Greg Mankiw is up to no good

Greg Mankiw comments on why he is not interested in heading the NBER:

Why did I decide not to pursue the job? As in many such decisions in life, various factors were at play, both personal and professional. But what really pushed me over the edge was pending tax policy. With the Bush tax cuts set to expire in a couple years, I am looking for ways to reduce my taxable income.

He also quotes a paper by Martin Feldstein, the outgoing NBER head, which sheds light on what Greg intends to do:

A change in individuals' marginal income tax rates can induce them to alter their taxable income in a wide variety of ways, including:

1. changes in labor supply,
2. in the form in which employee compensation is taken,
3. in portfolio investments,
4. in itemized deductions and other expenditures that reduce taxable income, and
5. in taxpayer compliance.

If my interpretation of Greg's statement is correct, the driving force behind his decision is not to increase the amount of leisure he consumes: he doesn't want to substitute some leisure for income, he is looking to reduce his taxable income. So 1 is out.

3 is also out, as it is not a labour market response and it is independent from his decision to take the NBER job. Four is largely independent of labour market decisions as well. This leaves us with 2 and 5, and 2 is in most cases nothing other than a soft version of 5.

So Greg's plan is to invest more resources in cheating the taxman, which is at best morally ambivalent and at worst outright illegal.

Furthermore, it is notesworthy how he takes this opportunity to make a political statement. He could have just said 'the NBER job does not pay enough'.

Friday Special 88

If you don't know what's shown on the above picture, then you haven't live, you haven't dreamed, you haven't watched movies!

by mendoza | Wednesday, January 30, 2008
  , , | 0 comments | | Friday Special 88 @bluematterblogtwitter

A short story

A father lays in his deathbed. He had a long and productive life; having started out with nothing, he managed to amass a fortune of mythical proportions.

Not so much the gold, or the land that stretches far beyond anyone's eye could see. His fortune lay in his wisdom: through toil, wits and luck he found a way to plough the land so that instead of one it can feed a million people, he discovered how to mix herbs to heal the wounds, and he uncovered the secrets of flying in the skies.

His two sons are by his side. The one on his right is strong, clever and hard-working, the one on the left a bit less so - although some say his misfortunes are due to his bad luck.

The cruel father utters these last words: 'May my land and my diamonds go to the strongest one; and as for my most expensive treasure, the knowledge I have developed, may that be free for both of you to use'. And as he closes his eyes, the strong son goes on to cultivate his father's lands, and to apply his father's knowledge and develop it even further; the weak son goes on living on the breadcrumbs that fall from the strong son's table.

But the good father utters these last words: 'My two sons, one of you is strong and the other weak. Yet, my strong son, no matter how you claim your wealth is all of your own making, you would never be able to get rich without my knowledge, without the foundations I built. Most of what you produce is not of yours, but of my making.

I love you both the same, and this holds true of your children and of your children's children that I will never meet. So, I will grant you each half of the rights to my knowledge - call it a patent if you wish. Should one of you utilise this knowledge to create wealth for himself, he should compensate the other for using his half of the rights to the knowledge that I, your father, bequethed you. Never forget, you are standing on the shoulders of giants, and the giants have no reason to love either one of you more than another.'

Which father is the fairer of the two? What would your father be more likely to do? If you are confused, it may all become clearer if you remember Will giving me a hard time.

by datacharmer | Tuesday, January 29, 2008
  , | 5 comments | | A short story @bluematterblogtwitter

Jerome Kerviel

FRIENDS of rogue trader Jerome Kerviel last night blamed his $7 billion losses on unbearable levels of stress brought on by a punishing 30 hour week.

Kerviel was known to start work as early as nine in the morning and still be at his desk at five or even five-thirty, often with just an hour and a half for lunch.

One colleague said: "He was, how you say, une workaholique. I have a family and a mistress so I would leave the office at around 2pm at the latest, if I wasn't on strike.

"But Jerome was tied to that desk. One day I came back to the office at 3pm because I had forgotten my stupid little hat, and there he was, fast asleep on the photocopier.

