The Captain had been informed that a gang of boys who had become addicted to the cocaine habit frequented the cave. He said he would investigate for the purpose of getting evidence against certain druggists who, it was alleged, had been selling cocaine to boys of tender age.
    The interesting point here is that the police want information on who is selling the drug, and do not necessarily seem intent on arresting the drug user.

    The story goes on to describe the plight of a mother whose two sons were heading toward addiction. The eldest son allegedly pawned his clothes in order to purchase cocaine and "after learning this...she caused the boy's arrest." The story is less clear on what, exactly, the son was charged with.

    However, similar to today's meth problem, the article reports that

    [w]hile is was a criminal offense for a druggist to sell cocaine to any one who did not have a physician's prescription, the boys managed to get it at first by buying catarrhal and toothache preparations which contained the drug. Under the pure food law the makers of these catarrh cures were compelled to print on the label the fact that the powders contained cocaine.
    There's one of the unintended consequences of an otherwise reasonable law (as far as laws go).

    The story goes on:

    Dr. Gregory, the chief of the psychopathic ward of Bellevue Hospital, said that unless something is done to put a stop to the manner in which some druggists sold cocaine, the hospitals would soon be filled with cocaine users. Many hospitals now had a cocaine ward set aside especially for the treatment of cocaine fiends.

    Another physician of prominence said that it is worse in a way than the morphine habit, as it killed by inches the person who became addicted to the drug. A person taking an overdose of morphine, he said, would die immediately, while cocaine killed slowly, but surely, those who snuffed it after acquiring the cocaine habit.

    Posted by Craig Depken at 12:41 PM in Culture

    January 07, 2007
    Taiwan has a bank run

    Taiwan on Friday experienced a run on the Chinese Bank, a member of the Rebar Asia Pacific Group. Contrary to the Diamond-Dybvig theory of bank runs, it was not triggered by depositors’ liquidity needs or by depositors’ fears that other depositors would run. Consistent with the “bad news” theory of bank runs, it was

    triggered by insolvency of two other companies under the group, namely China Rebar Co. and Chia Hsin Food and Synthetic Fiber Co. FSC tallies show that clients withdrew a total of NT$15 billion from the bank on Friday.

    At the current exchange rate, NT$15 billion is equivalent about US $460 million.

    Posted by Lawrence H. White at 07:10 PM in Economics

    January 06, 2007
    Where “normal” = “agreeing with me”

    Brad DeLong writes:

    A normal person would not argue that the New Deal prolonged the Great Depression.

    Count me as not “normal”, then. (Btw, questioning the normality of those who might disagree with you is not what I would call a highbrow rhetorical move.) A central component of “the New Deal” was the cartelization of industry and agriculture under the NIRA and AAA codes. The codes restricted output (in an attempt to increase profits) and thereby, I and others would argue, prolonged the Great Depression. Does DeLong dispute this, or does he think that other parts of the New Deal (which?) swamped the effects of the NIRA and AAA?

    DeLong continues:

    A normal person would require a case that he or she could point to of a country that (a) relied on market forces alone to generate recovery, and (b) recovered fully from its Great Depression.

    Was there a country that relied on market forces alone in the 1930s, and failed to recover? If no country even tried laissez-faire, how does that prove that it wouldn’t have worked? Didn’t market forces work to end previous depressions?

    Posted by Lawrence H. White at 05:37 PM in Economics

    January 05, 2007
    Ice, Ice, Baby

    This won't actually go live on EconLib until Monday.

    BUT, in a semi-exclusive for readers here at Div-Lab, you can read it NOW!

    Posted by Michael Munger at 03:13 PM

    A change in the Fed’s mandate? Not with this Congress

    John M. Berry of Bloomberg News quotes Massachusetts Rep. Barney Frank, incoming chairman of the House Financial Services Committee, pouring cold water on the idea of revising the Fed’s mandate to give it a numerical inflation-rate target. Said Frank:

    “There are people who have been arguing that the Fed should have its mandate changed. That’s not going to happen when we are in power.”

    Berry then comments, no doubt correctly: “Well, it wasn't going to happen even if Republicans hadn't lost control of the House and Senate in last fall's election.”

