Malthus is well and truly dead

So get over it! Every once in a while, an economic commentator will come along and start yabadabing about how increasing population will eventually lead to mass starvation across the world. This time it's Niall Ferguson, Professor of History at Harvard, writing for the Telegraph (free access):

For a long time we have deluded ourselves that "illimitable improvement" was attainable. As the world approaches a new era of dearth, expect misery - and its old companion vice - to make a mighty Malthusian comeback.

What seems to be the trouble? First a quick revision of Malthus, gory details and all, for those that missed history of economic thought 101:

Malthus's key insight was simple but devastating. "Population, when unchecked, increases in a geometrical ratio," he observed. But "subsistence increases only in an arithmetical ratio." We are, quite simply, much better at reproducing ourselves than feeding ourselves.

Malthus concluded from this inexorable divergence between population and food supply that there must be "a strong and constantly operating check on population". This would take two forms: "misery" (famines and epidemics) and "vice", by which he meant not only alcohol abuse but also contraception and abortion (he was, after all, an ordained Anglican minister).

"The vices of mankind are active and able ministers of depopulation," wrote Malthus in an especially doleful passage of the first edition of his Essay. "They are the precursors in the great army of destruction; and often finish the dreadful work themselves. "

"But should they fail in this war of extermination, sickly seasons, epidemics, pestilence, and plague advance in terrific array, and sweep off their thousands and tens of thousands. Should success be still incomplete, gigantic inevitable famine stalks in the rear, and with one mighty blow levels the population with the food of the world."

Sca-ry. So why should we be expecting Malthus to rise from the dead?

The real question is whether we could now be approaching a new era of misery. Even at an arithmetic rate, the United Nations expects the world's population to pass the 9 billion mark by 2050.

But can world food production keep pace? Plant physiologist Lloyd T Evans has estimated that "we must reach an average yield of four tons per hectare… to support a population of 8 billion". But yields right now are just three tons per hectare. And a world of eight billion people may be less than 20 years away.

According to the OECD, American output of corn-based ethanol and European consumption of oilseeds for bio-fuels will double by 2016. Only the other day, the executive director of the World Food Programme expressed anxiety about the unintended consequences of this huge shift of resources.

Some people worry about peak oil. I worry more about peak grain.

The fact is that world per capita cereal production has already passed its peak, which was back in the mid-Eighties, not least because of collapsing production in the former Soviet Union and sub-Saharan Africa. Simultaneously, however, rising incomes in Asia are causing a surge in worldwide food demand.

Already the symptoms of the coming food shortage are detectable. The International Monetary Fund recorded a 23 per cent rise in world food prices during the last 18 months. Maybe you've observed it yourself. I certainly have.

Of course, we're not supposed to notice that prices are going up. In the United States, the monetary authorities insist that we should focus on the "core" Consumer Price Index, which excludes the cost of food. According to that measure, the annual inflation rate in the US is just 2.2 per cent. But food inflation is roughly double that.

It's a similar story in Britain. Officially, UK inflation was running at 2.4 per cent in June. But food accounts for just 10.3 per cent of the notional basket of goods on which the CPI is based. Food inflation is actually 4.8 per cent.

There's a good reason why food accounts for just 10.3% of the notional 'basket' on which CPI is based: we don't spend that much on it, and what little we do spend tends to go towards 'quality', not subsistence (i.e. if we were simply interested in maintaining a daily calorific intake, our consumption of food would be way lower).

So let's accept that the price of food has been going up indeed (I'm by no means sure that's the case, but it doesn't really matter) and we are fast approaching a doomsday scenario where there is so little food available, and at such high prices, that people are dying on the streets of London.

You'd be surprised to find out how extremely cheap it would be to secure yourself and your family against such an eventuality: a hectare of agricultural land in the UK sells for less than £8k, and the UK is one of the richest, most crowded, fewest-farmers-per-capita countries on earth.

Also, given the current and projected scarcity of food, it feels pretty weird to me that farmers in the developed world are so hooked on government subsidies, or that they are not ecstatic about the bright future ahead ('a world of eight billion people may be less than 20 years away').

And why does agriculture, alone amongst all other sectors, need to improve productivity in a hurry when there's a shock in demand for its product? 'Plant physiologist Lloyd T Evans has estimated that "we must reach an average yield of four tons per hectare… to support a population of 8 billion". But yields right now are just three tons per hectare'. Yield per hectare is what it is and it will take a while for technology to work its magic and increase it further, but when any normal sector faces an increase in demand they say 'let's rent out more office space, buy more computers and hire more people', not 'let's start being more productive tomorrow'.

Malthus's world was very different to ours: people's main goal was surviving another day, and this involved dedicating most available resources to food production. But we are now well beyond that stage and, if you haven't noticed, most of our resources are employed elsewhere. Food prices may rise, but I am sure the proportion of my income spent on food will not be jumping to 100% even if the earth's current population tripled and we had our Martian cousins over for dinner too.

Until I see cows grazing in Central Park, Malthus will stay well and truly dead. Boo.

Postscript: Tip'o'the hat to Tim Worstall, Mark Thoma has a lot of comments.

Who pays corporation tax?

Food for thought:

Who bears the corporate tax burden? Some may be tempted with a quick answer, "corporations." But that is clearly wrong. The Econ 101 admonition that people pay taxes -- in this case, suppliers of capital through lower returns, workers through lower wages, and/or consumers through higher prices -- remains true even when the tax is aimed at capital. And the category "owners of corporate capital" (that is, stockholders) is also too narrow. In his celebrated analysis of the corporate tax almost 50 years ago, Arnold Harberger showed, for a closed economy, that a separate tax on corporate capital would reduce returns to all owners of capital, making it a tax on saving (and, in a framework more general than Mr. Harberger's, on investment).

Recent research has cast an eye in a somewhat different direction, showing that the tax may be borne not entirely (or even principally) by owners of capital, but by workers. Globalization plays a role. In an open economy, with mobile capital, a source-based tax like the corporate tax will lead to a capital outflow, reducing investment and productivity and wages. Indeed, Mr. Harberger's updated research on the incidence of the corporate tax concluded that labor bears not just the brunt of the tax, but a burden that may be larger than the tax itself.

In other research assuming that the world-wide capital stock is fixed, William Randolph of the Congressional Budget Office finds that labor bears about 70% of the corporate tax. More generally, the burden on labor is higher to the extent that saving is responsive to after-tax returns and the country has a small effect on world prices of goods.

Most of this research has relied on theoretical models, albeit sometimes with parameters calibrated from actual experience. But direct empirical tests of the effects of openness, corporate taxes and their combination on workers' wages tell a similar story.

A recent paper by Kevin Hassett and Aparna Mathur of the American Enterprise Institute analyzes data across countries and over time, concluding that for countries that are part of the Organization for Economic Cooperation and Development (OECD), a 1% increase in corporate tax rates results in a 0.8% decrease in manufacturing wage rates.

Wage effects of this size suggest labor bears much of the burden of the corporate tax. In fact, workers collectively would be better off if they voted for higher taxes on labor with corresponding cuts in the corporate tax.

This is Glenn Hubbard at the WSJ (gated), via Assymetrical Information.

I almost always read the articles and papers I link to in their entirety, but I am not a subscriber to the WSJ and won't have time to go through the papers mentioned any time soon. (What's keeping me busy? There's something bothering me about the methodology of the recent paper on immigrants' institutionalisation rates I posted on here, and I also have some qualms about a paper on electrosensitivity that received quite a bit of coverage last week. I want to make sure I'm not missing something, and you will be reading about both soon.)