"At first I assumed he had been having sex with it, but then I remembered he'd been working for almost six hours."

As the losses mounted, Kerviel tried to conceal his bad trades by covering them with an intense red wine sauce, later switching to delicate pastry horns.

Well, that should finally be enough proof that the whole 'lump of labour fallacy' thing is an evil Anglo-Saxon conspiracy to destroy ze vorld. All credit to the Daily Mash for the scoop.

Yeah baby

by datacharmer | Friday, January 25, 2008
  | 1 comments | | Yeah baby @bluematterblogtwitter

Friday Special 38

Man on a mission to visit all 12'000 Starbucks stores in the world (his website)

The impressive domicile of a former UAE president and a car made of silver

Convey your message with these ready-to-email stationery

Bad day at the office (HILARIOUS)

Creative ads for eye glasses

by mendoza | Friday, January 25, 2008
  , , | 0 comments | | Friday Special 38 @bluematterblogtwitter

But are MBAs real humans?

Highly impatient individuals overweight immediate costs vis-a-vis delayed benefits, procrastinating in activities where costs are upfront, while overindulging in activities where costs are delayed with respect to benefits. While the link between these two phenomena is really at the heart of this literature, we are not aware of any paper testing the connection.

In this paper, we design an experiment to achieve this goal. We ask a large sample of MBAs students who have completed a series of games and won an amount between $0 and $300 whether they want to receive this amount now or in two weeks. Instead of paying them in cash, as is common in the literature, we choose to pay them with a check. This enables us not only to keep constant the delivery method, but also to follow the timing of their decision to cash the check and measure their degree of procrastination with the actual behavior in cashing the check.

Payment with the check makes the decision of when to optimally accept the prize less straightforward. In the acceptance decision, a rational individual will take into consideration his/her procrastination in cashing the check.

Our results lend support to the hypothesis that subjects who have a preference for immediacy are indeed more likely to procrastinate.

The Ernesto, Paola and Luigi (first, rather than last, names; chosen for how good they sound together) NBER paper is here.

by datacharmer | Tuesday, January 22, 2008
  | 0 comments | | But are MBAs real humans? @bluematterblogtwitter

What do you owe the world, and what does the world owe you?

This post is long-ish and quite out of character, but do read on it should be worth the while.

Landsburg, Harford, Rodrik, Cowen. The nominal subject is whether *we* should be compensating the losers from trade; here's the conversation:

Landsburg: Hey, without trade we'd still be jumping from branch to branch, banana in hand. Trade brought economic prosperity and got everyone rich in the first place - now why are the losers complaining?

Harford: Don't really know, but people who lose out from trade shouldn't receive better treatment than people who lost out due to other causes.

Rodrik: The idea of compensating those who lose out because of globalisation is not absurd, and in any case economists are not the people to ask - our tools are only helpful for positive, not normative, analysis.

Cowen: As economists and policy advisors we have a responsibility to think about ethics deeply. No, I don't think that an economist's core education covers these issues, but other disciplines do and economists have an obligation to study those too.

And your host:

I'm not so interested in trade itself or other stuff that create economic 'losers', my interest lies in fairness. Just two remarks in passing:
a) indeed, from a 'positive ethics' point of view, compensating losers from trade differently than you would losers from technological growth (etc, etc) does not really make sense.
b) where do we owe the immense wealth we enjoy today? Mostly economic/ technological growth, for which we have our ancestors to thank (whether that's Einstein or the guy who first thought of wearing shoes). Very little of these guys' social contribution was captured as private rents passed on to their children; for most part, they were scantily compensated for their efforts. These guys are dead now; it would only be right if we spread the wealth we inherited from them equally. Given our current level of wealth, everyone should be able to go through life without ever having to work to meet basic (and some not-so-basic) needs; those who wish to expend effort and take the whole enterprise further should only be rewarded at a level over and above that.