    The Fed’s legislated mandate calls for it “to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates.” Is that really a barrier to inflation targeting? The Fed’s official line has long been what is actually true, that low and stable inflation promotes the other two goals over the long term. (Whether the FOMC in practice consistently focuses on inflation and trusts the employment figures to take care of themselves is a different matter.) Following that line, the Bernanke Fed could adopt a numerical inflation-rate target by calling it a new strategy for internal policy-making, consistent with the max-employment and mod-interest mandates, rather than calling it a new mandate. It’s doubtful that even a Democrat-controlled Congress would legislate to tell the Fed it can’t do that.

    Posted by Lawrence H. White at 11:42 AM in Economics

    January 03, 2007
    Tax rates c. 2006

    Remember the initial income tax of 1% on incomes more than $3,000 (about $61,000 today)? Probably not, as that was the first income tax instituted in 1913 after the 16th amendment was ratified.

    For current tax rates and burdens, Income Taxes and Tax Rates for Sample Families, 2006 from the Urban Institute provides some insight. Figure 1 shows the "progressiveness" of the current system.

    I proposed reducing my federal tax burden by more than $4,000 by having four more children. Unfortunately (?), my financial adviser was not amused.

    I'm off to the AEA's in the morning - no blogging 'till next Monday.

    Posted by Craig Depken at 08:15 PM in Economics

    Trends in U.S. Tort Costs

    This report indicates that after a regime shift in the 1980s, the dollar cost of the U.S. tort sytem has been relatively steady at about 2% of GDP:


    Still, spending $800 for each man, woman, and child seems a little high, although I doubt the total costs of the tort system are equally spread across the population. One way to interpret this, however, might be whether individuals would be willing to spend $800 per capita ($3,200 for a family of four) for the right to sue if economic or physical damages are incurred. I think if the question were put in that context, people would think some reform (I am not sure what) might be warranted.

    Posted by Craig Depken at 07:51 PM in Law

    Spot the Malthusian fallacy

    In his 2006 book Plan B 2.0: Rescuing a Planet Under Stress and a Civilization in Trouble, Lester Brown writes:

    If paper use per person in China in 2031 reaches the current U.S. level, this translates into 305 million tons of paper—double existing world production of 161 million tons. There go the world’s forests.

    Yes indeed, the forests would soon be gone because, as we all know, once a tree is harvested for paper, that’s the end of that. The land is forevermore bare.

    Oh wait, no it isn’t: it’s possible to plant new trees. As the price of paper rises, paper companies would find it profitable to grow more paper-producing trees than they grow today. And at a high enough price of paper, it would pay to recycle more paper (just as it already pays to recycle aluminum cans).

    Brown makes similar projections for grain and oil, and concludes:

    The inevitable conclusion to be drawn from these projections is that there are not enough resources for China to reach U.S. consumption levels.

    Quite right. And in 1907 it was equally impossible for the US to ever reach its current 2007 consumption levels.

    Posted by Lawrence H. White at 01:42 PM in Economics

    New Year's Roundup

    I'm back in town for a couple of days between family vacation and the AEAs. Some things that have caught my attention recently:

    1. IHS has two videos about its programs and summer seminars up on YouTube. Much of the footage in both was shot at Princeton last summer and I have a brief appearance in the first one (my voice was lousy all week from allergies/laryngitis). Links here and here. Kudos to IHS's marketing department--headed by my former student Keri Anderson--for the fine work.

    2. It would be remiss if someone on this blog failed to post on P.J. O'Rourke's latest offering. In On the Wealth of Nations, O'Rourke's gives us his humorous take on Adam Smith's The Wealth of Nations. O'Rourke will be discussing the book this weekend on CPAN2's BookTV (Sinday at 12 pm and Monday at 12 am).

    3. Two interesting new papers from NBER. In one,

    We showcase our approach empirically by exploring the extent to which the U.S. Endangered Species Act has altered land development patterns. We report evidence indicating significant acceleration of development directly after each of several events deemed likely to raise fears among owners of habitat land. Our preferred estimate suggests an overall acceleration of land development by roughly one year.

    In the other,

    We document large differences in trend changes in hours worked across OECD countries over the period 1956-2004. We then assess the extent to which these changes are consistent with the intratemporal first order condition from the neoclassical growth model. We find large and trending deviations from this condition, and that the model can account for virtually none of the changes in hours worked. We then extend the model to incorporate observed changes in taxes. Our findings suggest that taxes can account for much of the variation in hours worked both over time and across countries.