Having made clear I have not read Hubbard's piece or the quoted papers, I have a couple of comments:

1. Qualitatively, the analysis is sound. Tax incidence is a sneaky thing: labour is bound to be picking up part of the tab for corporation tax. This, of course, does not mean that they would necessarily like to see it cut: you raise a tax, you spend a tax, and you may like the latter part more than you dislike the former.

2. Quantitatively, the estimates seem excessive to me. In the face of uncertainty both Hubbard and the WSJ tend to argue well on the right of the mean, so - issues having to do with tax competition aside - I don't quite buy that 'workers collectively would be better off if they voted for higher taxes on labor with corresponding cuts in the corporate tax'. In the absence of more information, I will wait for Paul Krugman to rule on the matter - and then pick the mid-point.

Postscript: I said that the WSJ tends to argue on the right of the mean 'in the face of uncertainty', but of course sometimes they are outright fanatics.

by datacharmer | Monday, July 30, 2007
  | 0 comments | | Who pays corporation tax? @bluematterblogtwitter

It's getting hot in here

Look at this picture carefully, and try to spot the controversy.

I've said before that the reason most people follow politics is its entertainment value. Bring it on:

Sen. Hillary Rodham Clinton's campaign has sent out a fundraising letter calling a Washington Post fashion writer's column on Clinton's cleavage "grossly inappropriate" and asking donors "to take a stand against this kind of coarseness and pettiness in American culture." Givhan, who won a Pulitzer Prize last year, said: " [...] It's disingenuous to think that revealing cleavage, any amount of it, in that kind of situation is a non-issue."

But let it not be said that the issue is not kept into perspective:

"It's obviously not the most important thing in the campaign. It's obviously not the most important thing Hillary Clinton has ever done by any means."

And the unavoidable pun:

Boston Globe columnist Ellen Goodman wrote today that Givhan "managed to make a media mountain out of a half-inch valley."

Ah, these primaries are gonna be fun!

Lessons from the animal kingdom

They are a quite a model community for they respect their Queen and kill their unemployed.

This is Robert Baden-Powell, founder of the scout movement - this year celebrating its 100th birthday - on bees.

Friday Special 11 & 12

Sorry for missing the Friday Special last week, especially to the readers that complained about it! To make up for my absent-mindedness, this week's special is a double.

Essential advice for every politician: Try Incarcerex, the solution to all your polling problems! (via Tim Worstall):

Rain magic to wash Homer away

'Since he was adopted by staff members as a kitten, Oscar the Cat has had an uncanny ability to predict when residents are about to die. His mere presence at the bedside is viewed by physicians and nursing home staff as an almost absolute indicator of impending death, allowing staff members to adequately notify families.'

Cultures on the Edge photo gallery

Central American migrants cross Mexico to get to the U.S. riding "The Beast" - the train, risking mutilation and amputation. Follow the link for more photographs by the Atlanta Photojournalism Seminar Constest winners.

What to do with a large apartment, lots of time and loads of eggs


You know you're living in 2007 when...

The age project: how old do you think I am?

Two chicken break up rabbit fight (no kidding!) - video

Online auction economics, and great ebay tips

Ulrike Malmendier, an economist at the University of California at Berkeley, tracked auctions of common items – things readily available online or in stores but offered on eBay at a discount.

Most economists assume these kinds of auctions are largely immune to the passions and unpredictabilities of ravenous bidders, she says. Simple bargain hunting, they hope, would bring out our inner homo economicus, someone who acts in their self-interest to get the best deal possible.

No such luck, she says.

Ms. Malmendier tracked 166 auctions offering "CashFlow 101," a personal-finance-themed board game. During the seven-month trial, the game's designer sold the box set on his website for $195.

Meanwhile, eBay sellers usually offered an opening price of about $45 and set a one-click, "buy it now" price of about $125. It looked like a great deal for buyers. They could pay less than retail to end the auction immediately or place bids in the hope of fetching an even lower price.

But this is where eBay users fell prey to what Malmendier and her coauthor, Stanford University economist Hanh Lee, call "bidder's curse." Apparently, some bidders grew so enthusiastic about winning the auction that they lost sight of the "buy it now" price, sometimes offering more than $185.

There's much more here, via Seth Godin. But enough with theory: how can the economists help you make some money?

If you are a seller:

1. Set low opening prices. Buyers favour whichever auction has the most bids, and starting with a low price is a great way to attract offers. A buyer has limited information on the quality of your item/service, and even if he can be bothered to read the description he will still worry he could be missing something. Observing lots of other bids allays those fears.

2. Don't use secret reserves. Buyers are afraid they may be wasting their time with your auction, and your item will attract fewer bids and end up selling for a lower price than it could have achieved.

3. Try to appear honest and dependable. If the buyer spots relatively large shipping costs or some other 'clever' trick, he will start worrying what else he may be missing - try to present your offer in a simple and straighforward manner. (the article has more on optimising shipping costs).

And if you are a buyer:

1. Don't bid until the last minute - early bids attract competition.

2. Don't fall in the 'many bids' trap: read the item description and seller information carefully and disregard demand by other buyers completely - they are unlikely to know more than you do. You are simply observing their preferences and biases, none of which carries information of relevance to you. Have a clear idea of how much you value an item before bidding, and don't succumb to 'bidder's heat' - you want to buy a product at a good price, not come first in a fools' race.

3. Dump Ebay and switch to Yahoo's online auctions (no longer available in the US, alas). Identical items auctioned on both sites sell on Yahoo for 30% less. The smaller Yahoo marketplace seems to lessen competition amongst buyers more than amongst sellers.

Bloody passwords

By the end of this week, I have to change my work computer password - for the fourth time this year. And of course I can't choose any old password: amongst other requirements, it has to be between 12 and 16 digits long, contain both letters and numbers, and it can't be the same as any of the last 9 passwords I used.

It's not just my employer that's giving me trouble. I have to remember passwords and pins for dozens of different services and websites, all of which tend to have different sets of rules regarding length, characters that are acceptable, etc. Even though I have four 'generic' passwords, each compliant with a frequently used set of different 'password strength' rules, there are a number of services that stipulate yet more exotic requirements. And even with all the different passwords memorised, I still have to remember which one applies to each particular account.

In the end, password selection rules converge to this:

The password must be impossible to remember and never written down.

Here are a few economic insights, and some advice - even though I doubt many IT types are reading this blog:

1. In cases where I am the only one at risk from my own bad password habits, let it be. I can probably understand the rationale behind asking for a 'strong' password when the implications of any security breach will affect other users, but why on earth do you care if someone cracks the password to my personal email account?

2. Stipulating exact rules is suboptimal - it limits the character combinations an intruder would have to try out, and it rules out a number of passwords the user may be able to easily remember. Just ask for passwords that meet a minimum 'strength' standard (e.g. use an algorithm that gives 1 point for each character used, 10 point for using both letters and numbers, 10 points for using caps, etc, and don't allow passwords that score less than 15 points)

3. There are stuff other than remembering passwords I would like to expend my limited brainpower on. As a result, if you push me too hard, I'll cheat: for example, I may write the password down, or choose the easiest password compatible with the rules. There is a point beyond which 'password strength' requirements lead to less security, not more.

