Friday Special 17

You just kinda wasted my precious time
But don't think twice, it's all right

BusinessWeek presents the world's ugliest cars

World’s most expensive private island resort: Musha Cay Resort, Bahamas

Simulation of US daily airtraffic

The Xbox 360 laptop

Chinglish: Now with 10% more Manglish

Is the smoking ban based on bad economics? Part 2

This blog recently raised the issue of some bad economics behind the smoking ban . But in addition to these previous comments, missing from the whole media/public debate about the smoking ban seemed to be the issue of the massive tax revenues we raise from smoking.

I fully recognise that this is a highly regressive and inequitable tax, but ignoring welfare implications for other people (and other principles), the deciding factor for whether to be supportive of the ban should be whether you as an individual are better or worse off.

For smokers who don’t want to quit, unsurprisingly most are against the ban. The benefit of avoiding passive smoking doesn’t apply when you’re non-passively smoking anyway and for many, the smoking ban is equivalent to an exile from all pubs that don’t have an outdoor area and a winter of drinking at home lies on the horizon.

For non-smokers, there’s the benefit of avoiding passive smoking and avoiding smelling like an ashtray after a night in a pub/club. On this basis alone, all non-smokers I know are massively in favour of the ban, which seems to them to create massive benefits without any costs.

But this misses the potentially massive cost to non-smokers of reduced tax revenues from smoking, which non-smokers will ultimately have to fund themselves by either paying higher taxes or by seeing reduced public spending. Tobacco taxes are forecast to raise £8.1bn in 2007/08. The HMRC national stats pages helpfully provide information on how we might fund any loss of tobacco taxes.

Hypothetically, if the long-run impact of the smoking ban is to cause widespread quitting, we could conceivably lose a few billion of the £8.1bn. For the same tax year, 1% on the basic rate of income tax would raise around £3.3bn, so it’s not implausible that this might give an indication of the long-term impact of the smoking ban. For someone earning (say) £30k per year, this would equate to around £250 extra tax per year. Assuming you already worked in a non-smoking building, as a non-smoker, divide that by the number of times you go to the pub and you have your extra cost per pub visit of the smoking ban. If you go only 2 or 3 times a year (as per one of my non-smoking friends who massively supports the policy), the ban could end up costing you an extra £80-125 per pub trip. Even if you go once a week it’s still an extra £5 per visit, which is worth an least one extra gin & tonic in London and equivalent to 3 pints up North.

So when you add to that the absence of (interesting) smoking friends at the pub or having to stand outside to placate them, as a non-smoker ignoring the welfare of increasing the progressivity of the tax system, the mass support of the smoking ban by non-smokers seems like turkeys voting for Christmas.

PS. if losing smoking tax revenues due to anti-smoking policies could be funded by abolishing DEFRA rather than raising other taxes I might actually be in favour.

PPS. "Cigarette packs to feature graphic pictures".

Why bother posting on a bank holiday? Part 2

I now have the answer to this question, courtesy of the comments section and Tim Worstall, which is:

1) To reward loyal readers. A fair point and a regrettable part of the moral hazard that datacharmer accepted with his holiday cover, i.e. that we have far less incentive to cater for his loyal readers.

2) To create content for people that visit more infrequently but read older posts too. I'll begrudgingly accept this one, although I could have created the same amount of content for occasional visitors by posting 4 times on Tuesday and skipped posting for the 3-day weekend.

3) Because you might get a lot more visitors than you were expecting, possibly due to a link from another site.

On the subject of (3), I've revised my forecasting model to:
Visits = 119.8 - 33.2 * Weekend + 205.4 * TW, where Weekend is a dummy variable that takes the value of 1 for a weekend day and zero otherwise and TW is a dummy that takes the value of 1 if Tim Worstall links to this blog and zero otherwise, with all coefficients statistically significantly different from zero at the 95% level (and for the data miners amongst you, an R-squared of 44%).

A nation mourns

Looks like the worst is past now, and we can finally breath a collective sigh of relief.

There's much to be said, but I will keep this short. I am sad about the state of Greek journalism; however the resilience exhibited by the country's young political institutions a mere three weeks before a general election can only fill me with pride. There lies hope in the ashes.

by datacharmer | Wednesday, August 29, 2007
  , , | 0 comments | | A nation mourns @bluematterblogtwitter

1980s Endogenous Growth Theory Discovered in the 1960s

I may be a geek, but this is my idea of fascinating. A number of core ideas of endogenous growth theory that made up a massive (and ongoing) area of macroeconomic research in the 1980s and onwards were discussed but ignored in a barely-read article in the 1960s, Frankel (1963) (gated link here). This was unearthed by Edmund Cannon in 2000 (gated link here):

An important strand of the growth literature of the last decade or so is the assumption that factors which can be accumulated indefinitely may have marginal returns which do not fall to zero for society as a whole. The importance of this assumption lies in the consequence that a society’s growth rate will depend upon its propensity to save…

…The model in Frankel’s paper is of the “AK” variety, where the aggregate production function is linear in capital due to externalities at the firm level. As such it anticipates many of the features of the models found in Paul M. Romer (1986), Robert E. Lucas, Jr. (1988), and Sergio Rebelo (1991)…

…Frankel’s paper has lain unnoticed for the last 26 years…

Cannon goes on to discuss possible reasons why this paper was ignored at the time, but seems to conclude that this is essentially a mystery:

Why the paper was ignored at the time remains a bit of a puzzle and perhaps serves as a demonstration of the role of chance in the research and growth processes.

Ironically, the fact that an excellent pioneering paper on endogenous growth theory went unnoticed suggests R&D yield is substantially driven by chance, suggesting economics cannot do a good job of explaining technological growth, which in turn is a big argument in favour of Solow-style growth models in which technological growth is exogenous.

PS. for anyone currently formally studying growth or otherwise curious about Frankel's early discovery, I strongly recommend reading Edmund Cannon's short and very readable paper.

Why bother posting on a bank holiday?

Site visits for bluematter show a very pronounced weekly cycle, with most visits at the start of the week (normally peaking on Mondays, including on this graph the 6th, 13th and 20th) followed by a decline down to least visits on Sundays:

Using the last 30 days data before today, Visits = 119.8 - 33.2 * Weekend, where Weekend is a dummy variable that is 1 for weekend days but zero otherwise. The coefficient on Weekend is statistically significantly different from zero at the 95% level.

Given that most of our readers are probably English and it's a bank holiday, I can expect materially less than 86.6 people to read this today.

Maths and Tesco

Firstly, some maths. Assuming a firm faces a constant price elasticity of demand (PED) and has constant marginal costs, the price charged is a mark-up over marginal cost that is a function only of the PED faced, in this case, b. In perfect competition, b is infinity, there is no mark-up and price equals cost. In the theoretical case of a perfect monopoly facing perfectly vertical demand, b is zero and the mark-up is infinite. For any other value of b between zero and infinity, the mark-up is in between:

Also note that this result generalises to less simplified forms that don't assume constant PED and marginal cost

So based on this, which companies should consumers hate the most? In this basic set-up, anyone with a high mark-up is facing a low firm-level PED, which means they're exploiting market power, capturing consumer surplus as additional profits and creating monopoly deadweight loss

So why does Tesco seem to be the most hated company in the country? Based on the financial highlights on their Website, for their accounting period ending in 2007, Tesco were making a profit margin of 5.5% at the profit before tax level, which implies a mark-up of 5.8%, which implies they face a firm-level PED of 18, which suggests they face a very high level of competition and charge a price not far above the perfect competition outcome. So on this basis, Tesco should be loved as the consumer's best friend, a large company achieving economies of scale, but without the market power to use this scale to capture consumer surplus, make massive profits (compared to its revenues) and create monopoly deadweight loss.

I'm at a loss to really understand why Tesco is so hated in England. Many rightly claim Tesco are driving small local butcheries, bakeries and grocery stores out of business, but this only happens because consumers prefer the prices and goods at Tesco in the first place, so this is a case of consumers lamenting the loss of shops they weren't really using much anyway. Another common complaint is that Tesco use their scale to negotiate very low wholesale prices, especially when buying from farmers, but as a consumer, surely this is a good thing? I don't know of any other industry in which consumers worry about raw materials and intermediate goods made in the UK getting a fair price ("Fair Trade" is a different issue), so this is almost a more surprising argument than the concern over local little-used over-priced butchers going out of business. I also have no idea why this hatred doesn't seem to extend to Asda, Sainsbury's and Morrisons, businesses very similar to Tescos but less efficient and with less market share. Are these other companies being effectively praised for being less efficient than the market leader?

Any suggestions on why a firm offering cheap, popular, quality products is the most hated in the UK would be much appreciated.

by Indifference Merv | Sunday, August 26, 2007
  , | 1 comments | | Maths and Tesco @bluematterblogtwitter

The 10 Commandments of Applied Econometrics

A few posts ago, datacharmer gave a plug for Peter Kennedy's outstanding econometrics textbook. To follow up that plug, this is a paraphrased version of Kennedy's 10 Commandments of Applied Econometrics, a recipe for good research:

1. Thou shalt use common sense and economic theory
2. Thou shalt ask the right question
3. Thou shalt know the context
4. Thou shalt inspect the data
5. Thou shalt not worship complexity
6. Thou shalt look long and hard at thy results
7. Thou shalt beware the costs of data mining
8. Thou shalt be willing to compromise
9. Thou shalt not confuse statistical significance with substance
10. Thou shalt confess in the presence of sensitivity

Some Slightly Better Ebay tips

A while ago Datacharmer posted on observed behaviour on eBay doesn't fit well with thoery-based predictions of consumer behaviour. He also gives a few tips based on what economists have learnt while studying trading on eBay.

EBay is not all bad news for economics: the emergence of eBay does square very well with conventional economic theory. EBay fills in a 'missing' market - where transaction costs, informational difficulties and insufficeint liquidity used to make trading in certain goods difficult or impossible. The secondary market for concert tickets is one of these. With eBay the tout's margin is greatly lowered, the risk of buying a forgery is almost eliminated and the right ticket can be much more easily sourced. So all-round ease of both buying and selling means an increase in consumer and producer surplus and everyone's happy. Yet as Datacharmer outlines the behaviour of buyers (although not sellers) is in many ways contrary to economic theory and continues to baffle.

I've been buying (quite a bit) and selling (less) on Ebay for nearly three years and my experience jars with a lot of the tips posted. Here's where they're right and wrong.:

Set low opening prices. Is it really that simple? No. As a seller you have to set a price that strikes a delicate balance. You have to make sure you get bids in the first place. Yet you don't want to set a price well below what a lone buyer would be happy to pay. It's something I've never been able to get quite right. Blanket advice like 'low opening prices' masks a huge amount of complexity.

Don't use secret reserves. Agreed. They're a waste of time and just annoy bidders. Set your reserve as your asking price, because that's just what it is.

Try to appear honest and dependable [and leave shipping costs low]. Not necessarily. The seller doesn't pay fees on shipping costs so it's wise for him to keep this value high (which should also keep prices lower for buyers). It's not hard to for buyers fo sum item price and shipping price when making a bid. In theory eBay should set the shipping costs, as Amazon does, this would leave to greater transparency and ease for buyers. But given the proliferation of absolutely everything on eBay the policing of such a rule would be impossible.

Don't bid until the last minute - early bids attract competition. Not necessarily. It's often better to bid early as if you're going to be outbid you'll find out sooner. This means you can bid earlier on the next item (which is useful on time-sensitive products like concert tickets) or you find out early that you're priced well out of the market and don't waste time. And anyway I generally have better things to be doing than making sure I'm in front of a computer screen at 11.24pm on a Thursday or whenever a bid is timed to end.

Don't fall in the 'many bids' trap. Dead right. There is absolutely no point in bidding twice*. Decide on your reservation price and bid it once. Despite what anyone says there is absolutely no strategic advantage to multiple bids. This fact is beyond many experienced eBayers. I still have no idea why.

I have no advice for sellers as I've never managed to be a good one. For buyers: decide your reservation price; bid it early (and only once); then go enjoy the sunshine!

*Annoyingly, eBay encourages multiple bidding. For obvious reasons.

Friday Special 16

China bans reincarnation in Tibet

Is it really just cultural difference - Japanese going wild

Bored with the routine? Try glacier surfing

A quick review of women in film

Get the news. Spot on.

Popular Misconceptions about Private Equity, Part 1

Firstly, what do I mean by “private equity”? The term is used very loosely, often interchangeably with “venture capital”, sometimes to cover both (with venture capital identified as a subset of private equity) and sometimes only to define the top end of the private equity market such as leveraged/management buyouts, etc, and it’s this last definition that I’m using below. This confusion has been one of the great successes of the industry, with the blurred boundary between unleveraged equity financing for small and start-up companies (venture capital) and buyouts of large companies in highly leveraged transactions (private equity) enabling the latter to piggy-back on the former when it comes to the perceptions of the public and governments.

Private equity has been very topical over the last few months as it was noticed how little tax the very highly remunerated fund managers were paying on their income. This seems to lead to a trade off between fairness/equity issues with the issue of some very rich people paying little tax versus the undoubtedly massive impact of private equity on UK productivity. However, the second part of this equation is based on the misconception I most often hear about private equity, i.e. that private equity funds achieve their returns primarily by improving the productivity of the companies they buy. Regarding this misconception, the best source I’ve come across regarding how private equity funds generate returns is a 2004 survey of private equity in the Economist, which lists four methods for generating returns:

- Improve the profitability of the company…
- Buy low, sell high…
- Break it up…
- Use leverage…

Improving profitability/productivity is indeed one method by which private equity funds generate returns, but this is only part of the story and by far the most important method is the use of leverage.

I tend to think of the private equity market as following a very similar business model to the market for buy-to-let housing. With buy-to-let, a property is bought typically in the UK with around 80% debt and only 20% equity, with the debt funded by the property’s tenants and funds equal to only 20% of the purchase price required by the buyer. With rent covering debt service costs, the buy-to-let investor then achieves a magnified return on their equity. For example a £100k house bought 100% with equity that rises to £105k in value earns a 5% return on equity if 100% equity funded, but this equates to a 100% return on equity if the house was originally 95% debt funded.

With private equity, the typical leverage is around 70%, with the companies’ cash flow covering ongoing debt service costs and wiping out all corporation tax liabilities because interest expense is tax deductible. Then if a 10% increase in company value can be achieved each year for (say) 3 years, a £1bn company bought for £300m ends up worth £1.33bn, £630m after repaying the debt and generating a return on equity of over 100%.

It’s true that for this to work the company has to go up in value, but with leverage magnifying the upside, relatively small increases in company value end up generating handsome returns for private equity funds, and if the returns come primarily from leverage then I will leave it to the reader to decide what that means for the trade-off mentioned above.

Party like it's 1993

Just when you thought the Tories had not only got over Thatcher but Blair too off they go and bring back John Redwood to scare us all. He's behind a new report from the Competitiveness Council which amongst other things encourages the abolition of inheritance tax. Not surprisingly it's made quite a few headlines.

First the facts, then the rant. In the UK inheritance tax (IHT ) is payable at a rate of 40% on all estates over £300,000 (the nil rate band). The estate incurs the tax rather than the inheritors. So an estate of say £400,000 split evenly between four children incurs tax even though the individual shares may be below the nil rate band. Rising house prices and fiscal drag have seen more estates eligible for IHT in recent years. Still at last count it only affected 10% of estates and raised about £3.2bn - that's just under 1% of the total tax take but more than enough to pay for the work of Department of Environment, Food and Rural Affairs.

Redwood proposes abolishing the tax on the justification that:

many people, who could not in any sense be described as rich, suddenly finding that their family will be liable to pay quite substantial amounts upon their estates.
This is a quite extraordinary statement. Consider someone only just affected by IHT. Say he inherits an estate of £400,000 and will pay 40% of the amount over the nil rate band, leaving him with £360,000. Now we can quibble about the meaning of 'in any sense' and 'rich'. But £360,000 is a full fifteen times the UK median wage of about £23,600. And simply leaving this on deposit (probably not the best use of it) will pull him in £22,500 per year. So for doing absolutely nothing at all he'll pull in close that median wage yet again.

And yes, abolishing inheritance tax would have an opportunity cost. It means higher taxes on wages, consumption or profits. Or reductions in spending. Redwood seems to think opposite, dragging out an argument that sounds quite like it's based on the Laffer Curve. There's good reasons for a tax system that rewards enterprise and lets clever, innovative individuals get rich. But IHT isn't a tax on people who've made a lot of money. It's a tax on people who haven't: their children.

However there are some reasons for reforming IHT. At the moment the same amount of tax is levied whether the estate is split between one or 10 children. A more equitable system would charge tax on the inheritor rather than the estate. But to hold receipts constant this would mean reductions in the nil-rate band. Also, IHT tax is borne disproportionately by the moderately rich. Seriously wealthy people are able to avoid inheritance tax by means of trusts and various offshore instruments. But is this a reason for repealing IHT? Hardly. The super-rich are already able to hide offshore and avoid all sorts of taxes well before their death.

For reasons that continue to elude me inheritance tax seems to provoke a visceral reaction out of all proportion to either it's scope or depth. While no one likes paying tax it seems perverse that people resent paying tax on windfalls more than they do on earnings. Perhaps this comes down to tax salience - essentially the visibility of the tax to the taxpayer. As people never even see their PAYE they don't consider it a loss. While the prospect of a the state taking a chunk of the family home is a much more visible intrusion.

I don't particularly mind vast personal holdings of wealth. However I do think that it capital should be put in the hands of the people best qualified to allocate it. In the long run that's the best way to drive productivity and growth. We should defer to the Sage of Omaha on this one. Three-time father Warren Buffett says that repealing inheritance tax would be like "choosing the 2020 Olympic team by picking the eldest sons of the gold-medal winners in the 2000 Olympics". And remember high IHT usually means low taxes on labour and profits. So if IHT means less lazy wealth-holders and more self-made millionaires then let's keep it.

PS: The resurgence of Redwood isn't the only thing that makes it feel like it's 1993. Ever heard of the EU working time directive? Apparently it's stifling British business. Yawn...........

Datacharmer on holiday for two weeks

I'll be on holiday for the next two weeks, which will hopefully involve not having access to an internet connection for most of the time. So, until I return, two economist friends have kindly agreed to help keep this an uninterrupted service and guest-blog at Bluematter. (I sure don't want to be attracting Gabriel's rage)

Indifference Merv ('rhymes with curve') is new to this blogging thing, but he is a brilliant economist with a rare ability to communicate his thoughts in a succinct and effective manner. My probit model predicts he will make for a great blogger, and I can't wait to see him in action.

Hibernien has started his own blog here. His blog description reads: 'comment and analysis on Irish politics and economics with the odd trip left-field. Expect ideas that are empirical, liberal and green'. He takes a much more hands-on approach to commenting to politics that I do, and my hunch is that many of my current readers will disagree with his views; I often do. That being said, our conversations always provide me with ample food for thought; his posts should make for very interesting reading.

Last but not least: Stardom, a good friend that put together Bluematter.'s layout, has been providing most of the Friday Special links since this blog started. As a handful of astute readers have already noticed, he has also posted the specials himself for the past couple of weeks, and he will continue to do so in the future. So not really a guest-blogger, but this is my chance to finally say a public 'thank you' and officially welcome him to the team.

Off to catch my flight, see you in two weeks!

The conceptual revolution

Irving Berlin, Cole Porter, and other songwriters of the Golden Era wrote popular songs that treated common topics clearly and simply. During the mid-1960s Bob Dylan, John Lennon, and Paul McCartney created a new kind of popular music that was personal and often obscure. This shift, which transformed popular music from an experimental into a conceptual art, produced a distinct change in the creative life cycles of songwriters. Golden Era songwriters were generally at their best during their 30s and 40s, whereas since the mid-'60s popular songwriters have consistently done their best work during their 20s. The revolution in popular music occurred at a time when young innovators were making similar transformations in other arts: Jean-Luc Godard and his fellow New Wave directors created a conceptual revolution in film in the early '60s, just as Andy Warhol and other Pop artists made painting a conceptual activity.

This is the abstract of a new NBER paper by David Galenson (gated NBER version), emphasis is mine. For the graph below, I used his Billboard and VH1 data for Golden Era and Rock songwriters respectively.

by datacharmer | Tuesday, August 21, 2007
  , | 1 comments | | The conceptual revolution @bluematterblogtwitter

Cricket versus Baseball as an Engine of Growth

My previous post on parody and academic economics reminded me of the classic paper in this tradition, Howard Wall's 1995 'Cricket versus Baseball as an Engine of Growth' (free access). If you are a professional economist and haven't read this excellent paper before, do so now; it is only 3 pages long and is easily one of the most entertaining pieces ever to be published in an economics journal:

Until the pioneering work of Solow (1956) forced growth theorists to focus on things such as savings rates and capital accumulation, economists searched far and wide for engines of economic growth. One of the seemingly eccentric streams of the literature considered the relative effectiveness of sport in spurring economies along. Marshall (1889) was the first of the classical economists to suggest that the character-building aspect of sport may play an integral role in harnessing the capacities of an economy towards productive ends.

At the time, Marshall proposed that the sports that would best serve as an engine of growth were those that "involved the carrying, and sometimes the tossing, of a ball; and the frequent collision of opposing bodies." Subsequent research naturally looked towards gridiron football in the US, and rugby football in the UK.

Marshall’s case for gridiron and rugby did not last long. In a footnote to a theorem on the existence of irrational numbers in σ-dimensional lattices, Russell and Whitehead (1908) found an error in Marshall’s result. Russell and Whitehead had stumbled onto something would keep economists at odds for nearly fifty years. They found that the necessary, but not sufficient, conditions for a sport to be an engine of growth are (1) that it uses an ash implement to strike a round object; and (2) that at any time the majority of players spend their time standing idly in an expanse of grass, or sitting on a wooden bench doing nothing.

Within months of this result becoming public, opposing schools of thought developed, separated, as they often are, by the Atlantic Ocean. Cricket and baseball very quickly became the centers of growth theorists’ attention.

The debate raged until the entire field fell into disrepute in the early 1950s. The backlash began with attacks by the French economist Maurice Le Point. As a Frenchman, Le Point could not see any point in cricket nor in baseball, and failed to see how either could have anything at all to do with the economy. His most biting insight, which purportedly came to him while attending a St. Louis Browns baseball game, roughly translates as "there is a fine line between playing baseball and standing in a pasture dressed like an idiot." Although aimed at baseball, this certainly rings true for cricket as well.

So powerful was Le Point’s attack that nearly all traces of the two schools have been purged from the economics literature. The early works began to disappear from libraries, and later editions of Keynes (1936) do not include the original twenty-fifth chapter on the role of cricket in ending the Great Depression.

The purpose of the present paper is to revive and answer this long-forgotten question. With today’s statistical techniques and the availability of data for a large number of countries, the question of cricket versus baseball can be addressed once and for all [...]

The empirical results speak for themselves. For emerging countries without a history of cricket or baseball, baseball instruction and subsidies should be an immediate priority. The difficult problem is in devising a plan to eradicate the cricket-induced malaise of the cricket-playing countries. Clearly this is a task of Herculean proportions, rivalled only by the economic reform of formerly-communist countries. Like communism, years of cricket have polluted the very souls of these countries, and we need to measure the pace of reform in decades, not merely in years.

Postscript: Don't miss the references at the end of the paper.

Is alcohol too cheap?

Cheshire Police Chief Constable Peter Fahy hit quite a few headlines last week remarking that "Alcohol is too cheap, too readily available and too strong. Young people cannot handle it". Age decrying youth is nothing new and in the middle of August these kind of stories tend to get more mileage than they would otherwise. Still, he has a point. Price and age restrictions are doing little to restrict the supply of alcohol to those under 18 who are determined to get hold of it. And many of those of us old enough to purchase as much as we like drink too much.
So how should a society tackle problems caused by alcohol? "Negative externalities" (such as long-term health effects of alcohol consumption or environmental pollution) can be ameliorated by, say, banning alcohol or imposing quotas on pollution-producing activities. However economists generally prefer Pigouvian taxes. These impose a cost on the producer of the externality in order to discourage their behaviour and (at least in theory) the revenue raised can be used to compensate those who suffer. They also avoid the criminality and avoidance issues created by bans and quotas - think of Prohibition in the US. So a properly-levied tax on alcohol could both discourage consumption and be used to pay for the healthcare of those who over-consume.
Fahy suggests that drink is too cheap, so is raising the price of alcohol the answer? In fact it's already quite highly taxed compared to other food and drink. All alcohol sold in the UK faces VAT at 17.5%. Excise duty is also levied and is more tightly targeted to discourage consumption It's payable on the volume of alcohol rather than the value of the product. Rates of excise duty also reflects conventional beliefs about what problem drinkers drink. Excise duty on cider is almost double that on beer, so for a 5%-strength pint 75p is payable on the cider and only 39p on the beer. High prices isn't the only way governments round the world try to restrict problem drinking, there's high age limits (United States), a moratorium on the issuing of licences (Ireland) and a government monopoly on off-sales (Norway).
But Pigouvian taxes are most efficient when levied on activities which produce identical externalities whoever engages in them. A tonne of carbon produces the same effect whoever emits it and there's a broadly linear relationship between every extra cigarette smoked and the effect on your future health. So is the current excise duty regime the best way to deter problem drinking? Probably not. The marginal impact of that extra pint varies hugely if consumed by a moderate or a heavy drinker. Also, tastes are heterogeneous and the price elasticity of demand varies hugely across consumers. Problem drinkers are the ones least sensitive to changes in price. Moderate drinkers (who value alcohol consumption far less) are much more likely to reduce their consumption in response to upward price movements. So a well-intentioned tax hike targets precisely the wrong people.
Taxes on betting display the same problem. It's clear that problem gambling has an effect on individuals and particularly their families, hence winnings are taxed to discourage it. But unlike carbon emission the negative externality varies hugely from gambler to gambler. Is it either equitable or efficient that the occasional gambler or drinker faces the same tax rate as the full-blown addict?
Is there a better system out there? Probably. I propose a kind of tax-free allowance for drinkers so that everyone can purchase a reasonable amount of alcohol free of excise duty per month (say up to the recommended limit). After you've drunk your allowance you pay a price for alcohol at a pretty punitive rate. In practise this could be done with some kind of PIN-based card issued to all adults who apply for one. Once you've purchased your allowance you simply buy as much alcohol as you like at the higher price level, without the card. Unlike the current system this pricing regime would recognise that the marginal impact of alcohol varies hugely as consumption increases. Heavy drinkers and alcoholics pay the price for their activity while the rest of us aren't taxed for their sins.
Would this system be free of abuse? Not completely, but less than you would think. No one wants to be perceived as a heavy drinker and people would be reluctant to ask their friends to make trips to the bar to make use of their unused allowance. Anyway, friends would probably want to keep their allowance for themselves in case they need it. The system would also prevent the problem mentioned by Fahy of adults purchasing drink for under-18s. Smuggling is unlikely to be an issue either. Alcohol is heavy and bulky and contraband is already tiny compared to that other Pigouvian-taxed product, cigarettes. However the cost of installing and maintaining this kind of allowance-based system in pubs and shops would be large and would be greeted by predictable squeals from retailers and pub-owners. Yet there is a growing recognition that alcohol-related problems are a serious societal problem and neither the current pricing or sales regime is doing much to solve it.

On the Efficiency of AC/DC

Many an undesirable trait have been at times associated with economists ('dismal scientists' and all that), but surely no-one can accuse us of lacking a sense of humour. This is from Robert Oxoby's short paper On the Efficiency of AC/DC: Bon Scott versus Brian Johnson (free access), via MR:

The band AC/DC is considered one of the seminal hard rock bands, often compared to Led Zeppelin and Black Sabbath in influencing many subsequent hard rock and heavy metal bands. The band was formed in 1973 by Angus and Malcolm Young who took the band’s moniker from the back of their sister’s sewing machine. In its 35 year history, the band has sold more than 150 million albums.

Among musicologists, researchers of popular culture, and rock and roll lovers of all ages there exists a common debate. That is, with respect to the rock band AC/DC, who is the better vocalist: Bon Scott or Brian Johnson?

[...] using tools from the field of experimental economics, we consider which vocalist results in individuals arriving at more efficient outcomes in a simple bargaining game. Our results suggest that having participants listen to songs by AC/DC in which Brian Johnson served as vocalist results in participants realizing more efficient outcomes. Thus, in terms of a singer’s ability to implement efficient behavioral outcomes among listeners, our results suggest that Brian Johnson was a better vocalist than Bon Scott.

Our analysis has direct implications for policy and organizational design: when policymakers or employers are engaging in negotiations (or setting up environments in which other parties will negotiate) and are interested in playing the music of AC/DC, they should choose from the band’s Brian Johnson era discography.

Applause! Parody is a staple of political commentary; perhaps it can be put to good use in the field of academic economics as well.

Economists are idiots, says Lou Dobbs

Watch the video, it seems to me that Lou Dobbs is completely in sync with the 'average American' on free trade. The quality of the debate, as you would expect from CNN, is of the highest standards too.

Alex Tabarrok of Marginal Revolution is singled out for special praise.

Are data-miners made or born?

Green (1990) gave 199 students the same data but with different errors, and asked them to find an appropriate specification. All students had been taught that models should be specified in a theoretically sensible fashion, but some were also taught about how to use F tests and goodness-of-fit for this purpose. These latter students were quick to abandon common sense, perhaps because using clearly defined rules and procedures is so attractive when faced with finding a specification.

As with driving and flying fighter jets, the risk of 'accidents' when doing econometrics is at its highest amongst those with some, but not much, experience. The novice pilot, or econometrician for that matter, will take extra care to make sure everything is as it should be. Being concious of the possibility of disaster, she will not attempt flashy tricks, whether that's flying at mach-2 or drawing inferences from not-very-well-understood statistics.

