Chocolate and Gold Coins

Tuesday, May 31, 2005

The Economics of Wine Tasting

This weekend, my family took a little trip to central Virginia to the home of some of our first presidents: Jefferson, Madison, and Monroe. That region is also a wine-producing region and several local wineries offer wine tasting.

Now wine tasting is an interesting game. Some of the better wineries charge for sampling their wine. Lesser ones offer it free. And truly awful ones probably don’t offer tasting at all. The question is: isn’t it risky to offer mediocre wine for free? The answer is: no. You feel obliged to buy something if someone gives you a freebee.

Coincidently, Bryan Caplan at Econlog blogged yesterday about exactly this phenomenon in “Don’t do me any favors:”

What do you do if someone you don't like tries to give you an expensive present? Homo economicus would happily take it: "It's not like I signed a contract!" But most people would at least think twice before accepting the gift.

Why is this? My best guess is that (a) Our natural psychological reaction to a favor is gratitude and a desire to reciprocate, and (b) We are rational enough to foresee our reaction and try to avert it. Broadly construed, refusing a gift is a selfish act, because you know that if you take this payment, you will pay it back, even though you don't have to.

He might have added that offering a gift in the expectation of a sale is a selfish act.

Two years ago, my family visited Napa valley and we went to the famous St. Supery winery. They charge for wine tasting. They are signaling that their wine is so good that, 1. You would pay to taste it, and 2. You would buy a bottle after tasting it even if you were under no obligation to buy.

Most wineries will offer the wine free. They figure that you will not pay to taste their wine because you never heard of their wine. And even if the wine is mediocre, if it isn’t downright awful, you will feel obliged to buy a bottle after sampling the product. The wine tasting game is really the same as the tipping game which I blogged about before. We visited a winery, sampled several wines, and got one bottle.

The interesting thing about wine tasting is that there are two factors in favor of the winery: one is that offering the product free makes one feel obliged to buy, and two, the product tend to impair judgment.

Monday, May 30, 2005

Aphorism of the Day

"No great discovery was ever made without a bold guess."

-by Isaac Newton (25 December 1642 – 20 March 1727). [via websophia.]

Sunday, May 29, 2005

Gambling on Real Estate

The WaPo had an article in yesterday’s paper about interest-only home loans:

More than a third of the mortgages written in the Washington area this year are a risky new kind of loan that lets borrowers pay back only the interest, delaying for years repayment of any loan principal. