Category Archive for ‘Economics’ at Steven Landsburg | The Big Questions: Tackling the Problems of Philosophy with Ideas from Mathematics, Economics, and Physics

Skip to content

« Older Entries

Archive for the 'Economics' Category

What’s a Bitcoin Worth? (Wonkish)

Published

by

Steve Landsburg

on May 13, 2013

. 71 Comments

This might be one of those questions I’ll eventually be embarrassed for asking, but…..

Imagine a future in which Bitcoins (or some other non-governmental currency) are widely accepted and easily substitutable for dollars, at an exchange rate of (say) $X per Bitcoin.

Then if there are M dollars and B bitcoins in circulation, the money supply (measured in dollars) is effectively M + X B .

Money demand is presumably P D, where P is the general price level and D depends on things like the volume of transactions and the payment habits of the community. (If it helps, we can write D = T/V where T is the volume of transactions and V is the velocity of money.)

Equilibrium in the money market requires that supply equals demand, so

M + X B = P D

Now M is determined by the monetary authorities; B is determined by the Bitcoin algorithm, and D, as noted above, is determined outside the money market.

That leaves me with two variables (X and P) but only one equation. What pins down the values of these variables?

Continue reading ‘What’s a Bitcoin Worth? (Wonkish)’

To Hold You Over….

Published

by

Steve Landsburg

on May 3, 2013

in Bad Reasoning, Blogging, Current Events, Economics, Paul Krugman and Policy

. 77 Comments

Sorry to have been so silent this week; various deadlines have kept me away from this corner of the Internet. I’ll be back in force next week for sure. Meanwhile, if you’re looking for some good reading, this is the best thing I’ve seen all morning.

Edited to add: “Best all morning” was not intended as damning-by-faint-praise. It’s actually the best of many mornings.

Click here to comment or read others’ comments.

Friedman on Psychic Harm

Published

by

Steve Landsburg

on April 7, 2013

in Blogging, Economics, Morality, Philosophy, Policy, Recommendations and Truthseeking

. 15 Comments

Four terrific posts by David Friedman, partly on psychic harm, partly on talking about psychic harm. I’d recommend these highly even if they hadn’t invoked my name.

Landsburg v Bork: What Counts As Injury?

Response to Bork and Landsburg

Frightening Ideas

Why Landsburg’s Puzzle is Interesting

Click here to comment or read others’ comments.

Missed It by That Much

Published

by

Steve Landsburg

on April 5, 2013

in Economics and Progress

. 27 Comments

Why do senior citizens get so many discounts? A lot of it is because they have the time to shop for bargains — so if you don’t give them a bargain, they’ll find someone else who will.

We talked about this and other forms of discounting (or, in economic jargon, “price discrimination”) in my Principles class just last week, emphasizing that it does no good to hand out discounts willy-nilly; instead you want to target them to the most price sensitive customers. That’s why you sometimes have to jump through hoops (like filling out a rebate form) to get your discount — the customers who are motivated to fill out a rebate form tend to be exactly the same customers who are most likely to look elsewhere for a good price.

We talked too about how the airlines have always strived to separate business travelers from leisure travelers so they can charge the business travelers more and the leisure travelers less — the leisure travelers being more likely to take the train (or just stay home) if they don’t get a bargain. The problem, though, is that it’s hard to tell who’s a business traveler and who’s a leisure traveler. So historically, there have been devices like discounts for those who stay over a Saturday night, which is something a business traveler is unlikely to want to do.

Now I can go back to my students and tell them something about the value of staying awake in their economics classes. Because someone who’d obviously absorbed this lesson well has started a new site called GetGoing that takes this idea and runs with it. Here’s how it works: You book two conflicting itineraries, say a trip to San Francisco and a trip to Atlanta on the same date. You are quoted prices that are typically about half what you’d get elsewhere. You agree to fly. And then it books one of the trips, chosen randomly.