As the student becomes more comfortable and builds up some confidence in her abilities, she will tend to underestimate the amount of care that needs to be applied when performing a given manoeuvre. Flight instructors are well aware of this tendency, but it is still the case that most accidents involve pilots that have had between 500-1000 hours of flying experience. A very similar risk profile holds for budding econometricians; we should be thankful that the aftermath of a 'crash' for the analyst is far less painful than for the pilot.

The quoted excerpt is from Peter Kennedy's excellent econometrics textbook, now in its fifth edition. As far as I'm concerned, the book is unique in its approach; it focuses on the intuition behind the various methods and techniques used in econometrics using simple English, with the underlying equations relegated to technical annexes.

I have long thought that the way undergraduates are being taught econometrics is far from ideal: what good is it learning the proof of why OLS is BLUE in your second week in an introductory econometrics course? Kennedy's approach is promising, and purchasing the book is a good idea for students that have had little experience with econometrics and are not yet proficient in 'translating' the maths into something that makes intuitive sense.

The issue of the Political Methodologist where Green's article comes from is here (free access), but I have to warn you that the quality of the scanning is poor.

Fly Qantas

This must be the funniest FW: email I have ever received:

Here are some actual maintenance complaints submitted by Qantas’ pilots (marked with a P) and the solutions recorded (marked with an S) by maintenance engineers.
By the way,Qantas is the only major airline that has never, ever, had an accident.

P: Left inside main tyre almost needs replacement.
S: Almost replaced left inside main tyre.

P: Test flight OK, except auto-land very rough.
S: Auto-land not installed on this aircraft.

P: Something loose in cockpit.
S: Something tightened in cockpit.

P: Dead bugs on windshield.
S: Live bugs on back-order.

P: Autopilot in altitude-hold mode produces a 200 feet per minute descent.
S: Cannot reproduce problem on ground.

P: Evidence of leak on right main landing gear.
S: Evidence removed.

P: DME volume unbelievably loud.
S: DME volume set to more believable level.

P: Friction locks cause throttle levers to stick.
S: That’s what friction locks are for.

P: IFF inoperative in OFF mode.
S: IFF always inoperative in OFF mode.

P: Suspected crack in windshield.
S: Suspect you’re right.

P: Number 3 engine missing.
S: Engine found on right wing after brief search.

P: Aircraft handles funny. (I love this one!)
S: Aircraft warned to straighten up, fly right, and be serious.

P: Target radar hums.
S: Reprogrammed target radar with lyrics.

P: Mouse in cockpit.
S: Cat installed.

P: Noise coming from under instrument panel. Sounds like a midget pounding on something with a hammer.
S: Took hammer away from midget.

by datacharmer | Sunday, August 19, 2007
  | 0 comments | | Fly Qantas @bluematterblogtwitter

Broadband trouble

It's a funny world. I recently commented on a Wired article saying that 'French DSL is like a rude French waiter':

France has more broadband DSL customers than most countries, including the United States. But if you happen to be one of the millions of customers having major problems with your connection, then life can be a living hell. High-tech service in France is like service in a Parisian cafe -- intermittent and snooty.

The problem is that there are at least 10 DSL companies battling for a share of the French market. The companies do a good job of selling services, often bundling phone and TV service with DSL. Unfortunately, the companies make promises to gain subscribers without having the infrastructure in place to make good on them.

A few days later, Paul Krugman wrote this for the NYT- entitling it 'The French Connection':

And when the Bush administration put Michael Powell in charge of the F.C.C., the digital robber barons were basically set free to do whatever they liked. As a result, there’s little competition in U.S. broadband — if you’re lucky, you have a choice between ... the local cable monopoly and the local phone monopoly. The price is high and the service is poor, but there’s nowhere else to go.

Meanwhile, as ... Business Week explains, the real French bureaucrats used judicious regulation to promote competition. As a result, French consumers get to choose from a variety of service providers who offer reasonably priced Internet access that’s much faster than anything I can get, and comes with free voice calls, TV and Wi-Fi.

If I may add my personal experience, broadband internet provision sucks in the UK too.

The moral of the story? The grass is always greener on the other side; Paul Krugman hates George Bush; and if you are looking for reliable broadband service, your best bet is moving to Mars. Nothing new here, but confirming one's priors is always a satisfying experience.

by datacharmer | Saturday, August 18, 2007
  , | 0 comments | | Broadband trouble @bluematterblogtwitter

Friday Special 15

God's inbox

Searching for God's Number: currently at 26, and going down

Jesus vs. Batman? This could be the beginning.

SpringMass. Be aware: Potentially useless website.

The 10 most awesome movies Hollywood ever killed

On promiscuity, logical impossibilities, statistical ignorance and the blogosphere

This is Gina Kolata, writing in the NYT:

One survey, recently reported by the federal government, concluded that men had a median of seven female sex partners. Women had a median of four male sex partners. Another study, by British researchers, stated that men had 12.7 heterosexual partners in their lifetimes and women had 6.5.

But there is just one problem, mathematicians say. It is logically impossible for heterosexual men to have more partners on average than heterosexual women. Those survey results cannot be correct.

Notice that the federal survey refers to medians, so there really isn't any logical impossibility there. The British study, on the other hand, refers to means indeed - there can't be a median of reported sexual partners of 6.5 (unless it is an average of medians over a number of years or something equally weird). With means, assuming females define 'sexual partners' the same way as males, the study is based on a truly random sample and males don't travel abroad disproportionately more than females do, a logical impossibility indeed presents itself.

This is not to say that there is any excuse for the author reporting the federal survey and then going on to say that these numbers cannot be an accurate representation of reality. At the same time, the British study makes it clear that there is an issue with men on average over-reporting (or women under-reporting) the number of sexual partners they have, so the evidence supports the author's thesis (or in the case of the federal survey, it is not informative - but definitely not against. That is unless you make some simplyfying assumptions regarding the distribution and utilise the information from the British survey as a prior etc but let's not even go there).

What I found of real interest in all of this wasn't really Gina Kolata confusing means and medians - I can easily write 10 posts a day documenting abuse of statistics in the press. The really interesting bit is the blogosphere's reaction:

Crooked Timber, my original source, reports both results and goes on to quote Andrew Gelman: 'Jeff's response: MEDIANS??!! Indeed, there's no reason the two distributions should have the same median.' No mention of the fact the second result could not be referring to medians, and that it supports Gina Kolata's thesis.

The very, very, very clever Andrew Gelman discusses about the median, and then goes on to say 'Finally, it's amusing that the Brits report more sex partners than Americans, contrary to stereotypes.' As I mentioned above and a reader of Andrew's points out in the comments, the difference is between the American median and the British mean - not a terribly meaningful comparison to make. Andrew later acknowledged this in the comments - but I will have to put this down as the first time I have caught him off guard. I could bet good money he did not spend more than 10 seconds reading the article.

I'll lower that estimated time to 5 seconds for Ezra Klein, who even after attracting a flurry of comments pointing out that the results refer to the median rather than the mean (including from Robert Waldman ) defended himself by saying this:

My understanding has always been that these are mean numbers, as median numbers tend to specifically be reported that way. But this would be worth finding out.

To find out, of course, one would simply have to read the first three paragraphs of the original NYT article.

And last but by no means least, Brad De Long is taking the piss - but making sure he only quotes the irrelevant American results:

Ouch. Our own David Gale from the tenth floor is made to look ridiculous by Gina Kolata--you see, she didn't tell him that the survey didn't ask about means--about averages--but about medians. Which means that she doesn't know the difference between means and medians. Which is a very bad thing for a science reporter.

Brad spotted the second study, but he is reacting by deliberately posting the juicy bits only. Quoting the British results would not alter the conclusion that the NYT columnist really messed up here, so the issue is discreetly sweeped under the carpet (not that I find this an entirely wrong thing to do. I may be in a philosophical mood here, but there is an appeal to pithy and to-the-point posts on silly subjects such as this one).

