Division of Labour: September 2007 Archives
September 30, 2007
On Republicans c. 1907

I have mentioned this in some earlier post, but the Democrat candidate for the 1908 election was chosen in 1906 - there were no primaries or anything like that. This is just to put the current marathon, multi-year Presidential race in some perspective.

The Sept. 30, 1907 NYT has a letter to the editor concerning the 1908 election which ends with the following paragraph:

The object for which the Republican Party was organized was accomplished forty-two years ago, and there is no further reason under the sun for its continued existence. In fact, the party has degenerated into a system of commercial despotism which acts through party legislation as if we were at commercial war with the world, and taxes the people on a war basis so increasingly oppressive that it is becoming a problem for the average citizen now live decently.


I submit that the spirit of this paragraph pertains to both major parties in the U.S. today.

Posted by Craig Depken at 07:55 PM in Politics

Tax Systems and Vested Interests

Jim Wooten asks,

What better audience to test a revolutionary proposal on taxation than a gathering of the Georgia Chapter of the National Association of Tax Professionals?

Actually, it'd be difficult to find a worse audience--that'd be the case if the proposal under consideration were eliminating the income tax. Selling income tax preparers on fundamental income tax reform is like selling shares of Chick-Fil-A to chickens. Instead they were gathered to hear about a Georgia House Speaker Glenn Richardson's plan:

Richardson’s proposal, which he acknowledges is not yet perfected — it’s 85 to 90 percent there, he said — would eliminate all property taxes, including on homes, businesses and vehicles. Eliminating them would deprive local governments and school boards of between $8.2 billion and $8.5 billion per year, an offset that would come from the expanded sales tax. Existing “exemptions” amount to $10 billion per year, with groceries accounting for $1 billion, Richardson said.

All Georgians “ought to have some tax burden,” he said. “We’re rapidly becoming a nation that has more people who are not paying taxes than are paying taxes. That is a dangerous place for this nation to be. If we don’t stop it now we are soon going to kill the U.S. economy.”

The locals would not be deprived of revenues in the sums they’re now collecting. Richardson proposes a formula that would give each local government and school board the same share of the $8-plus billion they now collect. Another formula, now being drafted, would measure growth in the tax digest and give them the higher of inflation or actual property values. In addition, local governments could continue to seek voter approval for a 1 percent local sales tax, a portion of which could be spent on operations.

Posted by E. Frank Stephenson at 03:35 PM in Economics

BB&T Chair in Free Market Thought

For those who might qualify, the following pre-JOE job listing came through my inbox today. I believe it will appear in the October JOE.

Read More »

Posted by Joshua Hall at 01:06 PM in Economics

September 29, 2007
Questions About Divorce Rates

Betsey Stevenson and Justin Wolfers in today's NYT:

The story of ever-increasing divorce is a powerful narrative. It is also wrong. In fact, the divorce rate has been falling continuously over the past quarter-century, and is now at its lowest level since 1970. While marriage rates are also declining, those marriages that do occur are increasingly more stable. For instance, marriages that began in the 1990s were more likely to celebrate a 10th anniversary than those that started in the 1980s, which, in turn, were also more likely to last than marriages that began back in the 1970s.

I'm perfectly willing to believe that the media reporting of divorce rates is incorrect. Unfortunately, anything involving economics or statistics has a decent probability of being butchered. That said, I have two questions about Stevenson and Wolfers' discussion of declining divorce rates. First, do they hold constant the age of marriage? People getting married in the 1990s were older than those getting married in the 1970s. It's possible--probable?--that folks who get married at older ages are less likely to divorce. Second, I suspect that the marriage rate is falling; increasing out of wedlock births suggest so. If so, is it possible that Stevenson and Wolfers' finding of falling divorce rates is an artifact of some high probability of divorce folks never getting married in the first place? Stevenson and Wolfers are smart folks so they might well control for these factors; perhaps space constraints caused them to leave some material out of their NYT piece.

Posted by E. Frank Stephenson at 09:19 PM in Economics

September 28, 2007
Creative Destruction

Deirdre McCloskey's review of books about Joseph Schumpeter and by John Kenneth Galbraith contains this gem:

In truth the list of companies that Galbraith held in awe as great forces in 1967 looks quaint now. U.S. Steel, AT&T, and General Motors belie his assertion “of great stability in [a great corporation’s] position in the planning system.” Eight years after the first publication of The New Industrial State, Bill Gates founded Microsoft. Let creative destruction rip.
Posted by Wilson Mixon at 09:00 PM in Economics

The 400

Interesting essay on the Forbes 400. An excerpt:

Far from a country where only the rich get richer, the wealthy in the US are very much a moving target. While there are 74 Forbes 400 members who inherited their entire fortune, 270 members are entirely self-made. Though many attended Harvard, Yale and Princeton, there are countless stories within of high school and college dropouts, not to mention others who grew up extremely poor.

Politicians who regularly engage in class warfare would do well to keep the Forbes 400 out of the hands of their constituents, because it makes a mockery of the kind "Two Americas" rhetoric suggesting the existence of a glass ceiling that keeps hard workers at the bottom of the economic ladder. To read the Forbes 400 is to know with surety that the U.S. is still very much the land of opportunity.

Posted by Wilson Mixon at 02:36 PM in Economics

Should DUI be illegal?

This guy in Columbus says no.

Essentially, his viewpoint is that so few people are actually killed by drunk drivers that government shouldn’t be wasting its time on the issue.

While it'd be pretty easy for me to believe the current level of enforcement is too high in the sense that the marginal costs exceed the marginal benefits. It would be hard to accept the notion that the optimal level of DUI enforcement is zero -- even though that is exactly my view on many other issues with supposed negative externalities (e.g., drug use). But now that I'm thinking about it, I wonder...

Thinking like an economist, I wonder what the elasticity of injuries/deaths caused by drunk driving relative to enforcement efforts is. If the elasticity is sufficiently low, the enforcement costs are likely to be high and the benefits in terms of fewer injuries/deaths low...and doing nothing may indeed be optimal.

Here's a bit of the abstract from an academic paper on the question:

Using state level data over the 1975–1986 period, we report no conclusive evidence that any specific form of punitive legislation is having a measurable effect on motor vehicle fatalities. We report suggestive evidence that multiple laws designed to increase the certainty of punishment (e.g., sobriety checkpoints and preliminary breath tests) have a synergistic deterrent effect. The most striking finding is that mandatory seat belt use laws and beer taxes may be more effective at reducing drunk driving fatalities than policies aimed at general deterrence.

"Suggestive evidence" of a "synergistic deterrent" is the best they have? Hmmm.

So a blood-alcohol "cap" probably doesn't work, but an alcohol tax probably does. Forget carbon taxes and global warming, I'll be looking for Greg Mankiw to take up this cause for his Pigou Club.

Posted by Robert Lawson at 09:28 AM in Economics

Er, thanks.

I was happy to find DoL listed (at 68) on this list of Top 100 Academic Blogs Every Professional Investor Should Read, but the description was puzzling:

68. Division of Labour: The Division of Labour features historical economic headlines, ads, and more.

"Historical economic headlines" no doubt refers to Craig's NYT series.

But ads?

Posted by Robert Lawson at 08:35 AM in Admin

September 27, 2007
Reply to Salerno re: Doherty and Boettke

I thank Joe Salerno for his lengthy and thoughtful reply (posted in the comments section to my earlier entry commenting on his review of Brian Doherty's book.

Joe and I agree that Doherty should not have treated Pete Boettke’s account of the Austrian revival as authoritative. Joe has another account, as do I, as do other participants. I haven’t taken a position on the accuracy of Pete’s account, nor have I objected to Joe’s substantive critique of it. I would have to study the history more closely first.

Now to our disagreements. In his comment, Joe writes: “I do however have two objections to White's second comment, regarding my alleged suggestion ‘that a change in Boettke’s perspective has been driven by the changing agenda of his department’s chief soft-money source.’ White completely misses the point of the second part of my review. I never suggested such a thing.”

Never suggested such a thing? Joe in his review wrote that, if one assembles facts scattered about Doherty’s account, “one can reasonably surmise that Boettke's intellectual volte-face was a rational and deliberate response to the shift in the strategic vision of the Kochs. As the orbit of "Planet Koch" goes, so go its satellites.” Silly me: I took these two sentences to be suggesting just such a thing. I took “one can reasonably surmise” to mean “I, Joe Salerno, offer as a reasonable surmise”. Joe now says that he himself “clearly remained agnostic on the accuracy of this interpretation.” I fear that Joe’s agnosticism was far from clear in his review. At least, I missed it.

Read More »

Posted by Lawrence H. White at 06:11 PM in Economics  ·  Comments (1)

Customs rulings c. 1907

The Sept. 27, 1907 reports on the "latest customs rulings:"

It was decided yesterday by the Board of United States General Appraisers that artificial eyes composed of decorated glass and metal of which metal is the component of chief value are properly dutiable at 60 per cent. under the provision in the Dingley tariff for "decorated glass."

It was maintained by the importers, I. Henry & Co. of this city, that the eyes should be admitted as "manufacturers of glass" at 45 per cent. ad valorem, but the board considers the contention as being without merit.

In a decision by General Appraiser Fischer it was decided that postcards ornamented with feathers are not to be deemed "lithographic prints" or "printed matter," as those terms are used in the law, but must stand duty at the rate of 50 per cent. under the provision for "manufactured feathers." It was found that the feathers on the cards constitute the component of chief value.

A decision was handed down in the case of Hawley & Letzerich of Galveston holding that postcard albums are dutiable at 35 per cent. ad valorem, and not at 25 per cent. as alleged by the importers.

Thank goodness we are moving more towards free trade and therefore reducing the power of individual "General Appraisers" to determine what tax should be placed on each product coming in from another country, especially for those who need(ed) artificial eyes and picture postcards with feathers attached.

Unfortunately, we replaced this form of meddling with an income tax code that contains different forms of meddling.

Posted by Craig Depken at 11:26 AM in Economics

On fairness c. 1907

From the September 27, 1907 NYT:

North Dakota will be the name of Battleship No. 23, one of the new 20,000-ton vessels, contracts for which were recently awarded by the Navy Department. The other vessel will be called the Deleware.

President Roosevelt has decided that as so many vessels bear the names of New York cities it would be unfair to carry out the original plan of naming No. 23 the New York and of changing the cruiser of that name to the Saratoga. Utah now is the only one of the States after which no war vessel has been named.

Posted by Craig Depken at 11:17 AM in Politics

A Money Monopoly

Public radio's "Marketplace" program (aka Stateplace) had an interesting story about money in Guatemala. An excerpt:

Brett Neely: Guatemala's currency is called the Quetzal, named after the national bird. The biggest bill is 100 Quetzals -- a little more than $13.

When you get money from an ATM, you wind up with a big stack of 100s. And as tourists soon discover, a hundred Quetzals goes a long way. Maybe too far.

Joel: It's been virtually impossible to purchase anything with a hundred-Quetzal bill.

Dana: They always seem upset when you hand them a hundred.

Esteban: If I know I need to make some smaller purchases in the afternoon, in the morning, I'll get something really random from a large store so I can break my change down.

The lack of change is an inconvenience for tourists. But it's also a business problem for Guatemalans and for other Central and South Americans.

At a small store in the highland city of Quetzaltenango, owner Elimira Reyes Osorio tells me she's lucky if she's got change for two 100-Quetzal bills -- about $26 bucks. If she burns through that, she can only make the sale if she knows the customer.

But the reporter never considers why Guatemala has difficulty putting enough small bills in circulation. My guess--the small bill problem results from a monopoly on currency issue or some perverse regulations in the banking system.

I've emailed an acquaintance in Guatemala. I'll update if he sends back something interesting.

ADDENDUM: Here's the reply I got from the friend in Guatemala:

Yes, the story is true and your hunch is "right-on-the-money". Last year -nearing the Christmas season- the Banco de Guatemala (our central Bank) acknowledge to the embarrassment of it's authorities that it had run out of cash (due to bad planning, really). You can imagine that a large portion of Christmas sales in Guatemala are transacted in cash so the ineptitude of the central bank caused a mini-crisis specially in rural areas. The Banco de Guatemala did not acknowledge this but I know that they were purchasing Q20 bills for up to Q40 and Q50 (!!!). Somebody made a bundle out of this mess.
Posted by E. Frank Stephenson at 08:37 AM in Economics

Sign of Assimilation?

A news item:

Ten Hispanic immigrants filed a lawsuit on Wednesday against a Connecticut city, its mayor and police chief, and federal agents who led a crackdown on illegal immigration last year.

Just for the record, I'm pro-immigration. For all I know (I didn't read beyond the first paragraph of the news story), these immigrants might have a legit cause of action. I just found it interesting that they had figured out the American way of doing things is to call in the lawyers.

Posted by E. Frank Stephenson at 08:17 AM in Law

September 26, 2007
Pharmaceutical Costs

The NYTimes reports that WalMart and increased acceptance of generic drugs have slowed the rate of inflation for pharmaceuticals:

As overall health care costs continue to rise sharply, prescription drugs have emerged as a surprising exception.

Economists say the slowdown has come about because more people are turning to generics and because generic versions of some of the most common drugs have recently come on the market.

Another factor could be the so-called Wal-Mart effect. Last fall, Wal-Mart began offering many generic prescriptions at $4 a month. Target quickly announced a similar plan, and Kmart expanded its program, which offers a 90-day supply of generic drugs for $15. Other retailers have followed with their variations. Publix, a grocery store chain with 684 pharmacies in five states in the Southeast, announced last month that it would not charge for prescriptions for seven commonly used antibiotics.

Now, if only producers of legacy drugs were allowed to add to this pressure. But, as the Wall Street Journal reports, the FDA is moving in the opposite direction:

In a little-noticed program announced last June, the Food and Drug Administration is cracking down on remedies like quinine. These belong to a class known colloquially as legacy drugs: That is, they are generally recognized as safe and effective, and have been prescribed by physicians for decades, in some cases before the modern FDA regime was created in 1962. But since they lack a formal FDA stamp of approval, they're being yanked from the market.

In a more rational political world, legacy drugs might be "grandfathered in," since the risks they pose are so few. The FDA, however, remains under intense scrutiny for handling of pharmaceutical safety in the aftermath of the Vioxx furor. So the agency is pulling out all the bureaucratic stops to mollify its Capitol Hill critics like Pete Stark and Chuck Grassley.

Legacy drugs form about 2% of the total pharmaceutical market, and they're generally prescribed not to cure illness but to relieve symptoms -- cough, cold and allergy, as well as other specialty medications. They're manufactured by several hundred small- and medium-sized companies; the active ingredients and compounds are approved by the FDA and the drugs are synthesized in FDA-licensed facilities.

Legacy drugs, then, aren't medical moonshine cooked up in somebody's bathtub; nor are they new or experimental drugs. Nonetheless, the FDA is requiring them to be put through the same regulatory wringer. Some must complete a New Drug Application, which requires clinical trials and can cost between $5 million and $10 million per legacy drug.

Posted by Wilson Mixon at 03:45 PM in Economics

On mass transit c. 1907

The Sept. 26, 1907 NYT reports on the accidents of the mass transit systems in the greater New York City area. The story reports, "[t]he traction companies, steam, electric, and horse, surface, Subway, and elevated, kill or seriously injure every month about 200 persons."

The story reports that from Aug. 5 through Aug. 31, there were 5,500 accidents reported in the Greater New York area:

Persons injured in car collisions...............145
Persons injured in collision with vehicles...465
Persons struck by cars............................405
Persons injured boarding cars..................641
Persons injured alighting from cars...........1,263
Employes injured....................................641
Injuries on stairways...............................26
Other accidents......................................1,881
The paper counted each injury as a separate accident, so we don't really know how many separate incidents in which the 5,500 individuals were injured.

However, in the same time period, 189 persons were either killed or seriously injured:

Persons killed.............42
Fractured skulls...........10
Amputated limbs.........10
Broken limbs...............44
Other serious injuries...83
It's not clear that the August of 1907 was a typical month on the transit system. Moreover, we don't know how many people rode the transit system over the same period - perhaps the system was much safer (in percentage terms) than is portrayed in this article. Nevertheless, it seems that during that month it was rather dangerous to ride the trains in New York City.

Posted by Craig Depken at 11:14 AM in Economics

September 25, 2007
The modern history of Austrian Economics, revised

I have mixed feelings about Joe Salerno’s take, in a review written for the Quarterly Journal of Austrian Economics and posted today on the Mises Institute site, on Pete Boettke’s oral history of the modern American “Austrian school” of economics, as told to Brian Doherty in an interview and reported on a few pages of Doherty’s recent book Radicals for Capitalism. On the positive side, Salerno mentions yours truly. More seriously, I basically agree with Salerno’s point (although I wouldn’t have put it so harshly) that to get a more rounded picture of the tribulations of Austrian economics Doherty should have cast his interview net more widely.

Doherty should have realized that Boettke’s perspective, regarding what research programs or strategies Austrian economists have been or should be pursuing, differs from that of many other self-identified Austrians (as Boettke no doubt would acknowledge). Joe Salerno’s perspective also so differs, as does mine, as does that of any other single economist on Salerno's list. There is no one dominant point of view among current Austrians about how best to go about doing economics, or about where others may have pursued the wrong approach. (There were also differences among earlier generations of Austrians, which was the point of my student paper on methodology that Salerno cites.) Even Mario Rizzo and I have disagreed about it (see our dueling afterwords to Bruce J. Caldwell and Stephan Boehm, eds., Austrian Economics: Tensions and New Directions [Boston: Kluwer, 1992]).

On the negative side, Salerno concludes his review by suggesting that a change in Boettke’s perspective has been driven by the changing agenda of his department’s chief soft-money source. That’s a low blow for an academic journal review. And it cuts both ways. Does Salerno want a reader of his review to judge the argument on its merits, or does he want the reader to feel compelled to ask: who’s supporting Salerno, and what’s their agenda?

Addendum: Boettke's own response to Salerno, which is a model of scholarly decorum, is available on his blog The Austrian Economists.

Posted by Lawrence H. White at 08:46 PM in Economics  ·  Comments (6)

September 24, 2007
Is That an Iguana in Your Pants or ...

A news item:

A Californian man has been charged with using his false leg to smuggle three endangered iguanas from a nature reserve in Fiji to the United States.

Prosecutors say Jereme James stole the banded iguanas while on a visit to the South Pacific island in 2002.

He is alleged to have constructed a special compartment inside his prosthetic limb to move the reptiles.

Posted by E. Frank Stephenson at 05:00 PM in Funny Stuff

Grade Inflation

From President Bush's press conference last Thursday:

Q: Do you think there's a risk of a recession? How do you rate that?

THE PRESIDENT: You know, you need to talk to economists. I think I got a B in Econ 101. I got an A, however, in keeping taxes low — (laughter) — and being fiscally responsible with the people's money. We've submitted a plan that will enable this budget to become balanced by 2012, so long as Congress learns to set priorities. And we can balance the budget without raising taxes.

Pills for seniors, rampant spending, steel tariffs, China bashing, and an increasing regulatory burden warrant a much lower grade. I'll go with a D.

Posted by E. Frank Stephenson at 12:40 PM in Economics

Taxation for thee but not for me c. 1907

From the Sept. 24, 1907 NYT:

It is known that the members of the French Chamber of Deputies last year voted themselves an additional salary of 6,000 francs. It is not so well known that this action was resented by the Socialists...By some means it came to be understood that a "divvy" was the duty of the Socialist Deputy. If he handed over half of the "unearned increment" to the Socialist Treasury he might keep the other half.
So far, so good. However, it is interesting that the socialists didn't take all of the pay raise.

But it gets better:

Thirty-two Socialist Deputies have accordingly submitted to this Socialist tax. But ten have made only a partial surrender of the moiety, pleading, possibly the same "increase in the cost of living" which was pleaded in behalf of the increase of pay. Eight have omitted to divided with the party to any extent whatever, being apparently of the opinion that 3,000 francs would compensate them for any odium they might incur by keeping it for themselves...
Such an excellent and subtle economic argument offered in a similar story today would be surprising.

Posted by Craig Depken at 12:30 PM in Politics

In response to anarchists c. 1907

Following up on the Anarchist handbill story from last week, the Sept. 24, 1907 NYT reports on the exercise of private property rights:

On account of the Anarchist notice, which was posted on the property of H.C. Frick at Fifth Avenue and Grant Street, the other day, the property is to be closed to the public in the future. There is a high board fence about it, but during the Summer the gates have been thrown open and the place was used as a playground for the poor children in the downtown districts.

This afternoon all the entrances to the property were boarded up, and notices were posted announcing that persons who trespassed on the property would be prosecuted to the full extent of the law.

Posted by Craig Depken at 12:22 PM in Misc.

September 23, 2007
Forthcoming paper on Hayek and the Great Depression

My paper “Did Hayek and Robbins Deepen the Great Depression?” critically discusses the thesis -- variously advanced by Milton Friedman, Brad DeLong, and others -- that F. A. Hayek and Lionel Robbins gave “liquidationist” policy advice that swayed American policy-makers in the wrong direction in the early years of the Great Depression. As a forthcoming article it is now available here on the website of the Journal of Money, Credit, and Banking. Read it now before it is actually published and becomes harder to access!

Posted by Lawrence H. White at 05:56 PM in Economics

Assume a Sandpile, Take 2

Just for fun: Here's a tongue-in-check "example" of a negative feedback from ecoEnquirer.com, a site run by Roy Spencer. A good-natured article about the site is here.

[M]any people are now also having to deal with another sinister side effect of the extra CO2: plants are loving it. The extra plant "food" has caused a worldwide greening of the Earth, with vegetation sprouting to life in the spring weeks before it is supposed to. This unnatural disruption of Mother Nature's busy schedule has even caused some tropical species to expand their habitats poleward.

This worldwide greening has led to an unexpected problem for motorists in many countries. People are increasingly finding their cars, trucks, and SUVs covered in vegetation that has grown overnight into tangled masses that engulf their vehicles.

Posted by Wilson Mixon at 04:35 PM in Funny Stuff

Indian Run 60k

Yesterday I ran the Indian Run 60k in the Hocking Hills (OH). My final time was 6:31:02--13th overall out of 36, 12th out of 32 men, and 3rd out of 4 men in my 40-44 age group.

To answer your questions:

Yes, I know this is insane.
Yes, I know about Art DeVany 's view that running marathons (or ultra marathons) is bad for you.
No, I don't agree with him.
No, I don't think this is bad for my knees.
No, I am not "running from" something, at least nothing I can think of.

Posted by Robert Lawson at 02:49 PM in Sports

September 22, 2007
Ethically Challenged

Today's WSJ has an article (sub req) about MIT reporting incorrect SAT scores for the U.S. News rankings. It's a pretty small error and there may not have been an attempt to deceive, but this paragraph caught my eye:

Says Mr. Shmill [MIT's interim admissions dean]: "It was a pretty harmless error, or we wouldn't be talking about it."

So if it wasn't a "pretty harmless error" MIT would have kept it hush, hush. A real paragon virtue, eh?

Posted by E. Frank Stephenson at 10:09 PM in Misc.

HillaryCare Catch-22

From the WSJ's "Best of the Web Today":

The Associated Press reports on a Hillary Clinton health-care speech:

"It is long past time that Americans and the richest of all countries realize that health care is a right and not a privilege," Clinton said at a labor forum in Chicago. "And that goes especially for people who work hard every single day."

First she claims that "health care is a right and not a privilege," but then she qualifies this statement by saying "that goes especially for people who work hard every single day." The implication of the latter statement is that the right to health care is contingent on working hard "every single day."

But just the other day, the New York Post quoted Mrs. Clinton as drawing a different link between work and medicine:

The former first lady said she could envision a day when "you have to show proof to your employer that you're insured as a part of the job interview--like when your kid goes to school and has to show proof of vaccination.

"At this point, we don't have anything punitive that we have proposed," she said.

Well, that's reassuring. In Hillary Clinton's America, it seems, health insurance will be like experience: You can't get a job without it, and you can't get it without a job.

Posted by E. Frank Stephenson at 03:33 PM in Politics


GA political columnist Bill Shipp writes in today's RNT (no link) that "Georgia's congressmen don't bring home bacon." Shipp writes that Rep. Jack Kingston (his district is southeastern GA along the coast) owes "Georgians a big fat apology" and calls the $83 million in federal funds that Kingston has obtained for local projects "peanuts." It's rather ironic then that Kingston is Georgia's most pork happy Republican congressman.

Even more ironic--the page opposite of Shipp's column contains a photo of our congressman posing with the results of a local project for which he obtained federal funding.

Posted by E. Frank Stephenson at 03:17 PM in Politics

Why do we have a Fed?

As an economist who’s spent most of my career trying to understand how a free-market monetary system would work and how we ended up with central banking instead, I’ve naturally been keenly interested in the reactions of economics bloggers to the questions Jon Stewart asked of Alan Greenspan on Tuesday:

Why do we have a Fed? Is the free market – wouldn’t the market take care of interest rates and all that? Why do we have someone adjusting the rates if we’re a free-market society?

(My homemade transcript of the interview is here. The video clip is still available on Comedy Central for the time being.)

A colleague emailed me to ask whether I’d written Stewart’s questions. Actually, I suspect they were drawn from Brad DeLong’s review of Greenspan’s book in the L. A. Times. After describing how the Fed conducts monetary policy, DeLong asked:

Isn't this odd? Don't we have a market economy? Why should a central planner be setting interest rates?

Greg Mankiw’s remarks on the interview are particularly interesting. My thanks to those who cited my work with George Selgin in the comments section of Mankiw’s blog, but the fact that Mankiw was unaware of that work (or thought it not worth mentioning) is a sobering commentary on how little impact we’ve had, even on the free-market side of the mainstream, on the profession’s thinking about the question of why we have a central bank.

Below the fold I comment on Mankiw’s remarks in detail.

Read More »

Posted by Lawrence H. White at 01:10 PM in Economics  ·  Comments (4)

September 21, 2007
Assume a Sandpile, Take One

“Assume a sandpile, predict an avalanche,” says Peter Huber on page 52 of Hard Green. The global warming models appear to contain a lot of positive feedbacks. Prominent among them is that droughts caused by warming will convert the Amazon rainforests into savannahs. Will they? This article reports evidence that a negative feedback might be more likely with the Amazon greening up:

“If drought were to have the expected negative effect on canopy photosynthesis, it should have been especially observable during this period [of drought].
“The observations of intact forest canopy ‘greenness’ in the drought region, however, are dominated by a sgnificant increase, not a decline.”
Growth spurts would be “inconsistent with expectation”, they reported in the journal Science, and concluded the reduced rainfall was more than compensated for by extra sunlight.

Posted by Wilson Mixon at 09:01 PM in Science

Polar Opposites

Best of the Web points to an NYT article, "Scientists Report Severe Retreat of Arctic Ice." The article runs 459 words. The first 441 words expand on the title. Here are the last 18 words: "Sea ice around Antarctica has seen unusual winter expansions recently, and this week is near a record high."

Posted by Wilson Mixon at 08:41 PM in Politics

Capitalist anarchists? c. 1907

From the Sept. 21, 1907 NYT:

PITTSBURG - Intense excitement was caused here this afternoon when an Anarchistic notice was found posted on the high board fence which surrounds the old cathedral property, for which H. C. Frick paid $1,300,000...

The notice was written on a typewritter, and was perfect as to spelling and punctuation. It was as follows:


Murder the Rich and Burn their Homes.

Too long have the working people of this city been trampled by the rich. How easy it is for them to enjoy themselves, when they grind out the lives of the poor to add to their riches! How easy it is for them to enjoy themselves by sacrificing men's lives! Join with us and redress your wrongs. We have suffered too long.

We want agents to murder the rich and burn their homes. Wages, $10 a day. If you are the right kind of a man, go to the corner of Wood Street and Fifth Avenue, and a man will give you the proper sign.

EH.net suggests that nominal GDP per capita was about $390 per year, or approximately $2 per day. Now, if the redressing of wrongs provides a "good," the "right man" should be willing to pay for the privelege. Having to pay five times the average day's wage (and 8 times what Rockefeller paid his summer help), suggests that the recruitment of anarchists, and especially those who would be willing to commit murder and arson, was not easy.

The police at first think the posting is a joke but then:

they noticed several suspicious persons at the corner of Fifth Avenue and Wood Street, [and] they arrested them.

Posted by Craig Depken at 03:59 PM in Politics

On being wealthy c. 1907

The Sept. 21, 1907 NYT reports about ongoing testimony concerning the business practices of Standard Oil including, for the first time, revelation of the major stock holders of the company.


In 2005 dollars, J.D. Rockefeller's holdings would be worth approximately $2,4 billion. This amount seems relatively paultry compared to those on the Forbes 400. Indeed, J.D.'s Standard Oil holdings would put him around number 188 on today's list.

The level of concentration amongst the people listed here is moderate - the Herfindahl index is 2722. Here's the Lorenz curve:

Stata Data File

Another story carries the headline "Rockefeller Saves $198," and concerns the wages Rockefeller paid college students who worked on his estate during the summer. The daily wage was reduced from $1.50 to $1.25. When several of the students complained, the foreman said "If you don't want to work for $1.25, you know what you can do." Promptly, three people quit.

Posted by Craig Depken at 03:28 PM in Misc.

For the Children

An interesting historical note from a reader at the Mises blog site:

As early as 1871 the Liberals in my home town of Kettering, England, had (as Herbert Spencer in near by Darby would have been aware) already given up supporting liberty.

They campaigned for a School Board (which they were able to do under the Act of Parliament passed by the Liberal party government the previous year) to force people to pay for schools they wished to build and control.

The Liberals did this not because there were no schools in Kettering, but because most of them were Church of England "National" schools and they disliked the Anglican Church.

There was nothing to stop the Liberals building more "Nonconformist" (i.e. hard line Protestant) "British" schools, and most of the rich manufacturers in the town were Liberal "nonconformists" (so they could have educated the children of the poor in schools that avoided the "wicked" teachings of the Church of England had they chosen to spend their own money) - but they choose to opt for force (i.e. to reject liberty).

Posted by Wilson Mixon at 01:26 PM in Politics

September 20, 2007
APEE Essay Contest

From today's inbox:

Your students could win a lot -- and learn a lot -- through the 2007 APEE Essay Contest on the Benefits of a Free Market Economy. Open to all full-time students 25 years old or under, this contest can motivate your students to better understand markets.

The author of the winning essay receives $2,500; the second prize is $2,000; and the third is $1,500. Up to ten others can receive honorable mentions of $250 each.

Students can choose from three topics:

*What Causes Prosperity?
*What Is the Role of Ethical Behavior in a Free Market?
*Can Markets Protect the Environment?

Examples of previous winners are on the APEE Web site, as are sources of background for the essays.

The deadline is December 1, 2007, so alert your students now and remind them later. Winners of the contest, which is sponsored by the John Templeton Foundation, will be announced February 15, 2008.

You can fit this essay into your classroom teaching. Some faculty have made it a classroom assignment. Houghton College held a contest for its own students, with the best essays submitted to the national contest. And Jim Gwartney and his associates have incorporated it into their Common Sense Economics syllabus, which is based on the book Common Sense Economics by APEE members Jim Gwartney, Richard Stroup, and Dwight Lee.

Have fun -- and feel free to contact me (shaw@popecenter.org) if you have questions.

Best regards,

Jane S. Shaw
Executive Vice President
J.W. Pope Center for Higher Education Policy
200 W. Morgan St.
Raleigh NC 27601

Posted by Robert Lawson at 07:48 AM in Economics

OJ Trial: On two, ready break

There will soon be another O. J. Simpson trial. He is going to plead not guilty on all charges. Get ready for a huge shift in what the American public debates talk about.

Posted by Edward J. Lopez at 07:28 AM in Culture

September 19, 2007
Hayek & Wikipedia: Who GNU?

Interesting article on the Mises blog:

The English Wikipedia alone includes nearly two million articles, and has a word-length fifteen times that of the Encyclopedia Britannica. Wikipedia is the single largest encyclopedia ever assembled, having long since surpassed the Yongle Encyclopedia of 15th century China.

The man credited with founding Wikipedia, Jimmy Wales — known to Wikipedians as "Jimbo" — was a finance major at Auburn University when the Mises Institute's Mark Thornton suggested he read "The Use of Knowledge in Society," a now-famous essay written by Austro-libertarian economist and Nobel laureate Friedrich von Hayek. ... According to a June 2007 Reason magazine interview, this insight of Hayek's is what led Wales to found Wikipedia. The rather lofty vision that inspired Wales? "Imagine a world in which every single person on the planet is given free access to the sum of all human knowledge. That's what we're doing."

Those who refused to believe that a user-generated encyclopedia could compete with the monolithic, traditional encyclopedia written by experts and organized by professional editors, were no doubt shocked when Nature magazine published a 2006 article comparing Wikipedia to the well-known Encyclopedia Britannica. The article concluded that Wikipedia articles were comparable in accuracy and thoroughness to those of the older, paper encyclopedia.

According to [a Pew Research Center] study, "Wikipedia has become the No. 1 external site visited after Google's search page, receiving over half of its traffic from the search engine." All that traffic does not include sites that syndicate Wikipedia content, such as Ask.com.

Such syndication is free thanks to the special license agreement to which all contributors consent when adding content to the encyclopedia. The GNU Free Documentation License (GFDL) allows for royalty-free reproduction — in original or modified form — even in for-profit projects.

I have an attraction to GNU projects: I've been using GRETL (Gnu Regression, Econometrics and Time-series Library) for both instruction and research. I co-authored a review article that describes GRETL's capabilities as of a couple of years ago. As happens with things GNU, these have increased a good bit since then.

Posted by Wilson Mixon at 03:57 PM in Misc.

Voting With The Feet

A news item:

OTTAWA–Belinda Stronach, the MP for Newmarket-Aurora and former cabinet minister, travelled outside Canada's health-care system to California for some of her breast cancer treatment earlier this year.

Stronach, diagnosed in the spring with a type of breast cancer that required a mastectomy and breast reconstruction, went to California in June at her Toronto doctor's suggestion, a spokesperson confirmed.

Thanks to Gary for the pointer.

Posted by E. Frank Stephenson at 02:43 PM in Economics

On dead bees c. 1907

Although I am not remotely close to a bee expert, I found this story from the Sept. 29, 1907 NYT of passing interest:

Prominent beekeepers of the State, who spoke at a gathering under State auspices at the Agricultural Station here to-day, gave it as their opinion that the late spring and blight of apple blossoms were responsible for the poor output of honey, the harvest being one-third the normal amount.

Producers are selling honey at 25 cents, an advance of 3 cents a pound in the comb, and 3 cents more for the extracted article. The spread of "foul brood," a pest which decimates bee colonies, was reported to be so great that the industry was threatened with extinction.

Posted by Craig Depken at 12:52 PM in Science

On campaign financing c. 1907

From a Sept. 28, 1907 NYT editorial describing a speech by Judge Parker at Jamestown:

In the struggle for mastery in both State and Nation money has been sought as well for illegitimate uses as legitimate uses. As the corruption of the electorate has widened and deepened the demand for money has increased, a demand which long ago outgrew any sum that could be raised by patriotic contributors. So corporations having favors to ask were invited to contribute, and they did so, knowing full well that when legislation was needed or undesirable legislation was threatened the head of the organization could be relied upon for assistance; that his statement that this corporation contributed ten or one hundred thousand dollars to the campaign fund would lock or unlock the door to legislative or administrative action.
On the other hand, the "head of the organization" could simply claim that they did not know the individual or corporation who had contributed hundreds of thousands of dollars, could insist that they would not be swayed by contributions, and could "swear off" political action committee dollars.

As I have mentioned before, our problems aren't necessarily new, they are just "ours."

Posted by Craig Depken at 12:48 PM in Politics

Ethanol is Bad

So says an editorial in today's NYT; so says Mike Lester's cartoon in yesterday's RNT:


Posted by E. Frank Stephenson at 11:51 AM

Alan Greenspan and Jon Stewart on free markets versus central banking

From tonight’s Daily Show (my transcription from the Tivo’d interview):

Jon Stewart: Many people are free-market capitalists, and they always talk about free-market capitalism, and that is our economic theory. So why do we have a Fed? Is the free market – wouldn’t the market take care of interest rates and all that? Why do we have someone adjusting the rates if we are a free-market society?

Alan Greenspan: You’re raising a very fundamental question. … You didn’t need central bank when we were on the gold standard, which was back in the nineteenth century. And all of the automatic things occurred because people would buy and sell gold, and the market would do what the Fed does now. But: most everybody in the world by the 1930s decided that the gold standard was strangling the economy. And universally this gold standard was abandoned. But: you need somebody to determine –or some mechanism – how much money is out there, because remember, the amount of money relates to the amount of inflation in the economy. … In any event the more money you have, relative to the amount of goods, the more inflation you have, and that’s not good. So:

Stewart: So we’re not a free market then.

Greenspan: No. No.

Stewart: There’s a visible – there’s a benevolent hand that touches us.

Greenspan: Absolutely. You’re quite correct. To the extent that there is a central bank governing the amount of money in the system, that is not a free market. Most people call it regulation.

Stewart did indeed raise a very fundamental question. Greenspan’s answers were quite accurate as far as they went, but they left out a few details.

(1) The monetary system on the gold standard used mostly bank-issued money, and (to the extent that banks were unregulated) the volume of bank-issued money was market-regulated.

(2) We were on the gold standard at the time the Fed was established, so it follows (from Greenspan’s second sentence) that the Fed was not needed when it was established.

(3) Those who decided that the gold standard should be abandoned were mistaken. Greenspan does believe this, or at least he used to.

(4) A gold-backed system in which the amount of money is governed by free markets, and not by a central bank, is called free banking.

Addendum: Back in January 2006, as Greenspan was leaving office, I commented that "It will be interesting to see whether Greenspan, the erstwhile gold standard advocate, becomes more openly skeptical of central banking once no longer at the helm." He hinted at, but missed the chance to clearly convey, that message tonight.

Addendum2: A clip of the interview is available at the Daily Show website under "most recent videos".

Comments are open.

Posted by Lawrence H. White at 12:40 AM in Economics  ·  Comments (19)

September 18, 2007
Machiavelli on eminent domain abuse

I recently had the good fortune of attending a conference on Machiavelli's The Prince, which mixes artful ambiguity with positive political economy in beguiling yet somehow satisfying ways. Machiavelli's continued relevance is impressive. For example, there's been much ado lately about Kelo-style development takings. GMU law professor Ilya Somin has a chapter in my forthcoming book, Law without Romance, in which he argues that the Kelo rationale can justify any taking that benefits a commercial enterprise. This echoes Justice O'Connor's famous "any Motel 6 can be taken for a Ritz-Carlton" dissent. Machiavelli's take on it comes from Chapter 17 of The Prince, and includes an eery warning against what we know as Kelo's political backlash:

The Prince should nonetheless make himself feared in such a mode that if he does not acquire love, he escapes hatred, because being feared and not being hated can go together very well. This he will always do if he abstains from the property of his citizens and his subjects, and from their women; and if he also needs to proceed against someone's life [blood], he must do it when there is suitable justification and manifest cause for it. But above all, he must abstain from the property of others, because men forget the death of a father more quickly than the loss of a patrimony. Furthermore, causes for taking away property are never lacking, and he who begins to live by rapine always finds cause to seize others' property; and, on the contrary, causes for taking life are rarer and disappear more quickly.
Posted by Edward J. Lopez at 11:20 AM in Economics

September 17, 2007
Comparing Belichick to the 1951 NY Giants

Many articles on the Belichick/video camera kerfuffle contain references to the 1951 NY Giants who, in a recent book, were said to be stealing signs using a telescope located in the outfield and a buzzer for communication. For example:

The Patriots' three Super Bowl wins will now always be suspect thanks to a coach who not only refuses to play by the rules but also refuses to acknowledge he did anything to break them. But how about the pennant won by the 1951 New York Giants, who were using a telescope-and-buzzer system to steal signs at the Polo Grounds where Bobby Thomson hit the “Shot Heard 'Round The World?”

Although there is no way to prove that the Giants' sign stealing didn't affect the 1951 pennant race, I have a forthcoming paper showing that most of the Giants' improvement after they started stealing signs came from better pitching not better hitting. Indeed, the Giants scored nearly a run less (0.85) in home games after July 20 than in home games before July 20. (July 20 is the day the sign stealing scheme started according to Prager.)

This is not to say that Belichick was not stealing signs or that his sign stealing had no effect. (Yesterday's results--Patriot blowout of a good San Diego team and another Jet loss--suggest stolen signs had little to do with the Pats thumping of the Jets.) It does mean that writers should think twice about asserting that the Giants stole the pennant in 1951.

ADDENDUM: An astute reader asks if my results for the 1951 Giants might reflect a general trend of improving pitching over the course of a season. Two answers. First, my analysis of Giant hitting controls for the quality of the opposing team's starting pitcher. (I use ERA, but I also tried more sabermetric measures like HR rate and BB rate.) Second, the trend in 1951 might have been different, but the current trend is for pitching to deteriorate over the course of the season (here; scroll down to the section labeled "Months").

Posted by E. Frank Stephenson at 11:33 AM in Sports

Waiting to call 911 II

Frank notes below that a government school didn't call 911 when a student fell ill.

Heck that's nothing; a couple years ago there was a local high school here in Columbus that didn’t call 911 after a girl was RAPED.

Posted by Robert Lawson at 10:39 AM in Misc.

September 16, 2007
Bring on the nukes

This Boston Globe article argues for a nuclear policy like France's:

[C]andidates must face directly the one large-scale means of providing carbon-free electric power: nuclear energy. Candidates in both parties should swallow hard and confess that the United States must take steps that they find difficult. For Democrats, that means acknowledging that we need more nuclear power and that we must do something with the waste. For Republicans, it's even tougher - they must admit that we should become more like France.

[O]ur growing population, combined with the rise in thirsty electric products, will mean an estimated 45 percent increase in demand for power by 2030.

We'll need massive new generating capacity to meet that demand [, and] nuclear power is the only mature, large scale source of power that is essentially carbon-free. In 2005, nuclear power produced 19 percent of all US electricity; solar made up one-30th of 1 percent. If we don't build substantial new nuclear capacity, the alternative isn't going to be wind farms and solar arrays - it's going to be fossil-fueled, carbon-spewing plants. Those are the truths facing Democrats, however inconvenient.

The real question facing our leaders is how to shape the future of nuclear power to make it as sustainable as possible, both environmentally and economically. And even if it makes Republicans choke on their freedom fries, the answers are there in France, which generates 78 percent of its electricity from nuclear power and makes enough even to export it to other countries.

[O]n the issue of nuclear waste, the United States is stuck in the past. The Department of Energy has spent 25 years working on a repository at Yucca Mountain, but it is bogged down in a political morass. ... So what would an alternative look like? Here again, we should follow France. Instead of storing its waste at each nuclear plant (as in the United States) or burying it in containers underground (as we would do if Yucca opens), the French take their waste to a massive plant in Normandy, where spent fuel is recycled. They can reuse 80 percent of the material; the remaining 20 percent is "vitrified" - combined with molten glass and solidified - to immobilize the radioactive material. It can then go into long-term storage with much less risk of leaching into the groundwater.

Recycling waste is expensive - a plant would cost $15 billion. But not recycling is even more costly. By law, the US government was supposed to begin taking spent fuel from commercial reactors in 1998, but it has defaulted and is now running up a tab that could total $56 billion. What's more, even if Yucca Mountain were to open its doors tomorrow, it would soon be at capacity with the waste that already has accumulated.

Many who remember the Three Mile Island incident in 1979 still object to nuclear power on fears about safety. They are unfounded. Dozens of studies on the impact of TMI have found that the worst nuclear accident in American history resulted in no injuries or deaths. Moreover, plant design and operations have improved radically in the decades since TMI, and the nuclear industry is now one of the safest in our country, according to the Bureau of Labor Statistics.

Posted by Wilson Mixon at 11:08 AM in Economics

September 15, 2007
The new issue of EJW

If you haven’t seen it yet, the September 2007 issue of Econ Journal Watch is now available. Highlights: David Henderson uses Coasean logic to refute the claim that municipal smoking bans are good for restaurant owners; Benjamin Alamar and Stanton Glantz reply. Bruce McCullough finds that the JMCB’s data archive still doesn’t allow empirical findings to be replicated.

Posted by Lawrence H. White at 01:35 PM in Economics

September 14, 2007
" ... the strangest product launch since that of New Coke in 1985"

So says George Will about the launch of Fred Thompson's campaign for president. Will is especially scathing about Thompson's role in McCain-Feingold; a snippet:

In 1997, Thompson chaired a Senate committee investigating 1996 election spending. In its final report, issued in 1998, Thompson's committee recommended a statutory "restriction on issue advocacy" during "a set period prior to an election" when the speech includes "any use of a candidate's name or image." And in 1999, Thompson co-sponsored legislation containing what became, in 2002, the McCain-Feingold blackout periods imposed on any television or radio ad that "refers to" a candidate for federal office -- a portion of which the Supreme Court in June declared unconstitutional.

Thompson, contrary to his current memories, was deeply involved in expanding government restrictions on political speech generally and the ban on issue ads specifically. Yet he told Ingraham "I voted for all of it," meaning McCain-Feingold, but said "I don't support that" provision of it.

Oh? Why, then, did he file his own brief urging the Supreme Court to uphold McCain-Feingold, stressing Congress' especially "compelling interest" in squelching issue ads that "influence" elections?

Posted by E. Frank Stephenson at 12:45 PM in Politics

Waiting to Call 911

Bob's waiting for the Ohio AG to sue failing government schools, here's a story of a government school that wouldn't call 911 when a student fell ill:

The typed words on the school memo are as direct as they are stunning: "No Deans are permitted to call 911 for any reason."

An assistant principal at Jamaica High School wrote the order just two weeks before ninth-grader Mariya Fatima suffered a stroke at the Queens school in April.

Employees waited more than an hour before calling 911, according to court records, costing Mariya crucial minutes of medical treatment, a delay that may have made her paralysis worse.

A month after Mariya collapsed, the same assistant principal sent out another memo, flip-flopping and telling the deans it was okay to call 911, but instructing them to downplay assaults.

The author of the memo and the school's principal have both since left Jamaica High School, but that's little comfort to Mariya's family.

"You take it for granted that your child is going to be safe, but if they don't want to call 911, no matter what the circumstances, your child is not protected," family lawyer Gary Carlton said.

Mariya, who lost use of her right hand and leg, has had to relearn how to speak and walk since the stroke.

I once heard a talk show blabber call government schooling the most common form of child abuse. Articles like these make you wonder if it just might be so.

Posted by E. Frank Stephenson at 12:16 PM in Misc.

A new-fashioned bank run

Hundreds of old-fashioned customers seeking to withdraw their deposits are queueing up today outside branch offices of Northern Rock, a UK bank that has been having trouble rolling over its wholesale borrowings. Meanwhile, up-to-date customers are withdrawing money online. Reports Bloomberg:

The Newcastle, England-based company, which traces its roots back to 1850, had to restart its Internet banking site “over a period of time” today after unusually high usage froze the service, [a bank spokesman] said.

While the bank is reportedly solvent, and the Bank of England has agreed to provide emergency liquidity to the bank, those running on the bank are not being irrational. Under the Financial Services Compensation Scheme (the UK version of deposit insurance), deposits above £2,000 are covered less than 100%. As the BBC explains:

If you have up to £35,000 on deposit then you would, in the event of insolvency, get back all of the first £2,000 in your account and 90% of the next £33,000. That would be a total of £31,700 per person in compensation, or to look at it another way, a loss of £3,300. But any money above the £35,000 threshold might be lost altogether.

This kind of exposure of the insured to partial losses, though not a part of deposit insurance in the US, is of course a standard part of many types of insurance. It gives larger UK depositors an incentive to seek safer banks, and therefore gives banks an incentive to invest safely (helps contain moral hazard).

Hat tip: Ross McCormick, QUB '05 (M.Sc. Finance)

Posted by Lawrence H. White at 10:36 AM in Economics

September 13, 2007
Speaking of hockey

According to ESPN, the NHL will soon announce that a regular-season game will be played in an outdoor venue on January 1, 2008. Outdoor hockey? But won't the ice melt? One guess which city they picked.

ORCHARD PARK, N.Y. -- Get ready for an NHL big chill on New Year's Day: Penguins at Sabres in an outdoor game at Ralph Wilson Stadium.

The league is set to announce next week that the Buffalo Sabres will host the Pittsburgh Penguins, a person familiar with the event told The Associated Press, in what would be the NHL's second outdoor game.

Buffalo is considered an ideal location to host the game, and not only because of its reputation for cold, bitter winters. The Sabres' attendance has risen dramatically: last season's Presidents' Trophy-winning team sold out all of its 41 regular-season games.

HT: Mitch Mitchell for the title phrase.

Posted by Edward J. Lopez at 05:05 PM in Sports

Yeah, wait for it...

In today's local fishwrapper:

Dann sues 2 charter schools

Ohio Attorney General Marc Dann's lawsuits against two Dayton-area charter schools:

* Colin Powell Leadership Academy.
* New Choices Community School.

Attorney General Marc Dann moved to shut down two failing Dayton charter schools yesterday, vowing to take similar legal action against others across Ohio that fail to meet state academic and financial standards.

I eagerly await the AG's lawsuit against the 188 government schools [update] catering to 56,073 students [/update] that the state has designated as being in "Academic Emergency". (Excel spreadsheet with data here.)

Posted by Robert Lawson at 10:44 AM in Economics

September 12, 2007
Advertising can get the public to buy anything

Not. Not even when it's a Coca-Cola product.

Posted by Lawrence H. White at 10:00 PM in Economics

What's wrong with this sentence?

From a Bloomberg News piece about how the McDonald's restaurant chain is stealing customers from the Starbucks coffee shop chain by introducing less expensive lattes:

Analysts think [McDonald's has a winner] too; McDonald's shares will rise 18 percent in the coming year, UBS Securities estimates.

Obvious answer below the fold.

Read More »

Posted by Lawrence H. White at 09:51 PM in Economics

Why No Oil Shock Recession?

Olivier Blanchard and Jordi Gali answer a question that has been on my mind the past few years--why haven't high oil prices induced a recession? Here's the abstract to their paper:

We characterize the macroeconomic performance of a set of industrialized economies in the aftermath of the oil price shocks of the 1970s and of the last decade, focusing on the differences across episodes. We examine four different hypotheses for the mild effects on inflation and economic activity of the recent increase in the price of oil: (a) good luck (i.e. lack of concurrent adverse shocks), (b) smaller share of oil in production, (c) more flexible labor markets, and (d) improvements in monetary policy. We conclude that all four have played an important role.

For more, see this post by James Hamilton.

Posted by E. Frank Stephenson at 11:36 AM in Economics

Boortz Fires Back ...

... at Bruce Bartlett for his WSJ column attacking the Fair Tax plan. Boortz, co-author of The Fair Tax Book, aims at Bartlett's ad hominem about the Fair Tax plan originating with Scientologists. Boortz also goes after Bartlett for one of the issues I raised--comparing tax rates on an inclusive or exclusive basis.

Tim also had a recent post on the Fair Tax.

Posted by E. Frank Stephenson at 09:21 AM in Economics

Snarky Thought of the Morning

Yesterday's WSJ had an article on people moving from the auto to health care industries. Several bloggers have, rightly, commented on how this exemplifies the fluid nature of a market economy. But what caught my attention was the article's subtitle:

NURSING AMBITIONS In Shift, Auto Workers Flee to Health-Care Jobs Many Seek New Starts In Field That Bled Big 3; Detroit's Next Migration

Wrong--health care didn't bleed the big 3, the UAW did. The subtitle only fits if workers were leaving the auto industry to be union organizers. Sure the big 3 have high medical expenses, but those expenses are there because of the UAW.

Posted by E. Frank Stephenson at 08:25 AM in Misc.

September 11, 2007
The 3oz. Bottle in a Baggy Explained

I'm a pretty laid back guy, but I find T.S.A. and airport security as annoying as anybody. This New York Times article gives me a little more understanding the next time I pass through. While the article fails to question public sector enforcement, it does end up explaining the rationale behind limiting travelers to little bottles in little baggies.

Tests showed that a container of a certain size is needed for an effective explosion. Separate three-ounce containers limited in number to what will fit inside a single one-quart bag do not have “enough critical diameter” to blow up an aircraft, he said.

The rule was ridiculed. Critics scoffed, Mr. Hawley said. “Holy smokes! Three ounces in a one-quart baggie! Who made that one up?”

But the science, he said, is clear. “With certain explosives you need to have a certain critical diameter in order to achieve an explosion that will cause a certain amount of damage.”

“The size of the container itself,” he added, “is part of the security measure.”

He added: “It is incredibly complex and doesn’t lend itself to a sound bite. And we’ve certainly paid the price for that.”

What I want to know is, why haven't sundry suppliers begun to market packages of 3.4 ounces or less? I can't find toothpaste between 0.5 and 4 ounces.

Posted by Edward J. Lopez at 09:02 PM in Science

A chip off the ol' block.

My 12 year-old critter is in her Humanities class and....

TEACHER: Ok, students please take out a sheet of paper. No wait, you don't need a whole sheet of paper. Just use a scrap.

[Critter does nothing and keeps out her full sheet of paper.]

TEACHER [quietly to the crittier]: Didn't you understand what I said?

CRITTER: Oh yes, I understand, but I have lots of paper.

...makes her papa proud!

Posted by Robert Lawson at 05:07 PM in Economics

9/11 plus 24 quarters

From James Pethokoukis's blog at U. S. News & World Report:

Ayman al-Zawahiri said in September 2002: "We will also aim to continue, by the permission of Allah, the destruction of the American economy." No luck so far, despite bin Laden's recent videotape ravings about our taxes and mortgage debt. Although the towers came down, the resilient American economy didn't. Since September 11, the economy hasn't suffered a single down quarter. In fact, it has notched 23 straight quarters of economic growth. (And despite the subprime mortgage crisis, this is likely to be the 24th straight quarter of growth.) Those numbers are especially amazing when you consider that when the terrorist attacks happened, the Internet stock bubble was in full implosion mode. ... What's more, the unemployment rate is 4.6 percent today vs. 5.7 percent back then.
Posted by Wilson Mixon at 01:13 PM in Economics

September 10, 2007
Higgs on 9/11

On this sad anniversary, Bob Higgs pulls few punches reminding us of the many ways in which the terrorist attacks of 9/11/2001 have been used to feed Leviathan. Exerpt:

In the United States, everything memorable becomes an article of commerce in some fashion, and 9/11 is no exception. Many of these commercial offerings are maudlin or otherwise in bad taste, to be sure, but in this country no one is shocked when sellers market tasteless products successfully, and anyone who does not fancy the goods may simply decline to consume them. Indeed, one suspects that by this time, the demand for 9/11 media extravaganzas may be wearing rather thin even among those of mawkish sensibilities.

Far more troubling and much more dangerous, however, is the state’s exploitation of 9/11. During the past six years, 9/11 has often served as an all-purpose instrument in the state’s propaganda kit. For the Bush administration, it has provided the answer to every critical question about foreign and defense policies, among other things. If we challenge the wisdom, legality, or morality of the U.S. invasions and occupations of Afghanistan and Iraq, the government’s spokesmen and supporters throw 9/11 in our face. If we criticize the enormous run-up in spending for military purposes and for “homeland security,” much of it obvious political pork that contributes nothing to the public’s safety, the response to our criticism is that the people dare not risk another 9/11. If we express doubts about the wildly ambitious and morally presumptuous U.S. foreign policy of global hegemony, which, in its present swollen form, followed closely on the heels of George W. Bush’s embrace of a humble foreign policy with no nation building during the 2000 presidential campaign (“I don’t want to be the world’s policeman”), we are told that 9/11 changed everything. If we object to the government’s multifaceted assault on our civil liberties, the president stridently declares that everything being done is necessary to prevent another 9/11. If we wave our copy of the Constitution and express doubts about the president’s claim of overriding power as a “unitary executive,” the government’s lawyers assert that since 9/11 the nation has been “at war,” and hence the president’s constitutional power as commander-in-chief trumps everything else.

Comparisons between 9/11/2001 and 12/07/1941 follow. Full editorial here.

Posted by Edward J. Lopez at 09:18 PM in Politics

September 09, 2007
Erie Marathon Report

I ran the Erie Marathon today. It rained either hard or very hard the entire way, but I managed to run a nice time: 3:14:40 (about 7:25/mile pace). This is about a minute off my PR (Personal Record) but is good enough for a BQ (Boston Qualifying time). :-)

I've never felt so awful immediately after a marathon as today, but I feel pretty good now after several hours (of course that could be the celebratory beers talking!)

Times below the fold (for running nerds):

Read More »

Posted by Robert Lawson at 09:31 PM in Sports

Biofuels Source

To maintain energy independence, we must start working to get import barriers up, if this New York Times article is accurate.

[A] plant called jatropha is being hailed by scientists and policy makers as a potentially ideal source of biofuel, a plant that can grow in marginal soil or beside food crops, that does not require a lot of fertilizer and yields many times as much biofuel per acre planted as corn and many other potential biofuels.

Poor farmers living on a wide band of land on both sides of the equator are planting it on millions of acres, hoping to turn their rockiest, most unproductive fields into a biofuel boom. They are spurred on by big oil companies like BP and the British biofuel giant D1 Oils, which are investing millions of dollars in jatropha cultivation.

Other biofuels like ethanol from corn and sugar cane require large amounts of water and fertilizer, and factory farming in some cases consumes substantial amounts of petroleum, making the environmental benefits limited, critics say. But jatropha requires no pesticides, Mr. Samaké said, little water other than rain and no fertilizer beyond the nutrient-rich seed cake left after oil is pressed from its nuts.

Posted by Wilson Mixon at 07:44 PM in Science

September 07, 2007
EFW in the Economist
Economic freedom Sep 6th 2007 From The Economist print edition

Hong Kong retains its top position in the Economic Freedom Index compiled by the Fraser Institute, a Canadian think-tank. The index ranks the policies of each country according to how much they encourage free trade, both internally and with other territories. Countries with fewer taxes, strong property rights, low regulation and sound money score best. Britain and America tie with Canada for fifth place in the list. Germany is ranked 18th—on a par with El Salvador but above Japan. France and Italy are outside the top 50. Most of the low-ranking countries are African. The exceptions are Myanmar and Venezuela, both in the bottom ten. Zimbabwe has the lowest score of the 141 countries surveyed.


Posted by Robert Lawson at 10:09 AM in Economics

September 06, 2007
Elasticity 101

Robert Crandall and Hal Singer have a nice piece "Don't Drink the CAFE Kool-Aid" in today's WSJ (here; sub req). I do have a quibble with this part:

Second, the costs of excessive fuel-economy standards are added to the price of the vehicles, inducing consumers to buy fewer new cars, thereby reducing overall vehicle sales. Thus, while carmakers would be spending more to come into compliance with the higher standards, car buyers would be spending less on cars in the aggregate because the newer cars would be more expensive. Demand curves slope down, which means an increase in the price of cars would generate fewer car sales.

Yes, downward sloping demand curves imply that increasing the price of cars will reduce the number of cars sold. Selling fewer cars at a higher price does not imply that "buyers would be spending less on cars in the aggregate." As we all know from ECO 101, it all depends on the price elasticity of demand. And, if I remember the table of elasticities in Chapter 19 of Gwartney, Stroup, Sobel, and Macpherson correctly, the demand for cars is inelastic (at least in the long run). Inelastic demand means that consumers spend more in aggregate when price increases.

UPDATE: The Gwartney et al text (p. 430) reports that the elasticity of demand for cars is -0.2 in the long run and -1.2-1.5 in the short run. Student readers should think about why demand is more elastic in the short run than the long run.

Posted by E. Frank Stephenson at 10:53 PM in Economics

Fair Tax in Liberty

Frank discussed a bit about the FairTax in an earlier post, the topic also came up in a letter to the editor in the September issue of Liberty magazine, and C-SPAN aired a day's worth of Neal Boortz's show where he discussed the FairTax with his coauthor John Linder.

A couple minor points with Frank's post: he mentioned that the monthly "prebate" would be difficult to implement and enforce, and that consumers would have a strong incentive to cheat. On the CSPAN show, Linder described how the prebate process would be contracted out to, e.g, Visa. Maybe I'm naive about the following two points, but 1) I'm sure a government contract would reduce Visa's efficiency, but given that, 2) I don't think the process would necessarily be as inefficient as the IRS is now. At least there would be fewer steps. The prebate is only based on the number of people in your household, which is a little easier to calculate and verify than your income. Frank is certainly right, though, that "the real problem isn't so much [the] form of the tax system as the bloated government and the pols' fondness for using the tax code for social engineering."

The Liberty letter referred to an earlier Reflection by Gary Jason about graduated vs. flat income taxes and mentioned a national sales tax as an alternative. Jason worries that "no country I know of has completely replaced the income tax by any kind of national sales tax." So if it hasn't been tried, don't try it? He also says "such a tax might prove to be a major drag on consumer spending, and so risk slower growth or even recession." And here I thought it was production, not spending, that determined long-term growth. I've never spent my way to personal fortune. Increased consumer spending is the result of growth, not the cause. Keynesianism in Liberty? Next thing you know, I'll be getting good student evaluations.

On the CSPAN show, a caller mentioned an internet business he ran, and how the FairTax would affect him since currently internet sales are untaxed (but here in Louisiana, we have to report everything we buy online, then pay the state 8%, ugh). Linder said that, under the plan, the FairTax would get charged on online sales since, and I'm paraphrasing from memory, "we don't want to put brick and mortar stores at a disadvantage." This has always irked me about taxing online purchases, but aren't sales taxes ostensibly supposed to fund the public services provided that facilitate commerce? If I use a public road to get to the store then the sales tax on my purchase can help pay for road maintenance. The amount of public services used in online sales seems to me to be much lower than if I purchase the same item at a nearby store. Sure, the UPS truck drives on the road instead of me, but at least he has economies of scale in the number-of-items-carried-per-vehicle ratio.

Posted by Tim Shaughnessy at 12:32 PM in Economics

Time is money c. 1907

This was reported in the September 6, 1907 NYT:

Hereafter the 450 girl operators of the Keystone Telephone Company of this city will not say "please" to the subscribers, and the subscribers have been requested not to say "please" to the operators.

A.J. Ulrich, traffic manager of the company, has issued the order, and both the girls and the subscribers are happy with the new arrangement. According to Mr. Ulrich the girls in answering calls and the patrons in making them use the word "please" 900,000 times every twenty-four hours. Estimating that it requires half a second to say the word, 7,500 minutes are consumed every twenty-four hours, which is equal to 125 hours lost every day by the use of the word.

Posted by Craig Depken at 11:28 AM in Economics

September 05, 2007
Productivity in the U.S.

Remember this bit from Monsieur Krugman:

"First things first: given all the bad-mouthing the French receive, you may be surprised that I describe their society as "productive." Yet according to the Organization for Economic Cooperation and Development, productivity in France - G.D.P. per hour worked - is actually a bit higher than in the United States."

A U.N. report (and a previous post from yours truly) suggests otherwise:

American workers stay longer in the office, at the factory or on the farm than their counterparts in Europe and most other rich nations, and they produce more per person over the year.

They also get more done per hour than everyone but the Norwegians, according to a U.N. report released Monday, which said the United States "leads the world in labor productivity."

The average U.S. worker produces $63,885 of wealth per year, more than their counterparts in all other countries, the International Labor Organization said in its report. Ireland comes in second at $55,986, followed by Luxembourg at $55,641, Belgium at $55,235 and France at $54,609.

The productivity figure is found by dividing the country's gross domestic product by the number of people employed. The U.N. report is based on 2006 figures for many countries, or the most recent available.

Only part of the U.S. productivity growth, which has outpaced that of many other developed economies, can be explained by the longer hours Americans are putting in, the ILO said.

The U.S., according to the report, also beats all 27 nations in the European Union, Japan and Switzerland in the amount of wealth created per hour of work — a second key measure of productivity.

Norway, which is not an EU member, generates the most output per working hour, $37.99, a figure inflated by the country's billions of dollars in oil exports and high prices for goods at home. The U.S. is second at $35.63, about a half dollar ahead of third-place France.

Posted by E. Frank Stephenson at 01:30 PM in Economics

Trade & Trade Agreements

From "The Free-Trade Paradox" in Foreign Policy:

One of the most perplexing trends of our time is that free-trade negotiations are crashing while free trade itself is booming. For more than a decade, attempts by governments to get a global agreement to lower trade barriers have gone nowhere. These trade talks are routinely described as “acrimonious,” “gridlocked,” and “stagnant.” In contrast, international trade is commonly described as “thriving” or “surging,” and almost every year, its growth is lauded as “record breaking.” It’s no surprise that trade negotiators feel as despondent as international traders are cheerful.

This past June, after six years of talks, negotiators left the meetings on the Doha Round and denounced each other as uncooperative. Meanwhile, world trade continued to grow at its usual breakneck pace. In 2006, the volume of global merchandise exports grew 15 percent, while the world economy grew roughly 4 percent. In 2007, the growth in world trade is again expected to outstrip the growth rate of the global economy. This sustained, rapid pace of trade growth has led to a more than fivefold increase in world merchandise exports between 1980 and 2005. An unprecedented number of countries, rich and poor alike, are seeing their overall economic performance boosted by strong export growth.

So, who needs free trade agreements if international trade is doing just fine without them? We all do. Although trade may be booming, giving up on lowering the substantial trade barriers that still exist—in agriculture, in services, or in manufactured goods traded among poor countries—would be a historic mistake. Even the more pessimistic projections show that the adoption of reforms like those included in the Doha Round would yield substantial economic gains, anywhere from $50 billion to several hundred billion. Moreover, according to the World Bank, by 2015 as many as 32 million people could be lifted out of poverty if the Doha Round were successful.

But perhaps what is most important to keep in mind is that, despite all the misgivings about international trade, the fact remains that countries in which the share of economic activity related to exports is rising grow 1.5 times faster than those with more stagnant exports. And though we know that economic growth alone may not be sufficient to alleviate poverty, we have also learned that without growth, all other efforts will fall short.

Posted by Wilson Mixon at 10:15 AM in Economics

September 04, 2007
Economic Freedom of the World: 2007 Annual Report

Coming later today:

Posted by Robert Lawson at 08:02 AM in Economics

September 03, 2007
Labor Day, Then School's In

A couple of worthwhile notes from the Secretary of Labor:

America's economy is increasingly a knowledge-based economy. Two-thirds of all the new jobs being created require some kind of post-secondary education.

With the new school year starting, students need to be aware that high school dropouts make about $522 per week for full-time work and their unemployment rate is about 7.1 percent. Meanwhile, workers with a high school diploma average $704 weekly, and this segment of the work force has a 4.4 percent unemployment rate. Workers with associate degrees average about $846 per week, and this group's unemployment rate is 3.5 percent. But workers with a bachelor's degree or higher average $1,393 per week and have an unemployment rate of 2.1 percent.

Posted by Wilson Mixon at 12:02 PM in Economics

The Fed & the Army Corps

I followed Larry's advice and read Selgin's CSM article. This quote jumped out at me:

One culprit, though, has not only avoided blame but has come across as the episode's hero. And that culprit is the Federal Reserve itself. Like some renegade fireman, though unwittingly, the Fed played a part in igniting the conflagration it's now trying to smother.

It sounds so much like the effect of Katrina on the fortunes of the Army Corps. From the Washington Post:

Before Hurricane Katrina breached a levee on the New Orleans Industrial Canal, the Army Corps of Engineers had already launched a $748 million construction project at that very location. But the project had nothing to do with flood control. The Corps was building a huge new lock for the canal, an effort to accommodate steadily increasing barge traffic. Except that barge traffic on the canal has been steadily decreasing.

Of course, it's not all the Army Corps' fault. Even when they try to behave, Congress insists otherwise:

For example, after a $194 million deepening project for the Port of Iberia flunked a Corps cost-benefit analysis, Sen. Mary Landrieu (D-La.) tucked language into an emergency Iraq spending bill ordering the agency to redo its calculations. The Corps also spends tens of millions of dollars a year dredging little-used waterways such as the Mississippi River Gulf Outlet....

This last item, dubbed Mr. Go, must go eventually, because it's contributing to New Orleans's vulnerability. (See "A Big Uneasy ....") Of course the closing of Mr. Go will involve added funds for the Corps.

Posted by Wilson Mixon at 11:40 AM in Economics

September 01, 2007
The Fed's role in creating the mortgage credit crisis

My erstwhile colleague and frequent co-author George Selgin in the Christian Science Monitor yesterday explains how Federal Reserve policy inadvertantly generated the mortgage credit crisis:

Why did mortgage lenders earlier this decade start showering credit as if it were spewing from a public fountain? The answer is that credit was spewing from a public fountain – and that fountain was the Fed. …

The [current] crisis supports the argument, first developed by Austrian-school economists Ludwig von Mises and Friedrich Hayek, that the techniques central banks employ to increase spending power are bound to distort spending patterns by driving lending rates below their sustainable, "natural" levels.

ATSRTWT; Hat tip: Greg Ransom

Posted by Lawrence H. White at 05:08 PM 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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