Ben Muse

Steve Verdon explains moral hazard

Steve Verdon explains moral hazard

Steve Verdon explains moral hazard at his blog Deinonychus antirrhopus. Here: "Moral Hazard, Adverse Selection and Insurance"

Why do corporate managers have

Why do corporate managers have an incentive to overinvest in good government gurus?

These agents are more risk-averse than their principals, the stockholders. Professor Bainbridge explains here: "The corporate governance racket".

The iterative prisoners' dilemma Lawrence

The iterative prisoners' dilemma

Lawrence Solum covers the iterative prisoner's dilemma at his Legal Theory Blog. On Sunday he posted an introduction to the iterated prisoners' dilemma for law students, here: "Legal Theory Lexicon: The Prisoner's Dilemma"

"One of the most useful tools in analyzing legal rules and the policy problems to which they apply is game theory. The basic idea of game theory is simple. Many human interactions can be modeled as games. To use game theory, we build simple models of real world situations as a game. Thus, we might model civil litigation as a game played by plaintiffs against defendants. Or we might model the confirmation of federal judges by the Senate as a game played by Democrats and Republicans. This week's installment of the Legal Theory Lexicon discusses one important example of game theory, the prisoner's dilemma. This introduction is very basic--aimed at a first year law student with an interest in legal theory...."

On Wednesday he posts a follow up, here: "More on Iterative Prisoner's Dilemmas: The Grim Trigger Solution".

Political economy Two posts by

Political economy

Two posts by Lynne Kiesling at her blog The Knowledge Problem link to public choice materials.

First, her post "TWO MORE INTERESTING ECONOMICS BITS" links to an article by James Buchanan ("Public Choice: Politics Without Romance" from Policy magazine, a journal of the Centre for Independent Studies) on the origins and significance of public choice theory. Buchanan was "present at the creation." He talks about the ideas that piqued his interest, the origins and significance of his book (co-authored with Gordon Tullock) The Calculus of Consent, the charge that public choice theory is ideologically motivated, the charge that public choice theory is immoral, and the contemporary significance of public choice theory. A lot of good stuff in six - non-technical - pages. Is public choice theory ideologically biased? An answer depends on an appreciation of

"...the prevailing mindset of social scientists and philosophers at the midpoint of the 20th century when public choice arose. The socialist ideology was pervasive, and was supported by the allegedly neutral research programme called 'theoretical welfare economics', which concentrated on identifying the failures of observed markets to meet idealised standards. In sum, this branch of inquiry offered theories of market failure. But failure in comparison with what? The implicit presumption was always that politicised corrections for market failures would work perfectly. In other words, market failures were set against an idealised politics.

"Public choice then came along and provided analyses of the behavior of persons acting politically, whether voters, politicians or bureaucrats. These analyses exposed the essentially false comparisons that were then informing so much of both scientific and public opinion. In a very real sense, public choice became a set of theories of governmental failures, as an offset to the theories of market failures that had previously emerged from theoretical welfare economics. Or, as I put it in the title of a lecture in Vienna in 1978, public choice may be summarised by the three-word description, 'politics without romance'.

"The public choice research programme is better seen as a correction of the scientific record than as the introduction of an anti-governmental ideology. Regardless of any ideological bias, exposure to public choice analysis necessarily brings a more critical attitude toward politicised nostrums to alleged socioeconomic problems. Public choice almost literally forces the critic to be pragmatic in comparing alternative constitutional arrangements, disallowing any presumption that bureaucratic corrections for market failures will accomplish the desired objectives..."

Buchanan treats rent seeking behavior in a couple of paragraphs midway through. When you've finished Buchanan's article, turn to the links in a second Kiesling post: "OTHER INTERESTING NEW BITS". Kiesling has linked to, and provided commentary on, several posts on rent seeking behavior: Robert Prather discussing rent seeking at the state level, Gordon Tullock on "The Fundamentals of Rent Seeking," commentary on Tullock's essay by Steve Verdon, and Kiesling herself applying Mancur Olson's group model applied to negotiations on the current energy bill. Tullock covers the evolution of rent seeking behavior from 1967 when he came up with the idea, to 1974 when Anne Kreuger coined the phrase. Where do good ideas come from? In Tullock's case:

"...The point of departure for my 1967 paper was the conventional welfare loss to monopoly associated with tariffs, monopoly and theft. In this short essay, I shall focus almost entirely on the monopoly example. Original contributions very often occur when a scholar looks at a well-established theory with his eyes open, and not closed as so many of us do for so much of our existence. Such was the nature of my 1967 insight. I simply shifted attention from the welfare triangle to the profit rectangle and asked what self-seeking entrepreneurs would do to access such a profit rectangle from the zero profit environment of a competitive market..."

Will we grow our way

Will we grow our way out of the Social Security/Medicare problem?

Arnold Kling thinks we might, and explains why in The American Enterprise Online: "Will Science Save Social Security?".

"...There is one important perspective that has not been brought to bear on the issue of the burden of future entitlements. That is the perspective of science, technology, and innovation. The deterioration of Social Security finances is expected to take place over the next 15 to 50 years. Over that same time span, technologists foresee remarkable progress in computer technology, nanotechnology, and biotechnology. If these pundits are correct, then the economic impact of innovation is likely to swamp the effects of policy changes on our ability to sustain entitlement programs..."

The pros and cons of

The pros and cons of taxing sin

Jim Leitzel, at the blog Vice Squad, looks at the pros and cons of legalizing and taxing vices such as drugs and prostitution. There are two related postings. This one, on discussions over potential legalization of prostitution, "Legal Prostitution for Las Vegas? Thailand?" is the basis for the second, which gives an economic analysis of the pros and cons of legalizing and taxing this and other vices: "Tax Revenues as a Benefit of Vice Legalization".

A good prediction In early

A good prediction

In early September Max Zawicky (at the blog MaxSpeak, You Listen!) predicted:

"...We will soon be hearing that to help manufacturing, we must ease the tax burden on corporations...

"As we speak, Republicans in Congress are writing up more tax cuts, this time for corporations. They will sail under the flag of "fixing" the foreign sales corporations (FSC) loophole that has been found to be illegal by the World Trade Organization...