Continue reading ‘Missed It by *That* Much’

Legal Problems

Published

by

Steve Landsburg

on April 1, 2013

in Economics, Law and Policy

. 29 Comments

Economists often say that the law should be written to promote efficient outcomes. That’s more ambiguous than it sounds.

Suppose I want to take an action that causes you harm; for example, I want to cut down a tree that you like looking at. How do we tell if that action is efficient?

Definition 1. The action is efficient if my willingness to pay exceeds your willingness to accept. For example, if I’m willing to pay $100 for the privilege of harvesting the tree, and if you’d accept less than $100 to part with it, then the tree-cutting is efficient.

Definition 2. The tree-cutting is efficient if it would occur in a world with no transactions costs (i.e. a world in which there are no impediments to bargaining).

In many circumstances, these definitions are equivalent, and economists often pretend they’re equivalent always — but sometimes they’re not.

Example 1. I want to punch you in the nose non-consensually. (The non-consensuality is a big part of my enjoyment.) I’d pay $100 to punch you in the nose, and you’d accept $50 to take the punch. By Definition 1, the punch is efficient. But the punch would be unlikely to occur in a world with no transactions costs, because it would require bargaining, hence consensuality on your part, which kills my interest. So by Definition 2, the punch is inefficient.

Example 2. I am willing to pay $100 to cut down a tree; you are willing to accept no less than $150 to part with it. By Definition 1, the cutting is inefficient. But part of the reason I’m willing to pay only $100 is that I’m credit constrained. In a world with no transactions costs, I’d borrow more, and would be willing to pay $200 to cut down the tree. So by Definition 2, the cutting is efficient.

Example 3. I am willing to pay $1000 to cut down a tree; you are willing to accept $500 to part with it. By Definition 1, the cutting is efficient. But the only reason I’m willing to pay so much is that I make an excellent living in my job as a mediator who helps people overcome transactions costs. In a world with no transactions costs, I’d be much poorer and would be willing to pay only $200 to cut the tree. So by Definition 2, the cutting is inefficient.

Continue reading ‘Legal Problems’

How Markets Work

Published

by

Steve Landsburg

on March 25, 2013

in Economics, Education and Self-Promotion

. 12 Comments

A while back, I posted a link to the first of my four talks at the 2012 Cato University. Today, I’m posting the second talk, titled “How Markets Work”, with the others to appear eventually.

Get the Flash Player to see this content.

Incidentally, I won’t be at the 2013 Cato U, but other stellar speakers will be. This really is an extraordinarily well run event, and I’ve met many fascinating people every time I’ve been there. It’s not too late to register!

Click here to comment or read others’ comments.

Debt and Growth

Published

by

Steve Landsburg

on March 8, 2013

in Current Events and Economics

. 34 Comments

Is the public debt a drag on economic growth? Economist Salim Furth reviews the evidence here and finds cause for alarm.

My own instincts are substantially less alarmist, but it should be noted that unlike me, Furth (and those he quotes) have spent substantial time thinking hard about this question.

Click here to comment or read others’ comments.

Romer on Minimum Wages

Published

by

Steve Landsburg

on March 7, 2013

in Current Events and Economics

. 26 Comments

Christy Romer, writing in the New York Times, deems the Earned Income Tax Credit a more palatable alternative to the minimum wage. So do I. (So, I feel confident, do the great majority of economists). But there is almost no overlap between Romer’s reasons and mine. I believe her reasons are wrong.

First, Romer observes (correctly) that while the minimum wage tends to reduce employment (though perhaps not by very much), the EITC has the opposite effect. That’s because the minimum wage is essentially a tax on hiring unskilled labor, while the EITC is a subsidy. When you tax something you get less of it; when you subsidize something, you get more.

But, contra Romer, that’s no reason to prefer the EITC. Since when, after all, is it automatically better to have too much of something than too little? Underemployment and overemployment are both bad things. Indeed, if the minimum wage (for whatever reason) has very little effect on employment while the EITC increases it substantially past the efficient level, that’s a good reason to prefer the minimum wage.