4. If you are the boss: Your IT security guys have incentives that are incompatible with those of your employees and your organisation. They don't give a toss about productivity; all they care about is that there are no security breaches, and that when these do occur they can be blamed on a poor soul that 'didn't take security seriously' and wrote her password down. Try to find ways to align their incentives to yours, and for heaven's sake don't give them a free reign over IT security policy - they are the experts, but they don't have your best interests in mind.

This still leaves me with the problem of picking a new password. I was thinking of 'Rumpelstiltskin', but it turns out the miller's daughter was stupid: my computer says it's 'too easy'.

by datacharmer | Wednesday, July 25, 2007
  , | 0 comments | | Bloody passwords @bluematterblogtwitter

Pick a random number, if you can

In my continuing quest to showcase how our random number generator is well and truly broken (loyal readers will remember that people always go for carrot, and that you can easily win $20 million playing rock-paper-scissors), Bluematter. is proud to present solid scientific evidence to back the claims made here.

So, go ahead and ask your friends to pick a random number between 1 and 4. Dick De Veaux did (via Andrew Gelman), and here are the, well, not so random results:

Extend the selection range to twelve, and number 7 (as mentioned at the rock-paper-scissors post) is by far the most popular choice:

If you deal in statistics, or teaching others how to do it, De Veaux's presentation will make for an insightful read. Math is indeed music, and statistics literature:

We haven’t evolved to be statisticians. Our students who think statistics is an unnatural subject are right. This isn’t how humans think naturally.

But it is how humans think rationally. And it is how scientists think. This is the way we must think if we are to make progress in understanding how the world works and, for that matter, how we ourselves work.

Should I buy myself a football team?

Following a reader's request, I've been meaning to post something on this for a while. But Austan Goolsbee at the NYT beat me to it (via Mark Thoma):

Answering why people buy teams turns out to be important to more than just sports fans. There is big money at stake.

After owners indulge their childhood fantasy of buying a team, they tend to switch to an adult perspective and start viewing the team as a business. And they typically conclude that it’s a bad business.

Should we really care that it’s a bad business? If a billionaire throws a lavish 60th birthday party, it costs a lot of money. But that doesn’t make it a bad business. It’s a party. It’s not supposed to make money.

Is a sports team really that different?

Owners’ complaints about losses leave out the basic fact that capital gains are profits, too. And when scores of grown men desperately want to buy sports teams, there tend to be big capital gains.

Take the Sonics. The team may have lost $60 million while Mr. Schultz owned it. But he bought it for $200 million in 2001 and sold it for $350 million five years later. So he ended up making something like $90 million (taxed at the favorable capital gains tax rate, no less) on top of the fame, prestige and free tickets he got while he was owner.

If the Cubs do, indeed, sell for $1 billion, Tribune will have earned an annual return of almost 15 percent since it bought the team for around $20 million in 1981. Given the company’s recent problems, it’s probably the best investment it ever made.

So owning a sports team gives budding billionaires local stardom and a big return — no wonder that they are lining up to buy these teams. The only question that remains, I suppose, is why the vanity value of teams keeps climbing. You might have thought that this value would be about the same whenever there’s a sale, so that the capital gain wouldn’t be such a big component. But because ever-richer guys are bidding against one another, there has been persistent inflation in team values.

Having a stake in most companies yields no utility to its owners by itself: what matters is the financial rewards the investor is looking forward to. That said, a sports team (much like a charity) can survive and prosper even if the financial returns on offer are consistently below those of 'normal' companies.

Goolsbee makes a good point, in that when you buy shares in a sports team what you get (and pay for) is more than just a stake in future company profits and expected capital gains. Buying a controlling interest earns you status, and even fans owning a few shares acquire the privilege of owning a piece of their favourite team.

So should you buy yourself shares in a sports team? As is the case with 'ethical' or 'islamic' funds, the question you should really be asking is whether you value owning these shares in itself as much as the marginal investor. If you believe markets are efficient and you are not a fan or status-seeking multibillionaire, the answer is simple: steer clear.

The WSJ's Laffer-out-loud curve

The Laffer Curve analysis indicates that these corporate tax increases are likely to raise little if any additional revenue [...]

That's what I call ha-ha-ha analysis, proudly printed in the Wall Street Journal (via Statistical Modeling).

And to think that some people worried Murdoch would push the Journal downhill.

The economics of Harry Potter

Megan McArdle takes issue with the economics of Harry Potter:

Why are books about magic so exciting? The lure is almost tautological: magic is compelling because it allows us to imagine doing the things we cannot ordinarily do.

But there have to be generally accepted rules. Characters can't get out of the predicament the author is sick of by having the car suddenly start running on sand. Similarly, if your characters will be using magic, they must do so by some generally believable system.

Yet in the Potter books, the costs and limits are too often arbitrary. A patronus charm, for example, is awfully difficult - until Rowling wants a stirring scene in which Harry pulls together an intrepid band of students to Fight the Power, whereupon it becomes simple enough to be taught by an inexperienced fifteen year old.

The arbitrary ham fist of Ms Rowling is everywhere too evident - changing the rules, and then making the characters tap dance, like marionettes, to distract you from the enormous potholes in the plot.

A good economist always tries to explain the world around her, and Megan is a very good economist. But even practitioners of the dismal science have to loosen up a bit sometimes. We make our living by selecting the constraints we would be reasonable to impose on our models in order to predict real world behaviour. In art and literature, any such constraints are redundant. The story simply has to be entertaining, or enlightening: realism, even internally, will sometimes be entertaining and sometimes not.

In Greek mythology, the Gods are all-powerful, yet this does not affect the quality of the stories the least. Once you accept 1+1=3, what's the point of pretending 2+2 will always equal 4? What's the difference if the Deus ex machina (από μηχανής θεός) enters the stage not as an independent actor but from within the main characters?

Or look at surrealism: where does a preoccupation with scarce resources, or the laws of the universe for that matter, fit in? Your world doesn't have to be as crazy as that; but if you want to cut it as a fiction writer make sure your micro books stay safely out of reach, locked in a cupboard far, far away.

Arirang, North Korea

You're seeing about 2-3000 kids under 10 in the front doing intensely choreographed gymnastics moves, and look in the background. That's not a giant screen, that's thousands and thousands of children holding up sets of cue cards for the routine.

This is frightening, and beautiful.

by datacharmer | Sunday, July 22, 2007
  | 0 comments | | Arirang, North Korea @bluematterblogtwitter

Look at the future, the future is bright

[...] the greater a society’s future orientation, the higher its average GDP per capita and its levels of innovativeness, happiness, confidence, and (as the chart shows) competitiveness.

From the Harvard Business Review (free access), via MR.

I am not as sure as the authors about the direction the causality runs, however: rather than forward thinking leading to higher GDP per capita and all the other goodies mentioned, I suspect that worrying about the future is a luxury you can only afford once you are comfortable in the present.

Shock tactics

This year, one television ad portrays a man dressed as Moses coming to tell God about the [*]. With storm clouds rolling in, an off-screen God pronounces the initiative “a catastrophe.” If that’s not quite graphic enough for you, another ad shows a roll of toilet paper morphing into a cheese grater, in an attempt to describe how [*] will feel.

From The New York Times. Can you guess what the * could possibly be?

by datacharmer | Friday, July 20, 2007
  , | 0 comments | | Shock tactics @bluematterblogtwitter

Is Jane Austen worth a book deal?

A reader emails me with this fascinating story:

A string of publishers failed to spot blatant plagiarism of one of English literature's most famous authors, in a cheeky test to see if she would have secured a book deal today [...]