"...A small problem is that the FSC can't be fixed in a way that will be WTO-legal because the fault is in the basic structure of the corporate income tax. This dispute has been festering for decades. But not to worry, attached to the FSC fix will be all sorts of peripheral tax breaks that will survive, even as the FSC component remains in ever-lasting international legal limbo."

See "AND NOW FOR SOMETHING COMPLETELY SIMILAR". I noted it here: "What will the Bush Administration do to promote manufactures?", and I've been waiting to see what happened.

Friday's New York Times reports:

"The proposals are in the latest draft of a bill to replace a tax break for American exporters that the World Trade Organization has declared an illegal trade subsidy. The European Union has threatened to retaliate with up to $4 billion a year in tariffs on American products if the United States fails to repeal the old break...

"...In an attempt to placate as many groups as possible, the House proposal would repeal the original export tax break for what is known as extraterritorial income and replace it with a broader array of corporate tax breaks worth more than twice as much.

"Repealing the old tax break would bring the Treasury about $50 billion over 10 years, and the bill would raise nearly $30 billion more by blocking a variety of tax shelters and loopholes. But the new tax breaks would be worth about $142 billion over 10 years, leaving the net cost to the government at about $60 billion over the next decade."

See "House Leaders Are Pushing to Cut Corporate Taxes". I'm assuming the "illegal trade subsidy" in the Times story is Zawicky's "FSC."

P.S. 10-26-03 Steven Pearlstein had a column in the Washington Post on this corporate tax cut bill on Oct 22: " 'Reforming' The Corporate Income Tax".

"...Now Congress, under the guise of doing something to "save jobs" and "level the playing field" for the beleaguered manufacturing sector, is about to make things even worse [than they already are - just how bad is explained in preceding paragraphs - Ben]. You don't have to bother with the details of the various proposals. All you have to know is that we finally have a set of tax cuts so ill-conceived that even the Bush administration is against them..."

I learned about Pearlstein's column from Tyler Cowen at the Marginal Revolution blog: "Reforming the corporate income tax".

Garrett Hardin Edward Lotterman discusses

Garrett Hardin

Edward Lotterman discusses the influence of the late ecologist Garrett Hardin, here, in the Twin Cities Pioneer Press: "Real World Economics: Common property systems have uncommon results".

"Sometimes a bad idea, eloquently expressed, has enormous influence. Garrett Hardin's famous essay, "The Tragedy of the Commons," demonstrates that truth..."

Let me also draw your attention to the web site of the Garrett Hardin Society: "The Garrett Hardin Society". The site has transcripts of interviews with Hardin, including an exhaustive UCSB Oral History project interview covering his entire life and work. In Section 7 of the transcript he describes the genesis of his most influential paper, "The Tragedy of the Commons." This was an unusually hard paper for him to write.

"Why did I have so much trouble writing this paper? Well, I think it's because I didn't like my own conclusions. I found them deeply disturbing. I kept trying to escape from them, and I just couldn't..."

Do girls cause divorce? David

Do girls cause divorce?

David Leonhardt describes recent economics research suggesting that:

"In every decade since the 1940's, couples with girls indeed divorced more often than those with boys, United States Census Bureau data showed. The effect was not huge - just a few percentage points - but it was unmistakable. It happened in every region of the country. It happened among whites more than blacks and among people with only high school diplomas more than those with college degrees.

"Over the last 60 years, parents with an only child that was a girl were 6 percent more likely to split up than parents of a single boy. The gap rose to 8 percent for parents of two girls versus those of two boys, 10 percent for families with three children of the same sex and 13 percent for four. Every year, more than 10,000 American divorces appear to stem partly from the number of girls in the family..."

See "It's a Girl! (Will the Economy Suffer?)" in today's New York Times (Oct 26) for the full article. This article will probably only be available on line for a short time.

These research results have been covered elsewhere. I can think of two columns by Steven Landsburg in Slate, "Oh, No: It's a Girl! Do daughters cause divorce?" on October 2, and "Maybe Parents Don't Like Boys Better. A follow-up to the recent column about whether daughters cause divorce." on October 14.

The "Baltic dry" index is

The "Baltic dry" index is up. What does that mean for you?

Daniel Gross explains what the "Baltic dry" leading economic indicator is, where its been going recently, and what it might mean, in this Slate column: "The Shipping News. The best economic indicator you've never heard of.".

The continuing power of sunk costs

Sunk costs, costs that have been irretrievably incurred, and which can't be changed by a decision, shouldn't play a role in the decision.  Cognitive psychologists, however, tell us that they still sway us.  A case in point:

"The Aleut Corp., a Native regional corporation trying to convert the abandoned Navy base on faraway Adak Island into a thriving new commercial fishing town, could receive exclusive rights to bottom fish worth $10 million a year or more under legislation [a rider to upcoming budget legislation - Ben] sponsored by U.S. Sen. Ted Stevens...

"...Ted Stevens, who chairs the powerful U.S. Senate Appropriations Committee, said giving the pollock to Adak is important for the state, for the Aleut people and for making some use of a military installation that cost taxpayers more than $3 billion."

Whatever the other merits of the decision, the money already invested in the base is a sunk cost.  The complete story is to today's Anchorage Daily News: "Stevens' fish rider for Adak attacked.".

Why public administrators should know

Why public administrators should know something about opportunity costs

The Economist had a review of a new book on public security in the Oct 16 issue - Beyond Fear: Thinking Sensibly About Security in an Uncertain World by Bruce Schneier. Schneier is an expert in computer security writing for a general audience, and evaluating the suite of security measures to which we are increasingly subject. The Economist gave it a good review (I can't link to it because it's "premium content").

One of Schneier's points, summarized in the review, is that id checks at building entrances, may not be very helpful - in fact, may be a counter-productive - because of the opportunity costs (and psychological effects) they entail:

"...Many of the measures introduced and proposed in the past two years fail Mr Schneier's tests [tests good security systems should pass, described in the book - Ben]. Checking IDs in large office buildings means little, because fake IDs can easily be obtained by under-aged drinkers, let alone by evil-doers. Moreover, the need to check IDs may prevent security guards from noticing other activities, and the whole process may lead to a false sense of security, thus making things worse, not better..."