By the way, my own first reaction was to admonish the use of the median in the NYT article - but after seeing the attention this was attracting from fellow bloggers I thought the post was worth expanding.

And as I think I should, here is Wikipedia on the mean and on the median.

Survival of the richest

Nicholas Wade discusses a theory of affluence by Gregory Clark, author of 'A Farewell to Alms, A Brief Economic History of the World' in the New York Times (free access):

Generation after generation, the rich had more surviving children than the poor, his research showed. That meant there must have been constant downward social mobility as the poor failed to reproduce themselves and the progeny of the rich took over their occupations. “The modern population of the English is largely descended from the economic upper classes of the Middle Ages,” he concluded.

As the progeny of the rich pervaded all levels of society, Dr. Clark considered, the behaviors that made for wealth could have spread with them. He has documented that several aspects of what might now be called middle-class values changed significantly from the days of hunter gatherer societies to 1800. Work hours increased, literacy and numeracy rose, and the level of interpersonal violence dropped.

Another significant change in behavior, Dr. Clark argues, was an increase in people’s preference for saving over instant consumption, which he sees reflected in the steady decline in interest rates from 1200 to 1800.

“Thrift, prudence, negotiation and hard work were becoming values for communities that previously had been spendthrift, impulsive, violent and leisure loving,” Dr. Clark writes.

I am uncomfortable with this theory. The idea that certain segments of the population are driving the human race forward while others hold it back naturally leads to policy proposals that are not new at all: the name is Eugenics.

Eugenics is a social philosophy which advocates the improvement of human hereditary traits through various forms of intervention. The goals of various groups advocating eugenics have been to create healthier, more intelligent people, to save society's resources, and lessen human suffering.

Earlier proposed means of achieving these goals focused on selective breeding, while modern ones focus on prenatal testing and screening, genetic counseling, birth control, in vitro fertilization, and genetic engineering. Opponents argue that eugenics is immoral and is based on, or is itself, pseudoscience. Historically, eugenics has been used as a justification for coercive state-sponsored discrimination and human rights violations, such as forced sterilization of persons who are claimed to have genetic defects, the killing of the institutionalized population and, in some cases, outright genocide of races perceived as inferior or undesirable.

Breeding of human beings was suggested by Robert L. Lee. The modern field and term were first formulated by Sir Francis Galton in 1865, drawing on the recent work of his cousin Charles Darwin. From its inception eugenics was supported by prominent people, including Alexander Graham Bell, George Bernard Shaw, Winston Churchill, Adolf Hitler and Margaret Sanger. Eugenics became an academic discipline at many colleges and universities. Funding was provided by prestigious sources such as the Rockefeller Foundation, the Carnegie Institute of Washington, and the Harriman family. Its scientific reputation started to tumble in the 1930s, a time when Ernst Rüdin began incorporating eugenic rhetoric into the racial policies of Nazi Germany.

Since the postwar period, both the public and the scientific communities have associated eugenics with Nazi abuses, such as enforced racial hygiene, human experimentation, and the extermination of undesired population groups.

Of course, many things make me feel uncomfortable without being untrue. But I still struggle to see how the dynamics of this would work, and how this theory can ever be the main explanation of the tipping point that was the 18th century. Richer individuals most probably had more surviving offspring throughout the ages, so a 'poor being evolved away' model would give rise to gentle increases in income throughout the ages. In the absence of other forces, there is no point at which a step change is achieved within this framework.

While the industrial revolution was not really a 'revolution' at all - following mainstream definitions, it lasted for more than a century - there is no denying it was a sudden change when compared to the inactivity of the world per capita income series throughout the ages. I'll have to read the book before I can say more; but for the time being I will stick with the favoured economists' explanation of evolving institutions, not people.

Postscript: Tyler Cowen's review of 'A Farewell to Alms', also in the New York Times, does not mention this 'survival of the richest' idea at all.

by datacharmer | Thursday, August 16, 2007
  , | 1 comments | | Survival of the richest @bluematterblogtwitter

Property madness

A reader emails me with this from yahoo news:

The number of people looking to buy a new home fell at its fastest pace for three years during July as consumers speculated that the market may have peaked, figures show.

And his comment is spot on:

It’s now newsworthy to discuss the monthly rate of change in the rate of change (i.e. second differential) for one sub-sector of the property market. I expect to see the BBC reporting regression results within months, although they will probably be in levels and put too much weight on R-squared.

Also, a few days ago the National Housing Federation released their forecast of housing prices over the next few years:

Latest news: House prices are set to rise by up to 40% in the next five years, with the average home in London pushing half a million by 2012.

The forecast was the main story Metro (London's widely read free morning newspaper) ran that day, and various other press outlets covered it as news; as my reader comments, 'it must be true then'.

Despite the weather being as whimsical as ever, property prices is the only thing Londoners seem to be talking about these days, and it shows in the press coverage.

Doesn't this all sound a bit like Rockefeller and the shoe shine boy?

Postscript: I don't really buy the Rockefeller story. It is so good that even if it had no basis whatsoever, it would still make the rounds for years. On top of this, it probably suited Rockefeller himself to have a plausible explanation for still doing so well in the midst of the depression. Ergo, this is probably an urban myth; but a good story indeed.

by datacharmer | Wednesday, August 15, 2007
  , | 0 comments | | Property madness @bluematterblogtwitter

Economists in unlikely places

ESPN Soccer net reports on Manchester United vs Reading 0-0, a good result for the visitors:

A more typical sight was that of Rooney crowded out by five defenders, one of many indications of Reading's devotion to their defensive duties. Not even Ronaldo's beguiling footwork could breach a wonderfully marshalled rearguard.

But, with Chelsea and Everton ahead in the next week in a particularly tough start to the season, Coppell [Reading's manager] is considering rotating. 'Going back to my economics background, I'd be suffering with diminishing marginal returns,' he remarked wryly.


'Nature' Unmasks German Economist as Fabulist and Plagiarist: A 63-year-old German economist has for decades falsely claimed an affiliation with the University of Maastricht, in the Netherlands, according to an article in tomorrow’s issue of Nature. The economist, Hans-Werner Gottinger, also appears to be a serial plagiarist [...]

Mr. Gottinger’s deceptions began to unravel two months ago, after an attentive reader noticed that a paper he published in the journal Research Policy in 1993 had pilfered a string of complex equations from a 1980 issue of another journal. The editors of Research Policy started to sniff around — and their plagiarism investigation eventually turned into something much larger. [...]

In a 34-year career, Mr. Gottinger has published works on ethics, statistics, environmental policy, and the economic effects of technological change. His most recent English-language book, Innovation, Technology, and Hypercompetition, was published last year by Routledge.

Two years ago, Mr. Gottinger was a keynote speaker, alongside the Nobelist Thomas C. Schelling, at the annual meeting of the World Association for Sustainable Development. His biography has been scrubbed from the conference’s Web page, but this cached version describes him as “Director of the Institute of Management Science, University of Maastricht, the Netherlands, and Professor of Economics at the University of Osaka (KGU), Japan.” The Osaka affiliation was also false, according to Nature.

More here, via Tyler Cowen.

by datacharmer | Tuesday, August 14, 2007
  , | 2 comments | | Busted! @bluematterblogtwitter

Buy revenge for £10

A service offering a complete “revenge package” in which people can destroy the financial status and relationships of their enemies at the click of a mouse is being offered over the internet.

For as little as £10 a month, customers of the website can make the credit ratings of people they dislike plummet and even have them suspected of fraud.

Their bank accounts can be shut down remotely and all their essential utilities cut off.