Continue reading ‘Romer on Minimum Wages’

Thoughts on the Minimum Wage

Published

by

Steve Landsburg

on February 18, 2013

in Current Events, Economics, Fairness, Paul Krugman and Politics

. 101 Comments

The usual case against the minimum wage has three components:

Minimum wages reduce employment among unskilled workers.
Therefore minimum wages are bad for unskilled workers.
Therefore minimum wages are bad policy.

The problems with this case are that

Minimum wages might not reduce employment very much.
Even if they do, that doesn’t make them bad for unskilled workers.
Therefore we cannot conclude (via this route) that minimum wages are bad policy.

Minimum wages are bad policy, though — but for entirely different reasons.

I’ll get to those reasons shortly, but first let’s examine the traditional argument a little more closely. I’ll number my paragraphs to make it easier for commenters to respond.

Continue reading ‘Thoughts on the Minimum Wage’

Paul Krugman Hopes You’re Stupid

Published

by

Steve Landsburg

on February 9, 2013

in Current Events, Economics and Paul Krugman

. 58 Comments

Paul Krugman, apparently relying on the stupidity of his readers, opens with this quote:

“At some point, Washington has to deal with its spending problem,” Speaker John A. Boehner of Ohio said Wednesday. “I’ve watched them kick this can down the road for 22 years since I’ve been here. I’ve had enough of it. It’s time to act.”

Then Krugman comments as follows:

22 years, huh? Indeed, Boehner was elected in 1990, and entered the House at the beginning of 1991. So what kind of can-kicking was going on during his first, say, decade in office? Here’s the picture:

Hmm — it sort of looks as if the US was sharply reducing its debt during the presidency of a guy named, I don’t know, Bill something or other.

See what he did there? Boehner says something about spending; Krugman responds with an irrelevant chart depicting debt, and hopes you won’t notice he’s completely changed the subject.

Continue reading ‘Paul Krugman Hopes You’re Stupid’

Stress Test

Published

by

Steve Landsburg

on February 4, 2013

. 41 Comments

A man applies for a job, which requires him to undergo three days of testing. But just before the testing period begins, he gets another good job offer. How does this affect his effort and performance?

If you’ve got your economics-blinders on, you’ll probably answer: Once he’s got an offer in hand, he won’t try as hard and therefore won’t do as well. But Michigan grad student Susan Godlonton decided to put that theory to the test. She was here in Rochester this week to tell us what she learned.

Godlonton did her research in Malawi, where her research funds went a long way. 278 job applicants were recruited for a three-day training program, with job offers contingent on their performance. At the beginning of the training period, about 20% of the applicants (randomly chosen) were offered an alternative job; another 20% were randomly told they’d not be getting the alternative offer. (Still others were told they had various probabilities of receiving the alternative offer, but let’s concentrate on the extremes.) These alternative offers were kept secret from the evaluators at the training session.

The result: After controlling for background characteristics such as performance on standardized tests, previous experience, age, and so forth, applicants with no outside offer perform considerably worse in the training sessions, as measured by written exams, and the quantity and quality of their verbal participation. Those with alternative offers are 11.3% more likely to make verrbal contributions, and their verbal contributions are better.

Continue reading ‘Stress Test’

Why The Debt Ceiling Matters

Published

by

Steve Landsburg

on January 22, 2013

in Current Events, Economics and Politics

. 106 Comments

A number of commenters (at least one here and several elsewhere) have asked why we need a debt ceiling. If the Congress wants to spend less, why don’t they just go ahead and spend less?

The answer is that different spending programs command different majorities. Snip and Snap vote to fund rabbit hospitals; Snap and Snurr vote to fund trapeze subsidies; Snurr and Snip vote to fund lava lamp research. Plausibly, they’d all prefer to eliminate all these programs. Even if Snap thinks rabbit hospitals and trapeze subsidies are both great bargains, he might not be so happy about getting two for the price of three.