Stiglitz's new book During the

Stiglitz's new book

During the 1990s, Nobel prize winning economist Joseph Stiglitz was Chairman of Clinton's Council of Economic Advisors and Chief Economist of the World Bank. He's just published his account of U.S. economic policy during the 1990s: The Roaring Nineties (Norton, 2003). The book provides a left-liberal critique of Clinton administration and Federal Reserve policy during the period from an insider. Some related material on the web:

Stiglitz rehearsed his arguments in an Atlantic magazine article in October, 2002: "The Roaring Nineties"

In 1998, even before leaving the World Bank, Stiglitz discussed the lessons he'd learned during his time in the Clinton Administration, in an article in the Journal of Economic Perspectives, "Distinguished Lecture on Economics in Government. The Private Uses of Public Interests: Incentives and Institutions." (JEP, 12(5):3-22 - accessible via JSTOR). Stiglitz asks why its so hard for government to implement Pareto Optimal policy changes - after all, no one loses - and draws on his experiences to suggest four hypotheses.

Jason Nisse, a Business Editor for 'The Independent on Sunday' reviews Stiglitz's book and Paul Krugman's new book, here: The Roaring Nineties: Seeds of Destruction By Joseph Stiglitz. The Great Unravelling: From Boom to Bust in Three Scandalous Years By Paul Krugman. With respect to Stiglitz

"... He [Stiglitz - Ben] is critical of the way Clinton's third way...embraced the right-wing agenda of deregulation and small government without understanding their consequences. He attacks the sleepy watchdogs and financiers on the make, who had the ear of the administration. Before you can say: "But Joe, you not only supported Clinton, you advised him," Stiglitz is out there with his "I told them not to do it, but would they listen?" excuse.

"If you swallow that line, and switch off most of your critical faculties, this is an enjoyable book. It sticks it to American capitalism just the way that any pro-European liberal (and I include myself in this category) might want it to. Stiglitz's fact-light, high-octane writing style fair zips along. There are hardly any pesky footnotes and an almost total absence of figures. What's more, this all comes from an American economist who won the Nobel Prize, so take that, you Republicans.

"But therein lies the danger. This book can lead you into all sorts of trouble if you try to rely upon it. Stiglitz's selective use of facts leaves his arguments all full of holes. I'm sure he has the research backing for every word he writes, but it does not come through in the text. Anyone fresh from The Roaring Nineties and hoping to deploy Stiglitz's arguments to shut up that pesky neighbour who works in the City, will suddenly find themselves in an intellectual version of the final scene from Butch Cassidy and the Sundance Kid. Heck. I can shoot Stiglitz's arguments out of the skies. And I largely agree with him."

Will Hutton, writing for the left-wing Guardian also reviewed Stiglitz and Krugman together, favorably, and provided an extract from Stiglitz's book, here: "Our foreign friends ".

The Economist finds the interest of the book in Stiglitz's description of policy making in the Clinton administration: "Mr Stiglitz goes to Washington"

Tyler Cowen reviews the book at his blog, Marginal Revolution, here: "The new Stiglitz book".

Brad DeLong critiques Stiglitz's analysis of the Clinton administration's 1993 deficit reduction plan, here: "Department of "Huh?"". DeLong had a position in the Treasury, and was in a position to know what was happening. The Treasury Department is criticized by Stiglitz in the book.

The book has the subtitle "Seeds of Destruction" in the British edition - not in the U.S. edition.

How much are intellectual property

How much are intellectual property rights worth?

Eugene Volokh points out that the song, "Happy Birthday" is still under copyright, and tells what the copyright cost 15 years ago, and how much it brings in in royalties each year, here: "Happy Birthday!".

Bill Owens, Governor of Colorado

Bill Owens, Governor of Colorado

Virginia Postrel links to two items that touch on fiscal management in Colorado, and that highlight Colorado's "Tabor" (Tax Payers Bill of Rights). One is a George Will column puffing Bill Owens, the conservative governor of Colorado, the other is a selection from a Wall Street Journal column by Owens advising California Gov-elect Schwarzenegger to push for a California Tabor. Postrel's posting with its links is here: "GOOD GOVERNMENT IN COLORADO"

Colorado's Tabor appears to be a provision that "...restricts the growth of per capita tax revenue to population growth plus inflation..." (George Will) without a popular vote.

Are the rich getting richer and the poor poorer?

Are the rich getting richer and the poor poorer?

Various measures of income distribution indicate that the proportions of income accuring to the top decile of the population is getting larger.  But Kevin Brancato at Truck and Barter notes that "percentiles are not people."  In other words, we need to take a look at what happens to individuals through time as well as what happens to percentiles, or deciles, or quintiles.   Income mobility is an important dimension of the income distribution issue, and there is a lot of mobility in the U.S. through time.  He posts here: "Percentiles are not People ".  Brancato's post gives insights into the measurement and definition problems in this topic area, and has lots of links to other materials.

Behavioral economics Michael at 2blowhards

Behavioral economics

Michael at 2blowhards provides links to a suite of behavioral economics links, here: "Behavioral Economics 101". I learned about this at the Marginal Revolution.

What is the Coase theorem?

What is the Coase theorem?

Lawrence Solum explains it for law students at his Legal Theory Blog, here: "Legal Theory Lexicon: The Coase Theorem". I learned about this from the blog Crescat Sententia

Tobacco ban in prison spurs

Tobacco ban in prison spurs creation of black market

A ban on smoking on Colorado prisons has spurred creation of a black market in tobacco. According to this article by Kirk Mitchell in the Denver Post,

"...A prison-made "rollie" cigarette has one-tenth the tobacco of a Marlboro, but in Colorado prisons, where a smoke is now contraband, it is a more lucrative commodity than cocaine.

"An $11 can of Bugler tobacco can generate $5,000 in sales of toilet-paper-rolled cigarettes in the Colorado State Penitentiary. Cocaine, by comparison, only sees an 800 percent markup behind bars...

Lots of details about how the market works in the column - how does the tobacco enter the prisons?

"...One girlfriend of an inmate stashed tobacco in an empty McDonald's bag and dumped it near a predetermined road sign, where an inmate road crew was to pass by picking up trash, corrections investigator Jay Kirby said.