David Lassman, head of the Jane Austen Festival in Bath, sent manuscripts to 18 editors seeking a publishing contract, using only slightly disguised versions of chapters from the iconic novelist's most famous works.

But only one publisher spotted the fakes, which included perhaps the most famous line in all English literature, the opening sentence of her 1813 work "Pride and Prejudice".

My reader's accompanying comments are spot on:

Publishing houses are notoriously snooty/snobbish but don’t even know the work of one of the most famous English writers of all time. The attempted cover-ups are indicative of the superior attitude held and most publishing houses are notoriously closed shops for non-celebrities whilst publishing large amounts of rubbish books from people who have become famous in other fields but are mediocre writers.

It's a sad, sad situation, but I can't really blame the publishers. Whether a book turns out to be a success is notoriously difficult to predict; going with a famous name removes a lot of the risk to a publisher's bottom line. And as for not being aware of 'that truth universally acknowledged', well, they would probably rather spend their fortune on something more modern.

Would Jane Austen fare better as a blogger?

by datacharmer | Thursday, July 19, 2007
  | 1 comments | | Is Jane Austen worth a book deal? @bluematterblogtwitter

Orisinal Games

A reader alerts me that the link to Orisinal Games was broken, so here it is again. I have also corrected it on the original post, and in addition it permanently resides under 'links' on this blog's sidebar.

As I said before, the games are beautiful (and free), so I strongly recommend you give them a try. It will make your day.

by datacharmer | Thursday, July 19, 2007
  , , | 0 comments | | Orisinal Games @bluematterblogtwitter

Home ownership: Evil anchor or induced accidental wisdom? - updated

This paper argues that the housing market lies at the heart of the European unemployment problem. It describes a practical suggestion to reduce joblessness in Europe's nations -- that our continent should revive private renting and try to make the housing market function more smoothly. We can put Europe back to work, the essay argues, by reducing home ownership.

It is worth beginning with three background facts. Of the major industrial nations:

• Spain has the highest unemployment, and also the highest rate of home ownership
• Switzerland has the lowest unemployment, and the lowest rate of home ownership
• In the 1950s and early 60s, the United States had the highest unemployment, and at that time had the highest rate of home ownership.

The underlying argument in the paper is that an economy's 'natural rate' of unemployment depends on the ease with which its citizens can move around to find jobs. Fluid societies have efficient economies. Although Milton Friedman pointed this out in his famous American Economic Association address of 1967, few European economists have thought hard about labour mobility and different forms of accommodation. Yet we know the housing market is likely to have an influence on the degree of labour mobility.

By making it expensive to change location, high levels of home-ownership foster spatial mis-match between workers' skills and the available jobs.

This paper, in conjuction with my first ever post, sparked a long discussion with a friend, a loyal reader who is going to guest-blog here soon. He emails me:

The "self control" thing could explain a lot of the English obsession with house-buying, which for many people seems to create accidental saving that they are then very pleased with later in life.

Viewing repayment mortgages as a form of forced (non-discretionary) saving that in many cases people are unaware of explains a certain amount of the government policy aim of increasing home ownership and the love of property ownership amongst people who have seen others benefit massively from their own accidental saving.

e.g. my folks never seemed to save anything but have a mortgage free house now. My sister (who has a limited understanding of all things financial) has a strong desire to own a home because she can see the benefits of my parents' accidental saving without understanding that a similar outcome could be achieved with regular saving without home ownership.

There's more to home ownership than meets the eye. Comments are open, and very welcome.

Here's a short article Oswald wrote for The Times a while back.

Addendum: Another reader emails me with many interesting comments. Here's some excerpts:

Your latest blog entry. Oswald has a point, and he doesn't.

I've heard the link between friction in the housing market and unemployment made before. Tenure for life in social housing is another issue here. Once you've passed the (almost insurmountable) obstacles these days to get into social housing you've a) got it for life and b) you simply cannot transfer to social housing even five miles away.

While it's worth arguing that more renting is beneficial overall it's simply the case that the private rented sector is locked into a kind of low-price/low-quality equilibrium in this country. Landlords won't invest in buying and renovating high-quality housing as they know tenants will only stay in the short to medium term. Tenants want to buy as they can afford to and as such have no interest in demanding the kind of good-quality housing they want to live in long-term. It's hard to know which causes which but it's a cycle that I don't see ending any time soon.

I agree that people's involuntary saving by putting all of their resources into housing (what 98% of people in Britain on the 18th of July 2007 are convinced is a riskless asset) is unhealthy and leads to booms and busts. In the long run there's little enough that productivity gains can do to improve housing and it would probably be better if capital was allocated where long-term returns were higher. But, I've worked in removals and I've lived in 10 different places in the last 4 years and I'll tell you that in many cases the psychic costs of moving outweigh the financial costs. Indeed the reason I'm paying over the odds at my current place is that I just wasn't prepared to go on with the hassle of keeping on hunting for a place to live.

Oswald's dead right on the NIMBY things though. I was reading about a case where planning permission was sought to increase the density of an infill development in Dublin (where a shortage of supply amongst other things has led to prices hitting greater than London levels). 265 objections from local residents, none in favour. And this is an area that is ossifying and losing population as no one under 40 can afford to move in.

So anyway I fully intend to be an owner-occupier with a hefty mortgage by the time I'm thirty. Would renting be a wiser use of cash in the long term? Probably. Does the behaviour of me and my peers mean that we're keeping prices higher than they could be? Definitely.

But will I find a house for rent that I'd want to live in for say 20 years, with a certain security of tenure and the freedom to modify it to how I would like? Not a hope. And will I get mortage interest relief? Yes. So I think it's an easy choice to make.

Dow Jones deal sealed

The story is here.

The offer represents a 65% premium on Dow Jones' share price at the time the deal was announced, compared to an immediate 55% jump right after the announcement - so well done to all those shareholders who chose to hold.

Of course, we are only observing one of the possible realisations of history so this doesn't really settle the argument, but I felt some readers would be interested in this follow up to the debate sparked by my earlier post.

by datacharmer | Tuesday, July 17, 2007
  , | 0 comments | | Dow Jones deal sealed @bluematterblogtwitter

Queue for redistribution!

A few days ago I had to queue for four hours to see a dentist at a National Health Service (NHS) walk-in emergency centre. Furthermore, this was no 'virtual' queue: no 'the doctor can't see you now but let's book you an appointment for 7pm tomorrow', no 'grab the number 42 ticket, expected waiting time 4 hours' so I could go away and do something else in the meantime. I had to physically be there for as long as it would take before an (excellent, as it turned out) dentist could see me.

It's not difficult to spot the inefficiency here: instead of queueing, I could have been doing something productive - like enjoying my leisure time, or posting on this blog. What is more difficult to see, however, is the redistibutive effect. Making it inconvenient to consume public services is in some respects equivalent to a very progressive consumption tax.

The whole idea of having the NHS is that everyone should have access to medical care, regardless of how healthy their bank account is. This creates a problem: make something free, and demand for it will skyrocket. One way to restrict this demand is to start charging money for it, but this beats the whole purpose. Queues are a non-monetary alternative: they impose a very real cost to the user at the point of delivery, and, as a bonus, a very progressive one too.

Saying 'make the NHS free but NOT for those who can afford private health care' is not advisable: the rich are people too, and - more to the point - they have the vote. Furthermore, why should you exclude them from public services if they are willing to pay the 'inconvenience price' attached to them? (I find the anecdote about the founder of IKEA spending hours haggling over the price of vegetables with his grocer very amusing but, hey, it's his utility function to maximise.)