Fake e-mails and text messages which purport to come from someone else, such as the victim’s spouse, can be sent containing false accusations of affairs or sexual liaisons.

Here is the Sunday Times article (free access), via Surreptitious Evil. Here's Fox News. Having read the story and browsed the website, I would have sworn this is a hoax; but the Times writer claims s/he has acquired a passport off these guys. What can I say? You can buy anything on the internet these days indeed.

by datacharmer | Monday, August 13, 2007
  | 2 comments | | Buy revenge for £10 @bluematterblogtwitter

Clearing out my closet, part I

There is a large number of posts I started writing that never made it to this blog, either because I lost interest mid-way, or discovered I didn't really have anything interesting to say, or simply never found the time to complete. I'm clearing out my draft posts, so here are some snippets:

The Economics of Orgasm: "This paper models love-making as a signaling game. In the act of love-making, man and woman send each other possibly deceptive signals about their true state of ecstasy. Each has a prior belief about the other's state of ecstasy. These prior beliefs are associated with the other's sexual response capacity..."

Or if that is not enough for you: "In this paper, love is formally defined as a mixture of altruism and possessiveness. Love is shown to alter the man and the woman's payoff functions in a way that increases the equilibrium probability of faking, but more so for the woman than for the man."

And some of the results: 72 percent of women admit to having faked it in their current or most recent relationship, for men the number is 26 percent; you are more likely to fake an orgasm if you are in love; and the more education you have, the more likely you are to fake orgasm.

The politics of Eurovision: What the academic literature has to say about bloc-voting in the annual European kitsch-fest.

The meaning of Fu*k: I covered most of what I had to say on the topic here.

Organ donation: Politics and statistics on the go: BBC News has the story, which is where the funny statistics and inferences lie. Here's the politics:

Everyone should be seen as a potential organ donor on their death unless they expressly request not to be, England's chief medical officer says. Sir Liam Donaldson wants a system of "presumed consent" to be introduced in England to tackle organ shortages.

The Tories opposed the move, saying it would be better to increase the number of people on the donation register. Shadow health secretary Andrew Lansley said: "The state does not own our bodies or have a right to take organs after death."

I found the arguments to be plain silly. First of all, a dead person owns nothing - so this is really an issue about the rights of the family vs the rights of society as a whole. And secondly, this has nothing to do with 'who owns the dead person's body': you can always say you do not want to donate your organs when you die. The whole point is simply to set the default action for people who are indifferent either way in such a way so as to maximise societal welfare; a system of 'presumed consent' where it is easy to remove your name from the register constitutes a clear Pareto improvement. Such arrangements are naturally, and uncontroversially, already in place regarding all the other assets of a dead person: if someone owns a house and there are no designated heirs or family, we do not burn the house down: ownership passes on to the state (that is all of us!)

The death of the telecoms industry: The marginal cost of communicating over long (and not-so-long) distances has been falling continuously since the invention of the phone; in fact, it is converging to zero. With relatively limited scope for improving 'quality' and with regulators bound to stamp out anti-competitive practices in the (very) long run, telecommunications will soon become a normal-profits affair. Why in so-one lamenting the imminent loss of Vodafone and the other telecoms giants?

Africans are saving a higher percentage of their incomes than Americans are (so much for the "poverty trap" of being "too poor to save" endlessly repeated in aid reports). This is William Easterly, and what a sensational statement to make; shame it's completely meaningless.

Comment on Monster: At the start of the movie, Aileen (Charlize Theron), a prostitute, is contemplating suicide after performing oral sex on a client; however, she ends up postponing taking her life because it would have meant she had 'sucked this guy for free'. While it would seem like there's something to be said about the irrelevance of sunk costs here, I believe that Aileen's decision can still be shown to be rational using a plausible utility function and budget constraint.

The Internation Herald Tribune commits the lump of labour fallacy: Unemployment is high among non- university graduates, as well. Prolonging employment for older workers would make this predicament worse, possibly with volatile consequences. Beware of French bearing policy advice.

If any readers are interested in seeing any of the above topics covered in more detail, just post a comment or email me and I'll be happy to oblige.

God and Maths - I kid you not

This is not an education, it's a disgrace. From the maths curriculum of an American religious college:

Students will examine the nature of God as they progress in their understanding of mathematics. Students will understand the absolute consistency of mathematical principles and know that God was the inventor of that consistency. Mathematical study will result in a greater appreciation of God and His works in creation. The students will understand the basic ideas of both differential and integral calculus and its importance and historical applications. The students will recognize that God created our minds to be able to see that the universe can be calculated by mental methods.

Via Ars Mathematica. There are few things that scare me more than the rise of religious America, and things seem to be getting worse. Somebody stop these nutters before its too late.

Good Math, Bad Math has more, and a commenter links to this 'Professor of Mathematics' with 'devotionals connected to mathematical content'. A selection:

Devotional Title Course Topic Scripture References
Does God Change? Development of the Derivative Ps 11:3, Ps. 107:1, Ps 118:1, Ps. 117:2, Lam 5:19, Dan 4:34
In the Eigenspace of Christ Eigenspaces 2 Corin 3:7-18
God's Zero Tolerance for Error Numerical Integration and Error Bounds Philippians 3:1--9

And a couple of topics in statistics:

Success in God's Eyes Binomial Distribution Luke 18:9-14, Mark 9:33-35
Was Jesus Average? Normal Distribution Isaiah 53:1-6

Shock: Economists can damage your health

[…] my allergy to economists [is] on moral, ethical, religious, and aesthetics grounds.

Indeed, my allergy can be physical: recently, on a British Airways flight [...] between London and Zurich, I found myself seated across the aisle from an Ivy League international economist dressed in a blue blazer and reading the Financial Times. I asked to be moved and preferred a downgrade, just to breathe the unpolluted air of economy class. My destination was a retreat in the Swiss mountains [...] and I wanted nothing to offend my sensibility.

This is best-selling author Nassim Nicholas Taleb, more here. And may I also add that we drink from the carton.

Friday Special 14

The WSJ has more details on each president's record.

Spectacular pictures taken after the ice-storm in Switzerland.

The way we eat. Globally.

The all-new Sesame Street - innocence faded edition.

15 unfortunately placed ads

The real London Underground map

Londoners and the millions of people that visit London every year are familiar with this image:

The iconic map, originally designed by Harry Beck in 1933, is pure genius: it is efficient, visually appealing and kicks New York's and Paris's back alleys.

But while it delivers the information required in a classy manner, I and numerous others have no clue how far Uxbridge really is, and tourists insist on travelling the distance between Leicester Square and Covent Garden by train. With thanks to Dave for the pointer, here is the real thing:

by datacharmer | Thursday, August 09, 2007
  , | 2 comments | | The real London Underground map @bluematterblogtwitter

Malthus and Darwin

A few posts ago, I said that Malthus is dead: his ideas will never again be relevant for explaining a developed, and not-terribly-unequal, world - regardless of how much population grows.

This is not to say that Malthus was wrong at the time, or that his insights are not relevant in certain parts of the world today, or that his model was anything other than genius. This NYT article highlights another area where Malthus's thinking had a profound impact on: evolution through natural selection.

The tendency of population to grow faster than the food supply, keeping most people at the edge of starvation, was described by Thomas Malthus in a 1798 book, “An Essay on the Principle of Population.”