"Other wives passed balloons filled with tobacco to their husbands' mouths when they kissed in prison waiting rooms, he said.

" "A wife of another inmate made papier-mache lava rocks filled with tobacco and dropped them in a rock garden where inmate groundskeepers friendly to her husband would work, Claspell said..."

The ban on smoking was implemented to avoid inmate second hand smoke lawsuits.

"...Because tobacco is so easy to buy and smuggle into prison, it has become the top reason state corrections officers have been charged with crimes, with 18 guards, teachers and supervisors prosecuted in three years, prison officials say.

" "Some prisoners refer to (the tobacco contraband law) as a retirement assistance program for correctional officers," inmate G. A. Bowers said in a newsletter called "Inside Justice" published at the Fremont Correctional Facility."...

Read the story for the rest: "Ban turns tobacco into prison prize
Colo. Move spawns black market, arrests". I learned about this from the blog Vice Squad.

Does the smoking externality justify government intervention?

Professor Bainbridge analyses the externality argument for government imposed "no-smoking" regulations (not every externality requires government action for for efficient resolution) in his blog: 

Should China float its exchange

Should China float its exchange rate?

Joseph Stiglitz (Clinton Council of Economic Advisors chair, chief economist at the World Bank, Nobel Prize winner) says no in this Guardian column: "First Japan, Now China is the Culprit. In Reality, the US Has Only Itself to Blame for its Swelling Trade Deficit"

"...if a country invests more than it saves, it will need to borrow, and the counterpart to that borrowing is a trade deficit. America's burgeoning trade deficit is a result of Bush's unprecedented mismanagement. Tax cuts that the US could ill afford turned a huge fiscal surplus into a massive deficit; rather than saving, America is borrowing, much of it from abroad. That - not China's exchange rate policy - is the culprit...

"...China is right to have ignored America's demands. Floating the exchange rate would expose the country to instabilities that would lead to a host of further problems. A higher exchange rate would undermine job creation and would contribute to deflation, which China is successfully combating..."

I learned about this from Angry Bear who links to Stiglitz's vita. This is one reason for concern with the large federal deficits - they tend to reduce domestic saving, promote borrowing from abroad, and contribute to the trade deficit. I doubt they account for the complete deficit as Stiglitz implies, but they don't help.

Response to Jane Galt I

Response to Jane Galt

I linked to Meghan McArdle's Tech Central Station column on the problems unfunded Social Security and Medicare liabilities will pose, here: "Social Security's unfunded liabilities". Max Zawicky critiques her piece, here: "From The Desk and I Do Have One ...".

The fruits of 20 years

The fruits of 20 years of drug control

Jane Galt points to a Mark Kleiman blog posting ("The limits of drug law enforcement") on an extremely large drop in the wholesale and retail prices of heroin "in the face of an enforcement effort that increased the number of drug dealers behind bars from about 30,000 in 1980 to about 450,000 today."

Do religious monopolies backfire? Randall

Do religious monopolies backfire?

Randall Parker at ParaPundit draws attention to a New York Times story on the loss of religious faith in Europe. He points to a theory mentioned in the article that the state-sponsored religious monopolies to which Europe has been prone have (a) led people to be suspicious of the major denominations so sponsored, and (b) led to a lessening of interest in religion ("In a free market, people get more interested in the product..."). I'm skeptical about the second point; the intense interest in religion in Islamic countries or in Europe in the Middle Ages suggests otherwise.

Social Security's unfunded liabilities Megan

Social Security's unfunded liabilities

Megan McArdle (aka "Jane Galt" - see her blog, here: "Asymmetrical Information") has a column on the unfunded liabilities of the Social Security and Medicare programs today at the Tech Central Station: "The Bad News Is the Good News Is Irrelevant". Be afraid, be very afraid - whether you are older and have factored Social Security into your retirement planning, or whether you are young and will have to support all those old people.

"How big are those [unfunded - Ben] liabilities? The American Enterprise Institute has published a paper by Jagdeesh Gokhale and Kent Smetters that analyzes that question. According to their estimates, we, as a nation, have collectively promised to spend $44 trillion more than we have resolved to collect in taxes, almost all of it on Social Security and Medicare. If the United States government were a private company, we wouldn't just be in the red; we'd be in receivership."

When nature ran amok in Alaska

Doug O'Harra reports on the  Division of the American Association for the Advancement of Science September conference, "Extreme Events: Understanding Perturbations to the Physical and Biological Environment," in this Anchorage Daily News story: "Catastrophes shaped Alaska.  GROUND ZERO: Conferees discuss effects of jolts by natural forces".  Among the papers, one described the following disaster:

Should we reduce barriers to

Should we reduce barriers to the free flow of capital across national boundaries?

Even in the developing countries? Daniel Drezner argues yes, in this Tech Central Station column: "Against Sedentary Lifestyles".

"The argument for why capital account liberalization spurs greater economic growth is simple. Robust economic growth is strongly correlated with a high degree of "financial development," which means the size, sophistication and innovation of a country's equity markets, bond markets, and banking sectors. Critics suggest that economic growth leads to sophisticated capital markets, not vice versa. However, empirical studies reveal that financial development is robustly correlated with future rates of economic growth, increased productivity, and high rates of investment. Another study demonstrates that countries that liberalize their equity markets experience a one percent increase in their annual real economic growth. The more developed the financial markets, the better for society -- but not necessarily the state..."

There are live links in the quote, but you'll have to go to his column to access them.

Followup on bear attack at Katmai

Sometime earlier this week a grizzly bear in Alaska's Katmai National Part attacked, killed, and ate (or cached for future eating) a nationally known bear "expert" and his girlfriend. 

I posted links to two stories by Anchorage Daily News reporter Craig Medred, here: "Alaska grizzly bear attack".  Those stories described the almost unbelievably foolhardy behavior of the party. 

An Alaska Department of Fish and Game bear biologist has investigated the scene and filed his report on what happened.  The Anchorage Daily News carries Medred's story on that report today, here: "Biologist believes errors led to attack".  The biologist's report describes almost unbelievable behavior - pitching camp right next to a bear trail, approaching to within 10 feet of a sow with cubs.

Financial compensation for cadaveric organ

Financial compensation for cadaveric organ donation

Alex Tabarrok argues for it in this Marginal Revolution blog posting: "Dollars for Donors".

"The shortage of human organs for transplant grows worse every year. Better immuno-suppressive drugs and surgical techniques have raised the demand at the same time that better emergency medicine, reduced crime and safer roads have reduced organ supply. As a result, the waiting list for organ transplants is now 82,000 and rising and more than 6000 people will die this year while waiting for a transplant...

"...Aside from the obvious benefits of saving lives, financial compensation for organ donation [Tabarrok appears to be talking specifically about cadaveric donation - Ben] would likely save money. Here is a back-of-the-envelope calculation. There are some 285,000 people on dialysis in the US. Transplants are cheaper than dialysis by something like $10-$25,000 per year. About a quarter of those on dialysis are on the waiting list but perhaps as many as half could benefit from a transplant (fewer people are put on the list because of the shortage.) Let's take the lower numbers. Assume that a quarter of the patients on dialysis could benefit from a transplant and that cost savings are $10,000 a year for five years. Then ending the shortage would save 3.5 billion dollars. Note again that this is a lower estimate. How much would it cost to end the shortage? No one knows for certain but I think a $5000 gift to the estates of organ donors would increase supply enough to greatly alleviate the shortage - that would involve doubling the supply to 12,000 for a paltry cost of $60 million. If this is not enough - raise the gift - anyway you cut it, the savings from dialysis exceed the costs of compensating donors by a large margin.

"We should in fact count the value of the lives saved. If we can save 6000 lives and value each life at 3 million dollars (a lower value than what the US government typically uses in its calculations) then that is a further gain of 18 billion dollars."

Tabarrok's posting discusses legislation and practical steps being taken to address the shortage.

Corruption Transparency International has released

Corruption

Transparency International has released the latest version of its corruption perceptions index (CPI). The countries of the world are graded from one to ten (10 is a "clean" rating). Finland and Iceland are perceived to be the least corrupt (9.7 and 9.6) while Nigeria and Bangladesh are perceived to be the most corrupt (1.4 and 1.3). The U.S. and Ireland are ranked 18th. The index is provided here: "Transparency International Corruption Perceptions Index 2003". I learned about this from Tyler Cowen at Marginal Revolution

"The CPI 2003, published today, is a poll of polls, reflecting the perceptions of business people, academics and risk analysts, both resident and non-resident. First launched in 1995, this year's CPI draws on 17 surveys from 13 independent institutions. A rolling survey of polls taken between 2001 and 2003, the CPI 2003 includes only those countries that feature in at least three surveys. "It is important to emphasise that the CPI, even with 133 countries, is only a snapshot," said Peter Eigen. "There is not sufficient data on other countries, many of which are likely to be very corrupt."

Alaska grizzly bear attack

Outdoor writer and bear expert Timothy Treadwell and his girlfriend were killed and eaten by a grizzly bear in Alaska's Katmai National Park.  Apparently the attack was accidentally tape recorded. 

Craig Medred, the Anchorage Daily News outdoor writer covered the story in yesterday's issue ("Wildlife author killed, eaten by bears he loved"):

The Economic Plan for Iraq

The Economic Plan for Iraq

Jeff Madrick reports on the economic blueprint for Iraq, here in the New York Times: "An Extreme Plan for Iraq" (This link will go dead before too long).

"IRAQ'S new finance minister, Kamel al-Gailani, announced a sweeping liberalization of his country's economy at the annual meeting of the World Bank and International Monetary Fund in Dubai early last week. Amid the controversy over President Bush's request for $87 billion to finance the American presence in Iraq, the new laws hardly attracted attention in the United States.

"But by almost any mainstream economist's standard, the plan, already approved by L. Paul Bremer III, the American in charge of the Coalition Provisional Authority, is extreme — in fact, stunning. It would immediately make Iraq's economy one of the most open to trade and capital flows in the world, and put it among the lowest taxed in the world, rich or poor. Is this Middle Eastern nation, racked by war, ready for such severe experimentation? Moreover, the radical laws have been adopted without a democratic Iraqi government to discuss or approve them..."

Job loss point and counterpoint

Job loss point and counterpoint

Louis Uchitelle reports (in the New York Times) on efforts to count the jobs lost in the U.S. as manufacturing activity is "outsourced" overseas - but Brad Delong points out fundamental flaws in the exercise. Uchitelle: "A Missing Statistic: U.S. Jobs That Went Overseas" This link will go dead before too long, but DeLong quotes essential bits from it here, in his response: "Not the Right Number to Report".

Counting jobs Daniel Gross at

Counting jobs

Daniel Gross at Slate explains how the federal government counts jobs. Which is better, the "establishment survey" or the "household survey?" The answer has political implications. "Antidisestablishmentarianism. The partisan duel over the latest Bush trick to embellish economic data.". Brad DeLong on the same topic, here: "Allan Meltzer Long Ago Stopped Being Careful".

The Alaska Permanent Fund distribution

The Alaska Permanent Fund distribution

One of the more unusual events in U.S. public finance begins next week, when the Alaska permanent Fund begins its annual distribution. For years Alaska has been stashing away a large part of its oil income in the Permanent Fund. The fund currently has a about $25.5 billion in assets. Each year the fund distributions a share of its earnings to every Alaskan.

The Anchorage Daily News carries a story on this year's distribution by Mary Pemberton, here: "Alaskans prepare to spend annual windfall".

"...Beginning Wednesday, a total of $663.2 million will be handed out to an estimated 598,813 Alaskans. Dividend checks this year are hundreds of dollars less than $1,540.76 paid last year and well below the record high of $1,963.86 in 2000.

"In the days leading up to the disbursement, Alaskans are inundated with offers from businesses competing for the dividend money.

"Pawn shops offer to cash checks in the hope that recipients will drop their entire dividend in their stores. Huge blinking signs advertise PFD specials at car dealerships in Anchorage. Travel companies offer special tours to Mexico and Europe. A clothing store is running a newspaper ad of a buxom blond in black fishnet lingerie encouraging readers to have "some P.F.D. fun."

"The amount of the dividend is calculated on a five-year average of Permanent Fund investment income derived from stocks, bonds and real estate investments. The sharp decrease in the last few years was caused by the hit technology stocks took in the stock market in the late 1990s..."

The Permanent Fund's web page is here: "Alaska Permanent Fund Corporation".

Many Alaskan's think Iraq needs a permanent fund of its own. Former Permanent Fund Executive Director Dave Rose, maintains a web page devoted to this idea, here: The Iraqi Permanent Fund. Several Alaskan papers carried an Associated Press story on this last summer. Here's the Juneau Empire: "Alaskans propose permanent fund to help Iraqis".

More Modigliani obituaries The Nobel

More Modigliani obituaries

The Nobel winning economist Franco Modigliani died on September 25. I posted links to several obituaries, here: "Nobel prize winning economist Franco Modigliani dies". Here are a couple more. Richard Adams at The Guardian: "Franco Modigliani". Francesco Giavazzi at The Independent, here: "Professor Franco Modigliani". Pierleone Ottolenghi
at Open Democracy, here: "In memory of Franco Modigliani". (I learned about this from Marginal Revolution. The Economist carries an obituary here, "An adventurous economist", but its part of the premium content.

The market for human body

The market for human body parts

Tyler Cowen posts on the market in human organs, providing information on what is going on, and discussing the pros and cons of such a market, here: "Organ trafficking".

First agriculture, then manufacturing What's

First agriculture, then manufacturing

What's really going on with all those manufacturing jobs? Alex Tabarrok at Marginal Revolution points to the revolution in productivity: "Manufacturing fallacies".

This looks good: Stephen Bainbridge,

This looks good:

Stephen Bainbridge, at ProfessorBainbridge.com points to Order Without Law. How Neighbors Settle Disputes by Robert Ellickson in this post: "Briefly noted"About the book he says,"Robert Ellickson famously studied the way in which residents of Shasta County, California resolved disputes over trespassing cattle. Robert C. Ellickson, Order Without Law: How Neighbors Settle Disputes (1991). Ellickson found that that “large segments of social life are located and shaped beyond the reach of law.” (4) Most disputes are resolved without resort to law."

The Amazon web page, with table of contents and long extracts is here: Order Without Law. How Neighbors Settle Disputes. This is a Harvard University Press book, the Harvard page on the book says this about it:

"In Order without Law Robert C. Ellickson shows that law is far less important than is generally thought. He demonstrates that people largely govern themselves by means of informal rules-social norms-that develop without the aid of a state or other central coordinator. Integrating the latest scholarship in law, economics, sociology, game theory, and anthropology, Ellickson investigates the uncharted world within which order is successfully achieved without law.

The springboard for Ellickson's theory of norms is his close investigation of a variety of disputes arising from the damage created by escaped cattle in Shasta County, California. In "The Problem of Social Cost" --the most frequently cited article on law--economist Ronald H. Cease depicts farmers and ranchers as bargaining in the shadow of the law while resolving cattle-trespass disputes. Ellickson's field study of this problem refutes many of the behavioral assumptions that underlie Coase's vision, and will add realism to future efforts to apply economic analysis to law.

Drawing examples from a wide variety of social contexts, including whaling grounds, photocopying centers, and landlord-tenant relations, Ellickson explores the interaction between informal and legal rules and the usual domains in which these competing systems are employed. Order without Law firmly grounds its analysis in real-world events, while building a broad theory of how people cooperate to mutual advantage."

The Harvard site also provides the table of contents:

Introduction

Part I. Shasta County

1. Shasta County and Its Cattle Industry
2. The Politics of Cattle Trespass
3. The Resolution of Cattle-Trespass Disputes
4. Who Pays for Boundary Fences?
5. Disputes Arising out of Highway Collisions Involving Livestock
6. The Effects of Closed-Range Ordinances

Part II. A Theory of Norms

7. The System of Social Control

8. Shortcomings of Current Theories of Social Control
9. The Puzzle of Cooperation
10. A Hypothesis of Welfare-Maximizing Norms
11. Substantive Norms: Of Bees, Cattle, and Whales
12. Remedial Norms: Of Carrots and Sticks
13. Procedural and Constitutive Norms: Of Gossip, Ritual, and Hero Worship
14. Controller-Selecting Norms: Of Contracts, Custom, and Photocopies

Part III. The Future of Norms

15. Testing the Content of Norms
16. Conclusions and Implications

Bryan Caplan at George Mason University reviewed the book, here: "Robert C. Ellickson, Order Without Law: How Neighbors Settle Disputes (Cambridge, Mass: Harvard University Press, 1991).".

"...After studying dispute resolution among ranchers and farmers in Shasta County, California, Ellickson came to realize that most people find the costs of learning about the law (judge-made or statutory) and submitting to formal resolution procedures to be so high that it is easier to fall back on common-sense norms. He finds that all three of the functions of law - dispute resolution, rule formation, and enforcement - get supplied by means of these informal norms. Ellickson derives this observation about the importance of informal dispute resolution from "law and society" scholars, but firmly rejects their characteristic disinterest in economic analysis. The frequent use of informal rules is in fact an implication of the Coase Theorem, though one that Coase himself did not recognize. Says Ellickson: "Coase overstates the influence of law. His error lies in his implicit assumption that people can effortlessly learn and enforce their inital legal entitlements, and that they confront transaction costs only when they attempt to bargain from their legal starting positions. In a world of costly information, however, one cannot assume that people will both know and honor law." (p.281) Among law-and-economics scholars, the usual debate is whether transaction costs under bilateral monopoly are high or low: if low, they think that the government should let actors solve problems by bargaining; if high, the government should solve the problems by picking proper laws. What Ellickson points out is that if the transaction costs of learning the law are high, then there is little use for governmental re-molding of the law, since actors will ignore it anyway. Hence, high transaction costs (of learning and using the law) becomes an argument for bargaining rather than governmental solutions to property rights conflict."

(This review is one of a series of short essays posted to Caplan's web page, many of which look promising. Caplan's essays are here: "Armchair Economics")

Dan Ryan has some reading notes on Ellickson's book for his Mills College sociology course, here: "Ellickson Order Without Law a few reading notes...", here: "Chapter 6". and here: "Chapter 7". Herbert Jacob reviews the book at this Barnes and Nobel web site: Order without Law: How Neighbors Settle Disputes.

"Robert Ellickson has written a fascinating and important book that addresses concerns of political scientists, anthropolo- gists, legal scholars, economists, and sociologists. ORDER WITHOUT LAW analyzes the ways in which cattlemen and their neighbors avoid and settle disputes; it also develops a theoretical framework which seeks to clarify the circumstances under which various kinds of norms will be invoked by disputants.

Ellickson did his research in an unlikely site: Shasta County, California where he found cattlemen living under both open and closed range legal rules. This provided Ellickson a place to examine disputes involving ranchers about liability and fence-tending, for errant cattle have long created problems in locales where ranching is a major activity. Disputes of this sort are also the basis of much theorizing by Ronald Coase and his followers. Ellickson began his research seeking to find how the law affected ranchers' perception of liability for cattle trespass. Much to his surprise, the law plays almost no role in disputes about cattle that wander into neighboring ranches or residential plots nor is it prominent in the ways in which neighbors divide the costs of fence building and maintenance.

These matters, Ellickson discovered, are governed by work-a-day norms of neighborliness. The residents of Shasta County keep an informal ledger of debits and credits. When cattle cause damage, their owners are expected to provide an appropriate remedy -- moving them quickly and making good the damages. Small wrongs are simply entered into the ranchers' mental ledger for repayment in kind at some later time. When fences need to be built or maintained, ranchers reach informal, oral agreements which involve payment in kind rather a contract that compensates in cash for materials or labor provided by a neighbor. Only when cars and trucks hit cattle are more formal processes invoked. Ellickson attributes the use of law in these cases to the involvement of insurance companies, of strangers, and occasionally of large stakes. However, accident cases producing only minor damage are mostly settled informally without litigation.

Why is law so little used where so much law is on the books? Ellickson finds the answer in the host of informal norms governing the lives of ranchers and their neighbors in Shasta County. They employ informal norms, rather than the law, because they constitute a close knit group with many ties to one another. Their mutual obligations and the availability of informal sanctions to enforce them keep almost all follows: residents within the bounds of civility. Being a good neighbor is paramount because these men depend upon one another in myriad ways. Ellickson turns to both a law and economics approach and particularly to game theory to elaborate his theory. People, he argues, seek to minimize "deadweight costs" and transaction costs. Ellickson defines deadweight costs as those greater than the optimal, cooperative solution in a two-person game. He then argues that in almost every instance the employment of informal norms reaches such an outcome..."

This is only about half the review. The text on the Barnes and Nobel site was copied from somewhere else, and lacks paragraphs. Fro readability, I've added paragraph breaks that seem appropriate to this quotation.

Free trade misconceptions Daniel Drezer

Free trade misconceptions

Daniel Drezer points to an article on the benefits and costs of free trade in the November/December issue of Foreign Policy. Drezner's post is here: "Your weekend reading". The article, by Arvind Panagariya, professor of economics and codirector of the Center for International Economics at the University of Maryland, College Park, is available at the magazine's website, here: "Think Again: International Trade ". Foreign Policy as an article devoted to exposing misconceptions and "myths" about a particular topic in each issue (using a question and answer format). this is one of those.

"Why have disagreements between rich and poor nations stalled the global trading system? Because vapid debates over “fair trade” obscure some inconvenient facts: First, notwithstanding their demands for equity, poor countries are more protectionist than advanced economies. Second, if rich nations cut their self-defeating agricultural subsidies, their own publics would benefit, but consumers in many poor countries would not. Finally, despite criticisms to the contrary, the WTO can help promote economic development in low-income countries—but only if rich nations let the global body do its job."

How long does it take

How long does it take a city to recover from a devastating earthquake?

Virginia Postrel posts today on assessments of the Japanese recovery from the Kobe earthquake of 1995 (here: "Earthquake Preparedness Cont'd").

This was a big disaster. Gary Becker (one of her linkees) described it in an October 2001 Business Week column as:

"...The enormous earthquake that hit Kobe, Japan, in 1995...was the most severe quake to strike a modern city. It destroyed more than 100,000 buildings, badly damaged many others, and left hundreds of thousands homeless. Over 6,000 persons lost their lives--..."

Becker goes on to cite an academic study showing that "that the city had almost fully recovered after a little over a year. Most shops reopened rather quickly, and investments boomed." Becker's column is here: "Don't Be Surprised If the Recovery Is Rapid". Becker was writing about five weeks after 9-11 and his theme was that New York was likely to recover quickly.

Postrel also links to a 1998 article she commissioned (as editor) for Reason magazine. This article, by Michael J. Oakes, takes a much less optimistic view of the speed of the recovery (as indicated by his title: "Shaky Recovery. Three years after a devastating earthquake, Kobe is still in ruins. Why can't Japan cope with disasters?").

Oakes' theme is the limitations of public administration and plannng in the face of disaster, and the lessons he can draw from this for administratively guided economies such as Japan's.

"...Confusion and disruption are the rule in an earthquake and its aftermath. This is to be expected when solid earth turns to shifting mass, when streets split open and buildings fall under their own weight. But such a crisis tests far more than the faith of victims and the integrity of existing structures. It also tests the limits of how social, political, and economic systems--and the people operating within those systems--adapt, recover, and rebound from dramatically changed circumstances. An earthquake is a special case, one that brings to light usually subterranean organizing principles even as it brings down buildings and roadways. In this sense, the story of how Kobe responded (and continues to respond) to the quake is about much more than a city righting itself after a natural disaster. It is about how underlying rules and customs either facilitate or retard not just recovery from a natural disaster, but the ability to adapt and develop over time.

"This is, then, a frustrating story. It is one that raises serious questions about Japan's much-vaunted devotion to top-down order and stability and its implementation of a "plan-rational" at almost every level of society. Over the past two decades and as the first of the great Asian tigers, Japan has been hailed for the success of its "administrative guidance," its ability to implement elite economic planning that somehow managed to steer clear both of the "excesses" of unbridled capitalism and the poverty of a command economy. As its economy went into recession in the '90s, enthusiasm for Japanese-style economic management and planning understandably waned. A close look at the Kobe earthquake and the city's slow recovery efforts suggests reasons for the larger problems in Japan's economy..."