Continue reading ‘Why The Debt Ceiling Matters’

I Don’t Get It

Published

by

Steve Landsburg

on January 7, 2013

in Current Events, Economics and Policy

. 107 Comments

The frequently brilliant David Henderson seems to me to have fallen off a cliff in his (limited) defense of the recent tax bill. David thinks it’s a (relatively) good thing that under the new bill, income taxes rise only for those making over $400,000 and the estate tax is locked in only for estates over $5 million. (Relative, that is, to an across-the-board increase.)

David, in other words, seems to be saying that it’s a good thing that the tax code just got more progressive, and that a very small number of people are now going to bear a significantly greater share of the burden. I disagree.

Taxes are too high because spending is too high. But taking the path of spending as given (and David is right when he says that the delay of the sequester bodes very ill for that path), the question is not “how high should taxes be?”; that question is settled. Over time, taxes will be high enough to cover the spending. The only question is “how should the tax burden be distributed?”. The answer the politicians have agreed on is “a whole lot less equally”. They’re taking less now than they might have, but they’ll have to take more in the future, and when that time comes, they’ll have set a precedent that the rich should bear a greater fraction of the burden than they did a month ago.

Continue reading ‘I Don’t Get It’

Merry Christmas

Published

by

Steve Landsburg

on December 24, 2012

in Economics and Literature

. 54 Comments

I think I’ll make the reposting of this an annual tradition:

What I Like About Scrooge

Here’s what I like about Ebenezer Scrooge: His meager lodgings were dark because darkness is cheap, and barely heated because coal is not free. His dinner was gruel, which he prepared himself. Scrooge paid no man to wait on him.

Scrooge has been called ungenerous. I say that’s a bum rap. What could be more generous than keeping your lamps unlit and your plate unfilled, leaving more fuel for others to burn and more food for others to eat? Who is a more benevolent neighbor than the man who employs no servants, freeing them to wait on someone else?

Oh, it might be slightly more complicated than that. Maybe when Scrooge demands less coal for his fire, less coal ends up being mined. But that’s fine, too. Instead of digging coal for Scrooge, some would-be miner is now free to perform some other service for himself or someone else.

Dickens tells us that the Lord Mayor, in the stronghold of the mighty Mansion House, gave orders to his 50 cooks and butlers to keep Christmas as a Lord Mayor’s household should—presumably for a houseful of guests who lavishly praised his generosity. The bricks, mortar, and labor that built the Mansion House might otherwise have built housing for hundreds; Scrooge, by living in three sparse rooms, deprived no man of a home. By employing no cooks or butlers, he ensured that cooks and butlers were available to some other household where guests reveled in ignorance of their debt to Ebenezer Scrooge.

Continue reading ‘Merry Christmas’

Carbon Tax Policy: No Simple Answers

Published

by

Steve Landsburg

on December 17, 2012

in Economics and Policy

. 78 Comments

Assuming carbon emissions damage the environment, should they be discouraged through taxation? And if so, should the tax revenue be earmarked for damage abatement, or should it be paid into general funds?

Elizabeth Kolbert, writing in the New Yorker, suggests that economic theory decides this question in favor of a carbon tax. As I pointed out last week, she’s plain wrong. As a followup to some of the discussion on that post, here’s a simple example to illustrate that no policy can be infallible:

A steel mill pollutes the air, causing $24 worth of damage to the business of a laundromat next door. (Or if you prefer, read $24 worth of expected damage to the owners of oceanfront property or farmers in currently temperate zones.)

If the steel mill is forced to bear the consequences of this damage, it reduces its output. This cuts the pollution damage by $12, and cuts the profits of the steel mill by $17.

Question: Which is the best policy?

The steel mill incurs no penalty for polluting.
The steel mill pays a tax (or fine) equal to the damage it causes; the revenue is used to reduce the national debt.
The steel mill is required to reimburse the laundromat for all damage.

Answer: It depends. Consider the following scenarios:

Continue reading ‘Carbon Tax Policy: No Simple Answers’

A Little Knowledge Is A Dangerous Thing

Published

by

Steve Landsburg

on December 10, 2012

in Bad Reasoning, Economics and Policy

. 119 Comments

Writing in The New Yorker, Elizabeth Kolbert illustrates the power of analogy:

A man walks into a bar. He orders several rounds, downs them, and staggers out. The man has got plastered, the bar owner has got the man’s money, and the public will get stuck with the tab for the cops who have to fish the man out of the gutter.

…..

The man pulls into a gas pump. He sticks his BP or Sunoco card into the slot, fills up and drives off. He’s got a full tank; the gas station and the oil company share in the profits. Meanwhile, the carbon that spills out of his tailpipe lingers in the atmosphere, trapping heat and contributing to higher sea levels. As the oceans rise, coastal roads erode, beachfront homes wash away, and, finally, major cities flood. Once again, it’s the public at large that gets left with the bill.

In both cases, Kolbert endorses the “fair and logical” solution: The man should be taxed to incorporate the costs that his choices impose on the rest of society.

I like this game. Can I play too?

A man chooses to build his house on the oceanfront instead of 100 miles inland. This makes him especially vulnerable to rising sea levels and therefore leads him to lobby for a carbon tax. The man gets his house; the builders and contractors share in the profits, and the public at large bears the consequence of higher gas prices.

Or even:

Some people want to burn a lot of carbon, which raises global temperatures, imposing costs on owners of oceanfront property. Other people want to protect their oceanfront property, imposing costs on the people who want to burn a lot of carbon. A journalist at the New Yorker convinces her readers that the only “fair and logical” solution to this conflict of interests is to come down entirely on the side of the property owners, leading to the implementation of suboptimal policies. The journalist gets paid, the magazine editors congratulate themselves on the influence of their writers, and the general public suffers the consequences.

Should the property owner and the journalist be taxed for exerting their malign influences?

Continue reading ‘A Little Knowledge Is A Dangerous Thing’

How High Should Taxes Be?

Published

by

Steve Landsburg

on November 16, 2012

in Current Events, Economics and Politics

. 69 Comments

How high should taxes be? High enough to cover expected outlays going forward — but no higher.

That’s because any additional revenue would be used to pay down the federal debt, which is a bad idea. It was almost surely a mistake to run up this much debt in the first place, but now that we’ve got it, the best thing to do is to keep it forever.

Here’s why:

Continue reading ‘How High Should Taxes Be?’

Sandy and the Ants

Published

by

Steve Landsburg

on October 31, 2012

in Current Events and Economics

. 80 Comments

I was asked in another thread to refute the notion that Hurricane Sandy is “good for the economy” because at least it will create a lot of construction jobs.

I — and so many others — have so thoroughly debunked this notion in so many venues over the years that I fear I can find nothing new to say, so I’ll leave you with this:

If you find yourself in an argument about this, ask your opponent whether it’s “good for the ants” when you put a stick down their anthill, wiggle it around and destroy their infrastructure. Go ahead and acknowledge that this can sure put a lot of ants to work.

Or, for that matter….

Continue reading ‘Sandy and the Ants’

Kidney Failure

Published

by

Steve Landsburg

on October 16, 2012

in Current Events, Economics, Policy and Snark

. 65 Comments

So Alvin Roth wins the Nobel Prize for, among other things, figuring out the best way to allocate kidneys subject to the constraint that you’re too damned dumb to use the price system.

Next up: A Nobel prize in medicine for figuring out the best way to prolong your life while repeatedly shooting yourself in the head.

Click here to comment or read others’ comments.

Krugman — So Right and So Wrong

Published

by

Steve Landsburg

on October 13, 2012

in Bad Reasoning, Current Events, Economics, Paul Krugman, Policy and Politics

. 53 Comments

Paul Krugman offers a nice thought experiment to illustrate why government debt, in and of itself, does not make the country as a whole any poorer:

Suppose that … President Santorum passes a constitutional amendment requiring that from now on, each American whose name begins with the letters A through K will receive $5,000 a year from the federal government, with the money to be raised through extra taxes. Does this make America as a whole poorer?