To the point now. Fairness is important because it is an integral part of politics. Not only the capital P variety but the small p too: without group ('social') notions of fairness very little mutual co-operation could ever ensue, and our civilisation could never have existed in the first place. There are too many prisoner dilemmas in any real-life group to allow an agent economicus to survive as a species for long (no, repeated games can only account for some of the observed co-operation).

By the way, maybe we need the concept of evolution-consistent rationality to be introduced to economics? In other words, individuals can only be as rational as would be consistent with survival.

Your homo economicus would struggle to coexist in a group and survive in modern day New York (or for that matter the Savanna) for a day, let alone deliver you the truly amazing world we enjoy. Message for economists: why don't we apply the trusted *positive* tools we have to analysing and predicting society's *normative* preferences? Come on, economics needn't refuse to dwelve into the origins of preferences (especially social preferences), don't be such cowards.

Are we worth our salt as policy advisors when we have not tried to predict in any systematic way which policies are 'fair' and popular? (no, asking people whether they are pro-trade doesn't cut it, I want a theory, I want to know why. I want a systematic approach to this dammit)

Think of Becker's model of crime and Acemoglu's work on the political process. Modelling perceptions of fairness (yes, there's no such thing as fairness, only perceptions of it) as a way of supporting survival-consistent equilibria should be extremely rewarding (and while I'm at it, don't forget to throw a bit of information modelling in there; group notions of fairness are nothing if not efficiency-improving informational shortcuts).

I've been planning to have a go at a formal model of perceptions of fairness myself and will be doing so soon; stay tuned.

And there are dozens more

by datacharmer | Monday, January 21, 2008
  | 0 comments | | And there are dozens more @bluematterblogtwitter

What do the women do when all the men are in prison?

They go to college, or they get a job:

Whom you marry depends on where you live, but also on how old you are and what race you are. Most people marry people of the same race, of a similar age and from the same area. 96 percent of married black women have black husbands, and over 96 percent of married white women have white husbands. [...]

There are two million men in US prisons and just 100,000 women; and the men in prison are spread unevenly across age, race and geography. Huge numbers of young black men are in prison, and that is bound to pose a problem for the young black women they might otherwise have married.[...]

In New Mexico, for example, 30 percent of young black men, aged 20-35, are in prison (or, less commonly, in a secure mental institution). That is an extreme case, but there are 32 states with more than one in ten young black men in prison, and ten states where one in six young black men are behind bars. That is a serious business for young black women.

According to economists Kerwin Kofi Charles and Ming Ching Luoh, where a large number of a particular racial group is in prison, women of the same age and race in that state do not enjoy the gains from marriage, or a stable relationship, that women in a more equitable situation do.

Charles and Luoh show that young black women facing a shortage of men try to increase their attractiveness as marriage prospects. The more men are in prison, the more likely women are to get themselves a job, and the more likely they are to go to college. College-educated people are much more likely to marry other college-educated people, so an education doesn't just make you smart, it wins you a smart husband or wife.

Improving their bargaining position in the marriage market is, of course, not the only likely reason for these decisions. Since the high incarceration rates of young black men mean young black women are less likely to marry, a college degree and a job look like a rational investment for a single girl who can't rely on a partner as a source of income. What's more, the likelihood of young black women not marrying is greatly exacerbated by another trend: it appears that young black men who are not in prison typically take advantage of their strong bargaining position by not bothering to marry at all.

The better-educated guys stay out of jail, and they are smart enough to realize that with the competition locked up, they don't have to get married to enjoy themselves. [And] even though it's mostly uneducated men that end up in prison, Charles and Luoh show that the negotiating position of women is so weakened that they end up more likely, not less, to "marry down"—that is, to marry men who are less educated than they are.

This is from the I-would-be-very-surprised-if-it's-not-simply-excellent 'Logic of Life' by Tim Harford, FT columnist, author of The Undercover Economist and economics writer extraordinaire. The paper (free access) is here.

You can (/should!) order Tim's book at if you live in the UK, or at if you are in the US (and beyond, I guess). Buying the book by clicking on the link will put something less than one pound in my pocket via the amazon associates programme. The contribution would be greatly appreciated; the proportion of my demographic that is in jail is scandalously low, so I need the money desperately.