Instead, you say 'make the NHS free for everyone, and allow queues to form so that those that can afford it go private'. That way, you hit two birds with one stone: you raise the 'price' of public services at the point of delivery so that less is consumed by everyone, and at the same time you set this 'price' at a disproportionately high level for the rich.

I don't know whether they compute 'queue elasticities of demand' for the various procedures at the NHS - but they should, and break the estimates down by economic class as well. The richer you are, the less inclined to queue you are likely to be - you can better afford private care, you could be making more money if you were at work instead, and (by virtue of your higher income) you are likely to value your free time more too.

That leaves us with the inefficiency. Whether that's an acceptable price to pay to achieve redistributive ends boils down to taste, and is the purview of normative economics. As far as positive analysis is concerned, taxes on income (that other potent force for redistribution) are associated with particularly large deadweight losses too, and there are limits to how progressive they can be made to be: at the very least, people work less at the margin; at the extreme, they do a Mick Jagger and move abroad.

It's difficult to find the data to test for this, but it may well be the case that queueing for public services may be a better way to redistribute than taxes on income. Any progress with those queue elasticity of demand estimates?

Postscript 1: Funny word, q-ue-ue. Feels like the ue's are patiently lining up to get to the q.
Postscript 2: For those interested in the 'human element' of all this, my tooth pain is almost gone, thank you.

Goodbye Matt

I don't usually post personal stuff here, but today warrants an exception.

A colleague of mine, a brilliant economist and great friend, is leaving work (and town) to go on to bigger things.

Matt, thank you for a great year - it has been an absolute pleasure working with you. I hope our career paths cross again in the future, and I know we'll be in touch.

Farewell, and Best of British!

by datacharmer | Friday, July 13, 2007
  , | 2 comments | | Goodbye Matt @bluematterblogtwitter

Wow - Hans Rosling 2007

In a follow-up to his now-legendary TED2006 presentation, Hans Rosling demonstrates how developing countries are pulling themselves out of poverty. He shows us the next generation of his Trendalyzer software -- which analyzes and displays data in amazingly accessible ways, allowing people to see patterns previously hidden behind mountains of stats. (Ten days later, he announced a deal with Google to acquire the software.) He also demos Dollar Street, a program that lets you peer in the windows of typical families worldwide living at different income levels. Be sure to watch straight through to the (literally) jaw-dropping finale.

Watch this video, hat tip to Statistical Modeling.

Here is Trendalyzer, the free online software used to display the statistics in the presentation. Dollar Street is here (free to download). And watch the 2006 Rosling TED video here, from an older Bluematter. post.

Friday Special 10

This is one of the most creative and interesting thing I have ever come across on the net. Beautiful, free online games that lift my mood every single time. Don't miss this one: Orisinal Games

Die Hard in 30 seconds (and re-enacted by bunnies). Warning: Strong language/ violence

Give me a break - smokers are humans too. These guys' marketing campaign is plain ridiculous:

Blow in her face and she'll follow you everywhere: unbelievable ads from back in the day

Andy Roddick: Greatest Ace ever (video)

Bluematter. doesn't do gossip, but this BBC story is surreal: Parish Councillor from Cheshire weds Bin Laden's son

by datacharmer | Friday, July 13, 2007
  , , | 0 comments | | Friday Special 10 @bluematterblogtwitter

Immigrants are good people

[…] We examine immigrants’ institutionalization rates as a proxy for incarceration, and thus their involvement in criminal activity. […] Immigrants have very low rates of institutionalization compared with the native born. What’s more, immigrants’ relative rates of institutionalization have fallen over the last three decades. More recent cohorts also have better criminal-justice outcomes than earlier cohorts […].

Why is that so? Immigrants self-select, and recent economic conditions and policy made immigration less attractive to troublemaking (potential) immigrants and more attractive to the law-abiding sort (emphasis is mine, via Tyler Cowen).

The analysis is elegant, although I do have some doubts. A (free access) version of the paper is here.

'Nothing to eat' in Detroit

"Sure, there's other grocery stores, but try finding something to eat in there," said the 34-year-old skin care specialist. "You can't buy quality food in the city anymore."

The lack of major grocery stores has long been a quality-of-life problem in Detroit and one reason some families don't want to live in the city. Now, however, the situation is getting worse as the last two Farmer Jack stores in the city prepare to close by Saturday.

Globalisation critics, Detroit is the place to be: the only major American city without a national chain supermarket (hat tip: Peter Klein). I'm wondering why the residents aren't that excited.

That elusive Giffen good

It has finally been nailed down:

This paper provides the first rigorous, empirical evidence of the existence of Giffen behavior, i.e., a situation in which consumers respond to an increase in the price of a good by demanding more of it. We begin by examining several theoretical approaches to the Giffen phenomenon and show that in each case Giffen behavior is closely associated with poor consumers’ need to maintain subsistence consumption in the face of an increase in the price of a staple commodity. We then present evidence on the existence of Giffen behavior among extremely poor households in two provinces of China. In order to obtain an unbiased estimate of the key price elasticity, we conducted a field experiment in which we randomly subsidized households’ primary dietary staple. Using consumption data gathered before, during and after the intervention, we find strong evidence of Giffen behavior with respect to rice in Hunan province.

The paper is here, hat tip Mark Thoma.

I find some of the authors' assertions a tad extreme: failure to empirically observe Giffen behaviour is not 'an indictment of neoclassical consumer theory', simply evidence that the theory extends to cover situations that are not frequently encountered in the real world.

All the same, this is a groundbreaking paper: even if Giffen behaviour is not neoclassical consumer theory's holy grail, these findings still constitute a small treasure.

by datacharmer | Wednesday, July 11, 2007
  | 0 comments | | That elusive Giffen good @bluematterblogtwitter

A quantitative macroeconomist's self-portrait

Here. Warning: violence.

Thanks to Dave for the pointer.

When to get born, and when to die

You would have thought there isn't much choice on the matter - but you would be wrong.

Andrew Leigh, Joshua Gans and Elena Varganova, in a recent paper (free access), estimate that during annual obstetricians and gynecologists’ conferences, the number of births in Australia and the United States drops by 1 to 4 percent. This suggests, in the authors' words, that 'medical professionals are timing births to suit their conference schedule'.

And if the time of birth is moved for conferences, what about weekends? Gans and Leigh discuss this in another paper (free access):

These results suggest that doctors are clearly taking non-medical factors into account when deciding on the timing of some births, a clear case of moral hazard in the health system with unclear consequences on newborns' health.

But what about the parents themselves? It seems they have a say too: the authors suggest that when there is a potential conflict between parents wanting to avoid an 'inauspicious date' (such as April 1) and doctors wanting to enjoy the weekend, it is resolved in favour of the parents 25% of the time - not a bad batting average given the informational advantage physicians enjoy (after all, they are the experts).

And since parents are allowed this sort of power, few economists will be surprised that they use it to achieve financial aims too - at the same time demonstrating the potency of tax and benefit policy to alter behaviour.