The obvious answer is not, at least not in any direct sense. We’re just making a transfer from one group (the L through Zs) to another; total income isn’t changed. Now, you could argue that there are indirect costs because raising taxes distorts incentives. But that’s a very different story.

OK, you can see what’s coming: a debt inherited from the past is, in effect, simply a rule requiring that one group of people — the people who didn’t inherit bonds from their parents — make a transfer to another group, the people who did. It has distributional effects, but it does not in any direct sense make the country poorer.

Two comments:

Continue reading ‘Krugman — So Right and So Wrong’

Aaagh!

Published

by

Steve Landsburg

on August 15, 2012

in Back of the Envelope, Economics, Finance and Personal

. 76 Comments

I am buying a house, and am therefore faced with the choice between a 15 year mortgage at 2.875% and a 30 year mortgage at 3.49% (as of a couple of days ago; those rates have probably changed a little by now).

The main advantage of the 15 year mortgage is that it comes with a lower interest rate and, because I’m making larger monthly payments, it keeps my money out of the stock market, which is good if the market tanks. The main advantage of the 30 year mortgage is that it allows me to keep more money in the stock market for a much longer time, which is good if the market does well.

How should I weigh those factors? Economics tells me that I will solve this problem by forecasting the return on equities over each of the next 30 years, and computing, on the basis of my forecast, which mortgage will leave me richer in the long run. No, that’s not quite right. Actually, economics tells me that I’ll make many forecasts, assign each one a probability, and thereby compute two probability distributions for my future net worth and then choose the distribution I prefer.

Now let’s get serious.

Continue reading ‘Aaagh!’

Enough Already!

Published

by

Steve Landsburg

on August 14, 2012

in Economics, Empirical Puzzles and Musings

. 70 Comments

Today’s email brings a gripe from Mark Skousen, the irrepressible impresario behind FreedomFest, who could have avoided this problem by being born in the old Soviet Union:

I was in the large Stop & Shop grocery store here in New York to buy some items, including a new tube of toothpaste. I like Colgate, but I can never seem to get the same toothpaste product.

Now I know why. Guess how many different types and sizes of toothpaste Colgate sells?

Ready?

Continue reading ‘Enough Already!’

The Greatest Story Ever Told

Published

by

Steve Landsburg

on August 7, 2012

in Economics, Events, History and Self-Promotion

. 12 Comments

I gave a series of four talks last week at Cato University; only the first of them was broadcast by C-SPAN, and you can watch it here. (The title was “The Greatest Story Ever Told”, meaning the story of economic growth.)

Much of this material will look familiar to those who have watched other videos recently posted in this space, but I think it comes together a little better in this one. The remaining lectures contained more in the way of new material, and I’m hoping to be able to post at least some video excerpts in the near future.

There were a lot of fabulous talks at this event by such luminaries as Tom Palmer (here and here) and the extraordinary Robert McDonald, who held the audience in thrall with his gripping three-part series on the history of the American revolution (not, unfortunately, online, even in part).

If you missed it, there’s always next year!

Click here to comment or read others’ comments.

Paging Diogenes

Published

by

Steve Landsburg

on August 6, 2012

in Current Events, Economics, Technology and Truthseeking

. 43 Comments

Chapter 8 of The Big Questions is called “Diogenes’s Nightmare” and argues that: 1) In a world of honest truthseekers, there would be no disagreements about matters of fact; 2) In the world we inhabit, disagreements about matters of fact are ubiquitious; therefore 3) in the world we inhabit, there must be precious few honest truthseekers.

If you’re looking to ferret out one of those rare creatures, your best candidate might be a man who argues with eloquence and passion against subsidies for the industry where he makes his living. Meet David Bergeron.