    4. Robert Samuelson of the WaPo considers the importance of productivity growth and concludes,

    Therein lies a caution to the Democratic Congress and the Bush administration. Although government can't easily dictate higher productivity, its policies may perversely favor lower productivity. What's politically expedient today -- a dubious tax break, a lazy budget deficit, an expensive regulation -- may be economically corrosive tomorrow. Don't ditch the future.

    5. Dwight Lee puckishly proposes a market for American citizenship in which Americans would be allowed to sell their citizenship to immigrants. This one is a must read. HT: Mankiw.

    6. A gripe about the reformatted WSJ: I'm not fond of having to look in another section of the paper (the B section--a part of the paper I only read if a story on the front of the section looks interesting) to find the letters to the editor. It's now more time consuming to find letters such as this today's offering from Don Boudreaux (Don posts on the letter here):

    David Malpass rightly argues that the U.S. trade deficit is a sign, not of American economic weakness, but of vigor ("Embrace the Deficit," December 21). To further strengthen his case he might have pointed out that in 102 of the 120 months of that most economically depressed decade, the 1930s, the U.S. ran trade surpluses. On an annual basis, America had a trade surplus for nine of the ten years of the 1930s (with 1936 being the only year of a trade deficit). For the whole of that decade, the U.S. ran a significant trade surplus, with exports over those ten years totaling $26.05 billion and imports totaling only $21.13 billion.

    Clearly, just as a trade deficit is no sign of economic malaise, a trade surplus is no sign of economic vitality.

    Posted by E. Frank Stephenson at 10:31 AM in Misc.

    January 02, 2007
    Transaction costs do matter

    Transaction costs in divorce cases have always seemed "too high" to me. I have always wondered how much hate and/or distrust there must be between two people to let lawyers generally take a large portion of their estate during the "settlement phase," especially when the end result seems to "destroy the estate in order to save it." The urban myth of the estranged wife selling the Porsche 911 for $5, notwithstanding, it seems that a substantial amount of spite characterizes many divorce settlements, which (at least some) lawyers seem all too willing to encourage (although I admit that I have no direct experience with this). I have no empirical evidence of this, but I suspect many decisions made in spite, especially those that sacrifice considerable value to a third party, are later regretted.

    This is why I found the beginning of this WSJ article compelling:

    Tim and Edra Blixseth spent 25 years building a $2 billion life together.

    When they decided to divorce, they spent a single afternoon in the Beverly Hills Hotel, dividing it all up. With just two notebooks and a bottle of wine, the Blixseths -- California real-estate tycoons and founders of the famed Yellowstone Club -- finished the job in a matter of hours.

    No attorneys. No accountants. No judges.

    Yeah - transaction costs do matter, at least to this couple. Granted, they didn't seem to have the hate/mistrust from which many divorces seem to arise.

    As do-it-yourself wills and house transactions are becoming more common because the relative transaction costs of the previous model (lawyers and real estate agents) are increasing, does this story presage more do-it-yourself divorce settlements? One would think so, especially if lawyers insist (like real estate agents) that they cannot reduce the transaction costs they impose while lower transaction-cost alternatives become more viable. That said, I suspect the various Bar Associations, through state and Federal governments, will have something to say if we see more amicably determined divorce settlements.

    Posted by Craig Depken at 05:30 PM in Economics

    Eminent Oddity

    Missouri is one of 30 states to change its eminent domain laws in response to the Kelo backlash. The new statute has a lot of rules to make sure that government compensation isn't too low, but it does almost nothing to narrow the scope for eminent domain authority. The St. Louis Post Dispatch reports a weird yet predictable story.

    St. Louis' redevelopment agency sued a convent, a saint, a nun and an elderly woman in a wheelchair who has a 999-year lease on Friday, seeking to use eminent domain to condemn a property in the Ice House District north of Soulard.

    City officials hope the area will be a hip entertainment district one day, but first they have to remove stubborn landowners and tenants.


    The suit also names property owners from centuries ago and their heirs, including John Mullanphy, said to be St. Louis' first millionaire, a nun and "Philipini Duchesne." The suit appears to be referring to St. Rose Phillipine Duchesne, who founded a school for the Society of the Sacred Heart of Jesus in a cabin in St. Charles in 1818, according to the Vatican. She died in 1852 and was canonized in 1988.

    The lawyer who filed the suit, Alan Pratzel, said the defendants were based on the property's title records.

    Posted by Edward J. Lopez at 11:46 AM in Economics

    The statesman who should attempt to direct private people in what manner they ought to employ their capitals would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it. -Adam Smith

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