Dickert-Conlin and Chandra point out that the tax savings of having a child in the US are fully realised only if the birth takes place before midnight, January 1, and estimate that increasing the tax benefit of having a child by $500 raises the probability of giving birth in the last week of December by a whopping 27%. Also, in a lesson in how not to introduce a government policy, Gans and Leigh (free access) explain why more Australian children were born on the 1st of July 2004 than on any other day in 30 years:

In 2004, the Australian government announced that children born on or after July 1, 2004 would receive a $3000 “Baby Bonus.” Although the policy was only announced a few months before its introduction, parents appear to have behaved strategically in order to receive this benefit, with the number of births dipping sharply in the days before the policy commenced. On July 1, 2004, more Australian children were born than on any other single date in the past thirty years. We estimate that over 1000 births were “moved” so as to ensure that their parents were eligible for the Baby Bonus, with about one quarter being moved by more than two weeks. Most of the effect was due to changes in the timing of inducement and cesarean section procedures.

And if you can save some tax by being born at the 'right' time, what about postponing that other important date in a person's life? The dynamic duo strikes again (free access):

In 1979, Australia abolished federal inheritance taxes. Using daily deaths data, we show that approximately 50 deaths were shifted from the week before the abolition to the week after (amounting to over half of those who would have been eligible to pay the tax).

Wojciech Kopczuk and Joel Slemrod offer further insights (free access):

On January 15, 2000, The New York Times reported that in the first week of the new millennium local hospitals had recorded an astonishing 50.8% more deaths than in the last week of 1999. [...] Apparently, the anticipation of momentous events can motivate people to live longer.

Phillips and King (1988) report that, among Jews, the number of deaths was lower than expected in the week before Passover and higher than expected in the week after; the pattern was most pronounced in years when the holiday fell on a weekend, when it is most likely to be celebrated by the largest number of people. Phillips and Smith (1990) find that mortality among Chinese dips by 35.1% in the week before the Harvest Moon festival and peaks by the same amount in the week after. Anson and Anson (1997) find a similar effect related to the timing of Ramadan for Moslems living in Israel, and note that the effect was larger for women than for men, reflecting their different roles in the celebration of the holy day rites.

And here's the paper's conclusion, which (undeservedly) landed them the 2001 Ig Nobel Prize for Economics:

Evidence from estate tax returns suggests that some people will themselves to survive a bit longer if it will enrich their heirs. That there is any effect at all adds to the large body of evidence that taxes affect behavior, and particularly the timing if behavior, including activities such as marriage and childbearing which are not generally thought to respond to financial incentives.

The moral of the story? Birth, death and taxes are indeed the only certainties in life, but don't underestimate the power of the latter to affect the timing of the first two: make sure you keep your accountant, tax advisor and even travel agent in the loop at all times.

On the beach...

...back to blogging on Monday. Have a good weekend!

by datacharmer | Saturday, July 07, 2007
  | 0 comments | | On the beach... @bluematterblogtwitter

Statistical significance, and all that jazz

About two years ago, I was a reasonable person who argued that tests of statistical significance were useful in some limited situations. After completing research [...], I have concluded that tests of statistical significance should never be used.

This is J. Scott Armstrong, quoted in Decision Science News (via Statistical Modeling).

Here's the paper. It's a very readable piece, and I agree with almost all the points Armstrong is making. Unfortunately, it is gated; here is my summary:

1a. As a diagnostic tool, tests of statistical significance are too blunt and unnecessarily miss useful information. In some respects, they are also arbitrary. They can mislead the researcher.
1b. To make matters worse, many researchers do no understand how to construct appropriate and/or informative tests, or how to interpret them. Furthermore, journals tend to place unwarranted importance on 'statistical significance'; and even authors who do know better bend over backwards to please them.

2a. Reporting statistical significance at the x% level is too blunt and unnecessarily conceals useful information.
2b. To make matters worse, many consumers of statistical research do not understand how tests of statistical significance should be interpreted, or even what statistical significance means. Misguided commentary by the researcher doesn't help either.

A particular problem arises because there's rarely a good reason why the null hypothesis should be 'favoured'. When testing for statistical significance, the null is considered innocent until proven guilty, and the burden of proof is excessively high at 'standard levels'. The example Armstrong uses has to do with assessing whether combining forecasts can improve accuracy - why should there be a presumption that it doesn't?

The author also provides a handy list of what to do once you get rid of tests of statistical significance altogether:

What should one do without tests of statistical significance? There are better ways to report findings. To assess—
• importance, use effect sizes
• confidence, use prediction intervals
• replicability, use replications and extensions
• generality, use meta-analyses.

Finally, are there any circumstances in which tests of statistical significance could be useful? Only when utilising prediction intervals, replications, extensions and meta-analyses is impossible or too 'expensive' for the purpose at hand, and the limited (to some extent arbitrary) information tests of statistical significance convey can offer some indications:

This does not rule out the possibility that statistical significance might help in other areas such as (1) in aiding decision makers by flagging areas that need attention; (2) as part of a forecasting procedure (e.g., helping to decide whether to apply a seasonality adjustment or when to damp trends); or (3) serving as a guide to a scientist who is analyzing a problem (e.g., as a quick way to highlight areas that need further study). On the other hand, this is mere speculation on my part.

Before leaving this post, here's a related short paper written by my favourite blogger and Hal Stern: 'The Difference Between “Significant” and “Not Significant” is not Itself Statistically Significant' (free access).

This blog is rated: Restricted

Online Dating

Good thing I got rid of the French here then.

Also, apparently I am 59% Geek, my dead body would be worth around $3.5k and I rule at spelling.

These are from Mingle2 ,together with loads of other fun tests. Tip of the hat to Dan Drezner.

by datacharmer | Friday, July 06, 2007
  , | 0 comments | | This blog is rated: Restricted @bluematterblogtwitter

Was there ever a one-man top rate of income tax?

Franklin Roosevelt raised the top rate to 79% in 1936 [...]. It was said that John D. Rockefeller was the only person in the entire United States who paid so much as a penny of tax at the top rate.

Here's the source. I have come across this anecdote before - does any reader know whether it's actually true?

Friday Special 9

Life's too short for the wrong job: More here

Mexico's Mr. Slim overtakes Bill Gates to become world's richest person

The Best Geek Vacations: Chernobyl, South Pole, Tatooine

Forbes' Most Expensive Cars, and Most Anticipated Cars for 2008. Yes, I did put in an order for the Bugatti Veyron - just the car for getting to work in central London.

Even goddesses can get the sack

And finally, some are truly sorry to see Tony Blair go (hat tip: ASI blog)

by datacharmer | Friday, July 06, 2007
  , , | 1 comments | | Friday Special 9 @bluematterblogtwitter

Make trade, not war?

In a previous post, I passingly mentioned free trade as a potential force for peace. Philippe Martin, Thierry Mayer, and Mathias Thoenig (free access paper, Vox EU, via Mark Thoma) dig deeper and find that important qualifications apply - and the effect can go the other way too. From the abstract (edited, italics my own):

This paper analyzes theoretically and empirically the relationship between military conflicts and trade. We show that the conventional wisdom that trade promotes peace is only partially true. The probability of escalation is lower for countries that trade more bilaterally because of the opportunity cost associated with the loss of trade gains. However, countries more open to global trade have a higher probability of war because multilateral trade openness decreases bilateral dependence to any given country and the cost of a bilateral conflict.

We test our predictions on a large data set of military conflicts on the 1950-2000 period. We find robust evidence for the contrasting effects of bilateral and multilateral trade openness. For proximate countries, we find that trade has had a surprisingly large effect on their probability of military conflict.

The authors are by no means saying that trade should be avoided - read VoxEU for further comments - but they do a good job of highlighting there's more to 'trade stops wars' than meets the eye.

by datacharmer | Thursday, July 05, 2007
  , | 0 comments | | Make trade, not war? @bluematterblogtwitter

Extrapolating Mao's half-baked Aristotelianism to statistics

I remember that in graduate school, Xiao-Li Meng, now editor of this journal, told me they didn't teach Bayesian statistics in China because the idea of a prior distribution was contrary to Mao's quotation, "truth comes out of empirical/practical evidence."