David is the founder and president of Sundanzer, which supplies solar powered refrigerators worldwide, based on technology developed by David under contract to NASA. He also really really really understands why subsidizing solar technology is a terrible idea. And when I met him last week, he impressed me so much that I invited him to make a rare guest post here at The Big Questions. So without further ado:

Solar Subsidies: Misdirecting Industry and Consumers

A Guest Post

by

David Bergeron

In a recent Economist on-line debate, the affirmative motion “This house believes that subsidizing renewable energy is a good way to wean the world off fossil fuels” was surprisingly defeated.

In his closing remarks, the moderator softened his strident opposition to the negative case, even admitting that “subsidizing renewable energy, is wasteful and perhaps inadequate to address climate-change concerns.”

Beyond the Climate Debate

The debate, indeed, reopened the question whether anthropogenic greenhouse-gas forcing was a serious planetary environmental concern. But such focus short-changed what I think is the more important question for the Economist. Not only are the renewable-energy subsidies (such as for solar) wasteful and potentially insufficient, they are outright diabolical if indeed there is a looming environmental crisis.

Continue reading ‘Paging Diogenes’

Uncle Ezra’s Crazy Housing Plan

Published

by

Steve Landsburg

on July 26, 2012

in Bad Reasoning, Current Events and Economics

. 25 Comments

Ezra Klein at the Washington Post offers a way out of the current mess:

Tomorrow morning, Bernanke could walk in front of a camera and announce that the Federal Reserve intends to begin buying huge numbers of mortgage-backed securities with the simple intention of bringing the interest rate on a 30-year mortgage down to about 2.5 percent and holding it there for one year, and one year only.

The message would be clear: If you have any intention of ever buying a house, the next 12 months is the time to do it. This is Uncle Ben’s Crazy Housing Sale, and you’d be crazy to miss it.

Now, financial markets are not my specialty, and maybe Klein has thought about this more deeply than I have, but there seems to be a little flaw in this plan.

Continue reading ‘Uncle Ezra’s Crazy Housing Plan’

Mitt Romney vs. Joe Paterno

Published

by

Steve Landsburg

on July 24, 2012

in Current Events and Economics

. 70 Comments

What do Mitt Romney and Joe Paterno have in common? They both devoted substantial fractions of their careers to promoting wasteful competition — Romney at the Olympics, and Paterno at the Penn State football program. How do Mitt Romney and Joe Paterno differ? Romney, unlike Paterno, devote a substantial fraction of his career to promoting healthy competition at Bain Capital.

To understand what’s wasteful about Penn State football, think about what life will be like now that the program’s been eviscerated. The overall quality of college football will decrease — but not by much. Any titles Penn State might have won, someone else will win instead, and the games leading up to those titles will be almost as fun to watch. But Penn State has reaped enormous rewards over the decades in exchange for its relatively small contribution to the quality of college football — and has plowed a substantial fraction of those rewards back into the program in order to maintain the flow of revenue. In short, Penn State football has sucked up a lot of resources while providing relatively little in return.

Continue reading ‘Mitt Romney vs. Joe Paterno’

The Wrong Tool for the Job

Published

by

Steve Landsburg

on July 19, 2012

in Bad Reasoning, Economics and Paul Krugman

. 43 Comments

Paul Krugman, defending the IS-LM (a/k/a “old Keynesian”) model of the macroeconomy as a non-rigorous but useful “scratchpad”, misses the point by a mile:

It’s a simplified model that more or less gets at what you think are the essentials of an issue, and is easy to work with, so you can use it to reach quick first-pass judgments about policy or whatever.

………

But IS-LM isn’t the prime example of a scratchpad. What is?

The answer is, supply and demand.

It is not easy to derive supply and demand curves for an individual good from general equilibrium with rational consumers blah blah. And it’s definitely not easy to justify consumer and producer surplus as measures of welfare. And there have always been some purists who condemn any use of the S and D curves we all grew up with, the use of triangles to measure welfare loss, and all that.