Buying through the .com link credits Messrs Cowen and Tabarrok of Marginal Revolution with a similar amount.


Tyler Cowen posts on the potency of tax rebates as a means of increasing consumption:

Matt Shapiro and Joel Slemrod report:

Many households received income tax rebates in 2001 of $300 or $600. These rebates represented advance payments of the tax cut from the new 10 percent tax bracket. Based on a survey of a representative sample of households, this paper finds that only 22 percent of households receiving the rebate would spent it. Instead, they would either save it or use it to pay off debt. This very low rate of spending represents a striking break with past behavior, which would have suggested a much higher rate of spending. The low spending rate implies that the tax rebate provided a very limited stimulus to aggregate demand.

Tyler titles his post 'tax rebates don't always work', but this is not the point at all - in fact, I would be very surprised if the authors came up with results that were any different.

1. The evidence in the Shapiro and Slemrod paper come from a consumer survey; as any good economist knows, you should count less on what people say and more on what they actually do. That's especially the case when there is a 'right' behaviour: e.g. in surveys of alcohol consumption, heavy drinkers always understate the amount they drink.

2. Even if you don't buy this, people are more likely to save or pay off debt during recessions; 2001 was a particularly weak year for the American economy. So, it should be no surprise that 'This very low rate of spending represents a striking break with past behavior, which would have suggested a much higher rate of spending' - 'past behaviour' took place during the years of plenty.

Of course, this second point does not invalidate the 'tax rebates don't always work' statement; it does, however, call into question the implicit standard by which the effectiveness of the rebate is judged, i.e. how the marginal propensity to consume the rebate compares to the marginal propensity to consume as observed in previous occasions. The real question is how low that MPC is (compared with what the government would do with that money) in the case of rebates during times of weak economic performance, and Tyler fails to present any evidence relating to that.

by datacharmer | Monday, January 21, 2008
  | 1 comments | | Objection! @bluematterblogtwitter

Datacharmer explains the ongoing Anglo-Russian spat

They started it!

Friday Special 37

FreeRice and feed the world's hungry people

BBC spots still art: From edible to incredible

A view on GDP and beyond

by mendoza | Friday, January 18, 2008
  , , | 0 comments | | Friday Special 37 @bluematterblogtwitter

Bring on the stabilisers

[I]magine we enacted an investment tax credit, the size of which was a function of the unemployment rate. Firms would have an incentive to time their investment projects toward those periods when the economy was weakest and most needed a shot in the arm.

This is Greg Mankiw, more here. I'm all for automatic stabilisers of all sorts; note that whatever the potency of fiscal policy in stabilising the economy (and it does have an effect) automatic stabilisers are never a bad idea: at worst, they are harmless, and don't forget all their other benefits (such as alleviating hardship).

Given the current talk of a fiscal stimulus, also note that in the US (and not only) automatic stabilisers are the only type of stabilisers there is. I recall the late Wim Duisenberg (I think it was him!), first President of the ECB, putting it very nicely in a lecture: the US does not, and cannot, exercise discretionary fiscal policy to stabilise the economy - Congress simply does not have that sort of coherence. Alex Tabarrok makes a similar argument (and others) here.

by datacharmer | Thursday, January 17, 2008
  | 0 comments | | Bring on the stabilisers @bluematterblogtwitter

Dr Datacharmer's Brain Training

The classic proof that 2 = 1 runs thus. First, let x = y = 1. Then:

x = y
x2 = xy
x2 - y2 = xy - y2
(x + y)(x - y) = y(x - y)
x + y = y
2 = 1

NB: x2 signifies x squared.

Spoilers at overcoming bias, via Chris Dillow.

by datacharmer | Thursday, January 17, 2008
  | 2 comments | | Dr Datacharmer's Brain Training @bluematterblogtwitter

Your money or your vote

Bombardini and Trebbi have a fascinating new NBER paper out looking at the market for votes (don't get arrest warrants issued though, it's all implicit: politics they call it).