This is from my favourite blogger, Andrew Gelman. The post has a somewhat technical discussion of Bayesian vs classical methods and 'conservatism' in statistics. My take on the quote itself: tis' a sad truth, but empirical evidence do not self-interpret, nor is there a God-given 'natural' way to generate predictions. If you are interested in finding out the 'truth' rather than showcasing a seemingly 'pure' estimation procedure, give Bayes a chance.

Terrorism, poverty and education

A number of people I spoke to yesterday were surprised to find out that all eight terror suspects detained in relation to the failed car bombings in the UK had links to the National Health Service (NHS), most being doctors or medical students. That surprise mostly stemmed from a popular belief that terrorists in general, and suicide bombers in particular, tend to hail from the poorest, least educated, most deprived strata of society. Christina Paxson (free access) of Princeton quotes a number of Nobel Laureates on the links between education, poverty and terrorism:

“What is it that seduces some young people to terrorism? It simplifies things. The fanatic has no questions, only answers. Education is the way to eliminate terrorism.” (Elie Wiesel)

“If the mind is more open, that will automatically bring less fear. Education can narrow the gap between appearances and reality. The reality is that we and 'they' are not different.” (Dalai Lama)

“At the bottom of terrorism is poverty. That is the main cause. Then there are other religious, national, and ideological differences.” (Kim Dae Jung)

Thinking of terrorists, and especially suicide bombers, as people with 'nothing to lose' is intuitive. It is also very likely wrong. Alan Krueger and Jitka Maleckova (free access), in an extensive review in the Journal of Economic Perspectives, show that the available evidence do not support the myth:

Any connection between poverty, education and terrorism is indirect, complicated and probably quite weak. Instead of viewing terrorism as a direct response to low market opportunities or ignorance, we suggest it is more accurately viewed as a response to political conditions and long-standing feelings of indignity and frustration.

It is difficult to build an economic model of the link between poverty, education and terrorism, especially suicide bombings. Furthermore, we thankfully lack the depth of empirical evidence that would allow us to test these theories and draw more robust and universally valid conclusions. That said, there are plenty of factors that suggest wealthier and better educated individuals may indeed be more likely to support and participate in terrorism:

1. Wealthy and well-educated individuals may stand to gain the most from a change in the political order. A landowner in the West Bank stands to gain significantly from the creation of a free and prosperous Palestine, and so does a Palestinian doctor or architect. It is more difficult to extend this hypothesis to account for suicide bombings, but there may be a link to the degree that people care about the welfare of their families.

2. Education and wealth are positively correlated with drive. Whatever it is that pushes people to achieve academic excellence or business success is probably also a factor behind their pursuit of political/religious/national aims.

3. We may only observe more educated/wealthy suicide bombers. From Krueger and Maleckova: Nasra Hassan, a relief worker for the United Nations, interviewed nearly 250 militants and associates of militants involved in the Palestinian cause. One Hamas leader Ms. Hassan interviewed claimed, “Our biggest problem is the hordes of young men who beat on our doors, clamoring to be sent [on suicide missions]. It is difficult to select only a few.” In cases such as these, education may be a signal of higher ability to carry out successful attacks, or of a more solid commitment to the cause. In the case of 'self-starts', where no organisation is involved in recruiting candidates, wealthier and more educated individuals may be more capable of putting together a plan, gathering the necessary resources and successfully executing a terrorist strike.

4. Those with the higher levels of education are likely to have also received more religious or nationalistic education - and hence are likely to be placing more value on religious or national goals.

5. Education in general may also make people become more involved in the political process, even if that is by means of terrorism. For example, stydying history may make individuals place more value on posterity. History also allows students to see that drastic geopolitical changes have happened in the past and so could happen in the future. Less educated individuals, on the other hand, may find it difficult to believe that such changes do happen: 'it has always been the same around here'.

6. Societal pressure may be higher on the brightest, richest and most educated individuals. Much like a star athlete is expected to return with an Olympic medal and is deemed a failure if she doesn't, the 'best' of a society are expected to contribute disproportionately to that society's welfare. Dying in the name of a national or religious cause can achieve exactly that.

I have recently had a request for a post on what economists have to say about terrorism. The short answer is, quite a lot. I am falling awfully behind with these on-request-posts, but please be patient: I intend to answer to all of them in due time.

Disclaimer: 'The term “terrorism” is used to describe premeditated, politically motivated violence perpetrated against noncombatant targets by subnational groups or clandestine
agents, usually intended to influence an audience.' No other meaning is ascribed to the term for the purposes of this text.

The slave trade in paradise

This is an edited version of a fascinating post from an economist in paradise:

The history of Mauritius is inextricably linked to the slave trade. In 1806, the slave population reached 78 000, an estimated 85% of the population, for an island no more than 720 square miles.

Slaves changed masters via openbid ascending (English) auctions; males were sold separately, women and their children were sold as a bundle. Armed with a uniquely detailed data set gathered from notarial acts on auction sales over the period 1825-1835, economists Chenny, Dionne, StAmour and Vencatachellum ask two questions in two separate papers. Firstly, was the market for slaves in Mauritius characterised by imperfect information, whereby sellers (masters) had more information about the productivity of the slaves than potential buyers? Secondly, how did the British take-over of 1810 and rumours of abolition affect the market for slaves?

Between 1825 and 1835, 2827 slaves were bought and sold at an average price of 326 piastre per slave, that is around 320 US dollars (roughly a quarter of per capita US income of that time). The average price for a male slave was $337 and a female slave $288. There are three broad categories of slave occupation: ’skilled’, ‘labourer’ and ‘household’. Relative to the average male price, ’skilled’ males were sold at 15% more, ‘household’ males at 4% less and ‘labourer’ males at 7% less. Slaves that grew up in the island, called ‘Creoles’, were sold at at premium of 13% over the average slave price, those recently imported from Mozambique were sold at a 10% discount, those from Madagascar at a 3% premium and ‘Indian’ slaves were sold at a whopping 54% discount.

The question asked by the authors is whether these prices reflected fundamentals. In some way, they do: ‘Indian’ slaves were ’smaller’ people and perceived to be less productive than their ‘African’ counterparts, while the ‘Creoles’ were perceived to be more adapted to local conditions. But the authors also find that asymmetric information was prevalent in the market for slaves: the circumstances under which a slave was sold dictate his/her price.

There are, in fact, three reasons for a slave to be sold: (1) death of the owner, which under Mauritian Law, required the assets of the deceased to be sold off and the proceeds distributed to the heirs, (2) bankruptcy of the owner and (3) voluntary sales. Two main findings emerge. Firstly, when male slaves are being sold involuntarily (death or bankruptcy of the owner), they were traded at a big premium (around 45% above the price of a slave sold voluntarily). Secondly, if, when a slave was being sold involuntarily, a relative of the owner participated and won the auction, the slave is generally traded at an even higher premium. This seems logical since relatives had insider information about the slave and would only bid aggressively when the slave is known to be productive.

Rumours about abolition

In their second study, the authors attempt to deduce whether slave owners believed in the persistent rumours that the British would abolish slavery. One way of finding this is to assess the market for children slave. Since children slave would only be productive in the future, rumours about abolition ought to depress their prices. In fact, they observe that the price for children slave rose between 1825 and 1827, from which they conclude that slave owners did not treat abolition as a serious possibility. Indeed, the threat only started to reveal itself in the data after 1833, two years before actual abolition.

Technological change

Improvements in technology took the form of the introduction of the horizontal roller mill in 1819, and steam-driven rollers in 1822. It seemed that technology ironed out differences in productivity as the price discount on handicapped, Indians and Mozambicans fell in the slave market.

The slavery period was undoubtedly the grimmest part of Mauritian history, the consequences of which are still being felt, more than five generations later. Descendants of slaves, who account for quarter of the population attain, on many counts, much less than the average Mauritian. Is there, after terrible uprooting, a degree of path dependency that we economists tend to seriously underestimate?

The papers are here and here. By the way, An Economist in Paradise provides an invaluable 'live-at-the-scene' perspective into Mauritius and the economics of developing countries in general, and is well worth a place in your bookmarks folder.

Overstretching an argument

Over at Burning our money, they are abusing statistics:

Every so often I like to draw up the chart above. It shows the latest (2005) OECD figures on GDP per capita plotted against the size of government for each of the G7 major economies.

The negative relationship jumps off the page.

If we draw a simple line between the two, it says that for every one percentage point increase in the share of government in GDP, GDP per capita is lower by 2.9%. On average, for every one percentage point extra of governmnet spending they get, Italians are worse off by 2.9%.

That's one helluva price to pay for... er, whatever it is Big Government provides.

What's that? Laughably simplistic? Correlation does not imply causation?

Give me a break. Excluding the obvious outlier (the US), all I can see is a horizontal line. And even if there was a downward slopping line indeed, drawing inferences from 7 observations is at best non-sensical and at worst dishonest.

Now, Burning Our Money also quotes (hopefully better quality) OECD research:

As regular readers will know, the OECD itself has done stacks of work on this. And they've got people who have taken econometrics far beyond anything Tyler has forgotten from his LSE Masters. Their conclusion is:

"Taxes...seem to affect growth both directly and indirectly through investment. An increase of about one percentage point in the tax pressure... could be associated with a direct reduction of about 0.3 per cent in output per capita. If the investment effect is taken into account, the overall reduction would be about 0.6-0.7 per cent." (The Sources of Economic Growth in OECD Countries, Section 2.3)

0.6% of GDP for every 1% increase in government spending? So, if government reduces its share of GDP by 10% (a whopping change), all we lose is 6% of GDP - a mere two years worth of economic growth. These numbers, if anything, provide evidence for increasing government spending: the price we have to pay for doing so is very low indeed.

Now, let me make clear I'm not pro-big government, but I'm definitely pro-good argument. There are plenty of reasons to reduce the size of government. But please don't present graphs like the one above as evidence: they make a mockery of a good case.

Pricing risk

J. P. Morgan was once asked by a friend to lend him some money. Morgan took the man for a long walk around New York.

"Now," he declared at the end of the excursion, "that you've been seen with me, you will have no problem getting a loan."

Via Anecdotage.

by datacharmer | Monday, July 02, 2007
  , | 0 comments | | Pricing risk @bluematterblogtwitter

Ignorant America

This is from the Pew Research Centre, via the Big Picture.

Europeans love this stuff: it is evidence Americans are ignorant idiots that don't know the first thing about politics and life in general ('Europeans' for my purposes includes large parts of the East and West coasts, such as San Francisco and New York).

I have always found these polls to be highly amusing, and barely relevant. First of all, a large number of voters are quite some way to the right or left of the political mainstream. These people already know that they will be voting Republican or Democrat: the name of the Defence Secretary is of no practical significance to them. Secondly, given the inability of most people to influence government, especially at the federal level, what is in fact remarkable is that so many people do know the name of the Speaker of the House.

In fact, the numbers are as high as they are because of politics' entertainment value, not any desire to influence the process of government - that would have been irrational.

And what about the main lessons to come out of this research?

More than a decade after the Internet went mainstream, the world's richest information source hasn't necessarily made its users any more informed. A new study from the Pew Research Center for the People & the Press shows that Americans, on average, are less able to correctly answer questions about current events than they were in 1989. Citizens who call the Internet their primary news source know slightly less than fans of TV and radio news.

Again, no surprise. Mainstream media are elitist - they are staffed by people who got good grades at school, enjoy opera and tend to find politics more interesting than Paris Hilton. The internet allows people more choice, and the intelligentsia can no longer dictate what people should be interested in. There is plenty of amusing stuff out there, and media oligopolies tended to supply way too much politics than a competitive market would. The internet is simply getting us closer to the competitive outcome - for better or worse.

by datacharmer | Monday, July 02, 2007
  , | 0 comments | | Ignorant America @bluematterblogtwitter

F***: The economics of coarse language

Update: A couple of readers suggested I re-publish this post without the expletives. So, here it is.

A disclaimer: This post's intention is neither to offend nor to provoke, despite the fact that coarse language is often used for exactly this purpose. I believe that no subject should be off-bounds when it comes to discussion and research, and readers who may be offended are kindly advised to stop reading now.

Organizations and Markets links to an interesting article exploring the history, properties and legal implications of the word f***. You can view the abstract or download the full paper for free at the Social Science Research Network. Here's a snippet from this highly readable piece:

A trilogy of events motivated me to start this project. The first occurred during my second year of law teaching. In my Professional Responsibility course, the lesson for the day was attorney racist and sexist behavior. The case I assigned from a leading casebook was liberally sprinkled with f***, c***, s***, b**** and the like. Sensitive to the power of language, I recited the facts myself rather than ask a student as was my norm.

After the course was over, I was reviewing my student evaluations and discovered this: “I was a little disturbed by the way he seemed to delight in saying ‘c***’ and ‘f*****g b***h’ during class. I think if you’re going to say things like that in class, you should expect it to show up on the evaluation.” Now I was the one a little disturbed. How could any educated adult, much less a graduate student in a professional program, be offended by hearing these words read from a court opinion?

I've been meaning to post something on the economics of coarse language for a while now. The author of 'F***' points out that 'according to psycholinguists, its taboo status is likely due to our deep, subconscious feelings about sex' and offers a simple model explaining how the process of 'taboo-ization' operates through individual, voluntary self-censorship and the interaction with law. For the record, I tend to agree with the author's take on jurisprudence in this area and how it is often misguided and incoherent.

At the same time, I disagree with his assertion that 'word taboo is irrational' and with the taboo-isation model on offer. There are plenty of other words and expressions that convey the same meaning as 'f***', ranging from 'having sex' to 'copulating' to 'sleeping together'. Instead, I see using 'f***' as having the same rationale as wearing a tie: it is a signalling device, a means of imparting information about one's character, feelings, intentions, religious beliefs, socioeconomic class or other non-obvious characteristics.

The important fact to grasp here is that while use of the word 'f***' in a social setting can be costly to its users, in many cases it is actually beneficial. To give an example, using the word 'f***' in someone's presence is a way to show you trust that person (we tend to speak way more freely in the company of friends than in the company of strangers). To give a few more, 'f***' may be used to project power or intimidate, to signal the person uttering it is a 'simple chap' or to challenge authority.

F***, therefore, serves a useful function when it comes to social interactions, as it allows the user to communicate information about himself in an efficient manner. In that sense, it is a highly valuable word that has unsurprisingly survived centuries of use, and will continue to thrive in everyday language as long as social taboos allow it to retain its useful signalling properties.