Malthus’s book is well known because it gave Darwin the idea of natural selection. Reading of the struggle for existence that Malthus predicted, Darwin wrote in his autobiography, “It at once struck me that under these circumstances favourable variations would tend to be preserved, and unfavourable ones to be destroyed... Here then I had at last got a theory by which to work.”

by datacharmer | Tuesday, August 07, 2007
  , | 0 comments | | Malthus and Darwin @bluematterblogtwitter

Thoughts on house prices and comparing asset returns

Take a look at this graph relating to the UK housing market:

People fixate with house prices and completely overlook rents. This is strange, because rental yield is an important component of the total returns from investment in housing. (Note that whether you are an owner-occupier or buy-to-let property landlord is irrelevant. An owner-occupier still 'pays rent' the exact same way a tenant does; excluding the tax implications, the fact that he is 'taking money from one pocket and putting it in the other' does not affect the amount of resources he is consuming. This is perhaps a non-obvious point to some readers; tune in later this week for a simple explanation.)

As the graph demonstrates, rental yields have nearly halved between 1993 and 2005 as a result of house price growth dramatically outstripping growth in rents (compound annual growth of 9.7% for house prices but only 4.3% for rents). There are two points that follow from this:

1. Looking at house prices is severely misleading if we are interested in how affordable 'consuming housing' - as compared to 'investing in housing' - is. It is rents, not house prices, that are the best indicators of the real cost of putting a roof over our heads.

2. House prices are an inaccurate indicator of the performance of housing as an investment. As is the case with most assets, capital gains are only one part of the equation; the flow of payments (in this case, rent) is another. In other words, it is impossible to judge how wise your choice to buy a house was simply by looking at how house prices have changed - but house prices seem to be the only thing homeowners (especially owner-occupiers) and the press focus on.

This second point applies more widely: data on historical returns to assets (be it homes or listed companies) are extremely difficult to find; yet this is what people really want to know when they ask, say, how the stock-market fared in the 1990s. We are awash with data on share prices, but what about overall returns taking into account dividend yields (and, as the friend who provided this graph points out, the increasingly important buyback yields)?

In the absence of this information, comparing the past performance of various assets is subject to large errors. Look at stockmarket and house price indices if you have to, but never forget they are far from telling the whole story.

Renegade Dog

Andrew Luster had it all, a multi-million dollar trust fund, good looks, and a bachelor pad just off the beach in Mussel Shoals, California. Luster, the great-grandson of cosmetics legend Max Factor, spent his days surfing and cruising the clubs.

When the first woman alleged rape, Luster claimed mutual consent but the videotapes that the police discovered when they searched his home told a different story. Eventually more than ten women came forward and Luster was convicted of twenty counts of rape and sentenced to 124 years in prison. There was only one problem. Luster could not be found.

But Luster was brought to justice - by a dog. Duane Chapman, now known by the title of his television show, Dog: The Bounty Hunter, had been tracking Luster for months.

Finally, a tip from someone who had seen Dog on television brought Dog to a small town in Mexico with great surfing. Days later Dog spotted Luster at a taco stand and made the arrest.

Unfortunately for Dog, bounty hunting is illegal in Mexico and the US authorities, who in my opinion are embarrassed by their failure to capture Luster, haven't tried to intervene with the Mexican government to let the charges drop in the interests of justice.

This is Alex Tabarrok. Why am I posting this? To start with, entertainment value: a rich heir, a mysterious disappearance, a bounty hunter who won't quit and a raging international legal drama. That's the stuff that'll bring them in!

Secondly, 'to let the charges drop in the interests of justice'? Man goes to foreign country, breaks law of foreign country - and we are not talking been found holding a can of beer here - and justice is somehow served by allowing the man to walk free? Since when has American law been elevated to some sort of 'natural' law?

Thirdly, I get the opportunity to link to this thought-provoking paper by Alex and Eric Helland:

[Our] findings indicate that bond dealers and bail enforcement agents (bounty hunters) are effective at discouraging flight and at recapturing defendants. Bounty hunters, not public police, appear to be the true long arms of the law.

Being European, and putting effectiveness aside for a minute, I don't feel very comfortable with the concept of bounty hunters. At the same time, I can't think of a single reason why the institution is a bad idea. At the end of the day, we are not talking private justice here: the bounty hunters serve the simple administrative function of tracking down people already wanted by the police and handing them to the courts. Comments are open, and I would really appreciate any insight readers have to offer on this one.

Postscript: Yes, the title is a reference to Lorenzo Lamas.

by datacharmer | Monday, August 06, 2007
  , | 1 comments | | Renegade Dog @bluematterblogtwitter

Graphing the prices of different solids

Andrew Gelman comments on the prices of liquids graph I posted on Friday. I agree with his points, and given I'm enjoying another lazy weekend and I've already covered the effect daughters have on a President's politics, I thought I should post a nice graph with the retail prices of different solids.

For my first attempt, I take what excel gives me; but avoid a couple of graph no-no's. 3D, unless absolutely necessary, is evil; and given the humongous differences between the prices of the goodies I chose, a linear scale is out of the question.


The colour in the second graph hurts my eyes. The first graph is not as unpleasant, but what a waste of space. Reverting to dots (after struggling with formatting for a while) does little to improve the situation:

It looks like excel won't do it for me - there's something to be said about the effect of Bill Gates and Co. on the abundance of inefficient (and plain ugly) graphs out there, but I'll refrain from saying it now. Also, it's a bit too late for Stata now, so the job will have to be finished - inefficiently - on Photoshop.
Now, the y axis is neat, figuring out what each dot represents is straightforward, and hardly any space is wasted. I know, colour is unnecessary; but hey, it makes the graph stand out and it should't cause any problems even if you print it in black and white.

I'd be happy to email the data to anyone who may be interested - for the original sources, click on moondust (also here), weapons grade uranium, Viagra (note: based on the price of four 100mg tablets), gold, uranium. Lobster (John West's dressed, 43g) and butter (Anchor, 500g) prices come from Tesco's pricecheck.

Before leaving this post, one more thing. As I've mentioned before, Andrew Gelman is my favourite blogger - well, why not, a hero of mine. So, having him linking to me twice - even though the first time followed my emailing him and the second was to comment on something I didn't produce myself - is one of the greatest rewards I've reaped in the three or four months I've been blogging. Thanks, and I hope visiting here from time to time proves to be worth your while.


From BBC News, Venezuela's four-legged mobile libraries:

A university in Venezuela is using a novel method to take books into remote communities and encourage people to read.

[..]these mules are rather special. They are known as bibliomulas (book mules) and they are helping to spread the benefits of reading to people who are isolated from much of the world around them.

As the project grows, it is using the latest technology. Somehow there is already a limited mobile phone signal here, so the organisers are taking advantage of that and equipping the mules with laptops and projectors.

The book mules are becoming cyber mules and cine mules.

by datacharmer | Saturday, August 04, 2007
  | 0 comments | | Bibliomulas @bluematterblogtwitter

Where do the presidential candidates stand on the issues?

The picture above is a small part of a fantastic table with all the presidential candidates' positions on issues ranging from abortion to Guantanamo Bay. It's the first time I see a similar table - a great idea, and I'm sure someone will be running regressions before long.

Friday Special 13

Fridge magnets for the internet age

Send self-destructing emails

A blog worth keeping an eye on: cutting edge architecture

This man can move anything (video). Watch the whole thing.

100 (video)

And two websites with something in common:

RYT Hospital
: Pioneers of male pregnancy and creators of Clyven, a transgenic mouse with human cognitive abilities

Genpets: Genpets are living, breathing mammals. Bio-Genica is a Bioengineering Company that has combined, and modified existing DNA to create the Genpets lineup. Genpets have blood, bones, and muscle; they will bleed if you cut them, and die if mistreated just like any other animal. The electronic components are only in the packages and are for basic life support, outside of the packages the Genpets are wholly organic.

by datacharmer | Friday, August 03, 2007
  , , | 2 comments | | Friday Special 13 @bluematterblogtwitter