So read it for its insights into the administrative response to urban disaster, or for its larger lessons. Postrel's post also has a selection from an email sent to her by Brady Cusick, a Ph.D. candidate at Boston University, who is studying the response by volunteers to the disaster.

The Nobel prize This year's

The Nobel prize

This year's Nobel prize for literature was awarded to John M. Coetzee of the University of Chicago. The other Nobel prize award announcements are coming up, including the announcement of the Nobel prize in economics. Actually, the economists get the "The Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel" which is something different. See "Nobel by association: beautiful mind, non-existent prize" by Yves Gringas. I linked to this about this time last year, here: "When is a Nobel Prize not a Nobel Prize?".

"Marginal Revolution" posts I'm finding

"Marginal Revolution" posts

I'm finding myself linking to posts over at the new blog Marginal Revolution a lot these days. But here are two new ones:

Tyler Cowen links to a Stephen Landsburg column at Slate highlighting research that suggests that couples who have girls are more likely to divorce. Apparently the the more daughters, the more likely. Moreover, there is evidence that the effect is cross-cultural. For more, I'll refer you to Landsburg, by way of Cowen's posting, here: "Do girls cause divorce?"

Cowen also points out that the time available for talking in meetings is a common property resource and suggests a way to increase efficency through privatization, here: "Shutting up talkers". Cowen also links, in this post, to a short, and startling, essay by one Robin Hanson on "Fourteen Wild Ideas Five Of Which Are True!". Number two is:

"If medicine were taxed so much that people only bought half as much, they would be just as healthy.

In the 1970s, the RAND Health Insurance Experiment randomly assigned 5000 adults to free or full-price health care over 3-5 years. Free care folks got more eyeglasses and teeth filled, and spent ~30% more, but were otherwise no healthier. This result is consistent with typical time-series and cross-sectional analyses. I'm willing to extrapolate from this 30% change to a 50% cut. (More here.)"

The impact of globalization on

The impact of globalization on world cultures

Tyler Cowen has written a book on this, called Creative Destruction: How Globalization Is Changing the World’s Cultures. There is a review by Paul Cantor, here: "Creative Destruction...". In a posting to the Volokh Conspiracy blog, Cowen says "...Paul summarizes the book better than I ever could..." From the review:

"...Cowen makes his most valuable contribution in Creative Destruction--articulating the difference between two kinds of diversity, what he calls “diversity within society” and "diversity across societies" (pp. 14-15). As he points out, these two developments are frequently at odds: "When one society trades a new artwork to another society, diversity within society goes up (consumers have greater choice), but diversity across the two societies goes down (the two societies become more alike)". The question is not about more or less diversity per se, but rather what kind of diversity globalization will bring (15). When I objected to Australians watching Seinfeld in the outback, I was focusing on the diversity between the United States and Australia, but when I wanted to have Queensland mud crab served at the Outback Steakhouse in my hometown of Charlottesville, Virginia, I was focusing on the diversity within the United States. In the first case, I was speaking as a tourist; in the second as a consumer. And typically, as a tourist I wanted to decrease the diversity available within Australia in order to preserve my image of its difference, while as a consumer I wanted to increase the diversity available within the United States to broaden my own range of options at home..."

Corruption and growth in cities

Corruption and growth in cities

Rebecca Menes looks at the relationship between U.S. urban corruption and urban growth at the start of the 20th Century in this new National Bureau of Economic Research (NBER) working paper: "Corruption in Cities: Graft and Politics in American Cities at the Turn of the Twentieth Century." (NBER Working Paper No. w9990; Issued in September 2003).

This looks interesting, here's the abstract:

"The essay is an exploration of corruption as practiced by city politicians in the United States at the turn of the twentieth century. Corruption is generally considered to be bad for the performance of governments and for the growth and development of economies, but American cities grew rapidly and were, as far as tangible evidence suggests, relatively well governed. I propose the answer to this conundrum lies in the exact types of graft which were possible. Skimming from city contracts and manipulating local real estate markets encouraged politicians to pursue growth enhancing policies. Many of the most damaging forms of government interference - closing borders and pursuing input-substituting policies - are not possible in cities. Patronage politics made corruption more likely by insulating politicians from (some) voter wrath, but the ability of the tax base to depart the city provided some constraints on rent-extraction. The city Boss did not want to kill the goose that laid the golden eggs. The analysis of urban graft is based on contemporary reports, especially the very detailed reports in Shame of the Cities' by Lincoln Steffens. The analysis also answers other important questions raised by the experience of Progressive Era cities: Why did businessmen back reform? And why did machine politics rise, and fall, between 1890 and 1930?"

The NBER publications site is here: "NBER Publications".

Not all externalities matter Alex

Not all externalities matter

Alex Tabarrok reminds us in this post on auto safety inspections: "The Politician and the Mechanic Conspire to Rip Me Off".Revised

More tax cuts in the

More tax cuts in the pipeline?

Since the big tax cut bill last spring, the House has passed additional tax cuts "...that would add more than $500 billion to deficits over the next ten years..." reports Joel Friedman at the liberal Center on Budget and Policy Priorities: "More Fiscally Irresponsible Tax Cuts This Fall? New Corporate Tax Cuts And More Budget Gimmicks Loom On The Horizon"

"This analysis examines the status of congressional tax-cut legislation in the light of the deteriorating fiscal outlook. It finds that the House of Representatives has already approved additional tax cuts, beyond the tax-cut bill enacted in May, that would add more than $500 billion to deficits over the next ten years, and that further House tax cuts are in the pipeline. The analysis also finds that the Senate has been more cost-conscious and has increasingly moved to include “offsets” in its tax-cut bills. Some of these bills, however, would not yield a fiscally responsible outcome because they rely on budget gimmicks to make the costs of the tax cuts appear smaller than they will actually be over time. As a result of such gimmicks, the costs of the tax cuts in these Senate bills ultimately would exceed the savings from the offsets..."