But for the most part nobody pays attention. The supply-and-demand framework is so convenient, while pretty much getting at what you want to get at, that it’s what almost everyone uses to get a first-pass analysis of economic issues.

Okay, look. Supply and demand (and, especially, triangles of welfare loss, etc) are not entirely rigorous, but they’re good useful simplifications that actually give useful (though approximate) answers to important policy questions. Sort of like Ohm’s Law for electrical circuits.

But IS-LM is not like that at all, because IS-LM does not even address the key policy questions in macroecomics. IS-LM can tell you, perhaps, how to fight a recession, but it can’t tell you whether the recession is worth fighting — not even loosely, because the model contains no individual utility functions and no social welfare function. It therefore does not allow you even to formulate the question of whether a given policy is worth its costs, because it provides no framework for weighing costs against benefits.

Continue reading ‘The Wrong Tool for the Job’

Thursday Solution

Published

by

Steve Landsburg

on June 21, 2012

in Economics and Puzzles

. 39 Comments

Last week, I challenged readers to reconcile two apparently contradictory statements, both of which are frequently made in economics textbooks:

To minimize distortions, all goods should be taxed equally.
To minimize distortions, inelastically demanded goods should be taxed more heavily. (This is sometimes called the Ramsey rule, after Frank Ramsey, who plays a major role in the final chapter of The Big Questions).

I’ll give you the answer in a minute. The executive summary is that a) “Inelastically demanded goods should be taxed more heavily” is true only in very special circumstances; in general a much more complicated formula is needed, b) When all goods can be taxed, that complicated formula does in fact tell you to tax them all equally, and c) a lot of textbooks give incredibly misleading accounts of all this.

The more detailed answer follows; if you prefer a more mathematical account, click here. To keep things manageable, I’ve assumed all supply curves are perfectly elastic.

Continue reading ‘Thursday Solution’

Thursday Riddle

Published

by

Steve Landsburg

on June 14, 2012

in Economics and Empirical Puzzles

. 64 Comments

Do any of you guys know anything about economics? Because I have a question I can’t answer and I’m hoping you can help me.

In many real estate markets (including the one where I’m currently shopping), the agent’s commission is equal to a fixed percentage of the sale price. (Typically it’s 6%, though this is split evenly between the buyer’s and seller’s agents, each of whom gives a cut to their respective agencies, so either agent’s take-home is more on the order of 2%).

This means that if you sell a million-dollar house, you earn TEN TIMES the commission of your identical twin who sold a hundred-thousand-dollar house, though I doubt very much that you did ten times the work or bore ten times the expense.

Now, plenty of hundred-thousand-dollar houses are being sold, which means that plenty of agents are settling for the relatively dinky commissions. Question: Why are those agents not attempting to steal some of the high-end business by offering to accept a smaller percentage? After all, 1% of a million is still a lot more than 2% of a hundred thousand.

You might say that the agencies collude to restrain them — but what stops a rogue agency from busting the cartel?

All too many times in my life, I’ve noticed some apparently anomalous behavior which I’ve challenged myself and/or others to explain with the tools of game theory, axiomatic bargaining theory, and the theory of markets — only to discover that the true explanation is “It’s required by law”. (Of course one can always step a little further back and try using economics to explain the advent of the law.) But I don’t think that’s the case here. (I’m prepared to be wrong about this, though.)

Continue reading ‘Thursday Riddle’

Monday Puzzle: The Least Bad Tax

Published

by

Steve Landsburg

on June 11, 2012

in Economics and Puzzles

. 65 Comments

Today’s puzzle is specifically for the econo-geeks. Less geeky fare will follow in the near future.

Two of the main lessons that our undergraduates typically take away from their introductory classes are these:

To minimize distortions, all goods should be taxed at the same rate.
To minimize distortions, inelastically demanded goods should be taxed most heavily.

What is the correct response to this pair of apparently contradictory lessons?

Economics is large. It contains multitudes. Get over it.

Continue reading ‘Monday Puzzle: The Least Bad Tax’

« Older Entries