The authors look at the US Congress and uncover a hump-shaped relationship between the number of votes an interest group's members represent and monetary donations by the group to the politician. In other words, it turns out that the most populous groups need not donate much to get a politician to do their bidding. More specialised concerns, on the other hand, have to make up for the shortfall in numbers with hard cash (which is in turn used to 'impress' susceptible voters):

The role played by special interest groups in shaping policy-making is hard to ignore. One simple reason is the considerable size of the amounts the special interest groups (SIGs) inject into the political system.

[...] since the probability of being (re-)elected ultimately depends on the number of votes a politician can attract, the legislator should take into account both the electoral strength of an interest group (i.e. the share of voting population it represents) and its contributing possibilities when deciding whether to support or not legislation in favor of such group.

The main contribution of the paper is to show that the number of voters represented by interest groups is an important variable in explaining the pattern of campaign contributions. The data indicate that an inverted-U shape describes the relationship between the share of voters represented by an interest group and the contributions to a legislator.

[...] we find that an additional vote costs a politician between 100 and 400 dollars depending on the district.

The theory is elegant (and convincing), and the empirics plausible. Advice to voters: with the dollar at record lows, datacharmer recommends you take the cash deal.

by datacharmer | Wednesday, January 16, 2008
  | 1 comments | | Your money or your vote @bluematterblogtwitter

An economist's dad

Levitt is a veritable gas guru, a leading expert on the underappreciated field of flatus -- intestinal gas that escapes via the southern route. He admits his unusual expertise has put his three kids (one of whom is economist and "Freakonomics" co-author Steven Levitt) through expensive universities.

The article, which covers a lot of scientific knowledge on flatulence, is fun to read. I found the experiment on the potency of male vs female gases fascinating, if somewhat disturbing.

And playing amateur psychologist here, maybe it's precisely this background that gave young Steven the idea of pursuing unusual - 'freaky' - subjects in his own discipline, and most readers of this blog know all about that.

HT Odd Numbers.

by datacharmer | Sunday, January 13, 2008
  , | 0 comments | | An economist's dad @bluematterblogtwitter

Friday Special 36

Extreme Hangman (be aware, content may be disturbing)

Phenomenal images of earth as seen from space

Visualization of Who has the oil

by mendoza | Friday, January 11, 2008
  , , | 0 comments | | Friday Special 36 @bluematterblogtwitter

The Iowa Effect?

For the first time, Obama is now seen by the betting markets as the most likely Democratic nominee, and the most likely next President of the United States. If you believe otherwise, there's some good money to be made:

Clinton is not (too) far behind, but what an incredible reversal of fortunes this has been:

Betfair - very unhelpfully - does not label the x-axis, but the turning points shouldn't be too hard to guess.

Edwards, described by most commentators as also having a decent shot at the nomination, is in fact less than 3% likely to be given the Democratic crown. As for the rest of the Democratic pack, the betting markets have basically written them off. Next stop New Hampshire, with Obama having a 70% probability of winning and Clinton commanding most of the remaining 30%.

The Republican race is a multi-horse one, with McCain at the driving seat and slightly ahead of Giuliani. If you found Obama's graph impressive, take a look at this:

Notably, Giuliani is the favourite amongst his Republican colleagues in a different market, the one for predicting the next President.

Before leaving this post, thanks to those who emailed me following my failure to post anything for the past week - I've just been busy with less interesting stuff. Next week doesn't look like it will be much better, but I hope to have service return to normal by next Monday.

by datacharmer | Sunday, January 06, 2008
  , | 1 comments | | The Iowa Effect? @bluematterblogtwitter

Friday Special 35

A home with outstanding design and a small ecological footprint

We know that we are tiny, but this really does put things into perspective

New York in black and white at various times

If clicks were votes on Political Maps

Nina Conti stand-up comedy

by mendoza | Friday, January 04, 2008
  , , | 0 comments | | Friday Special 35 @bluematterblogtwitter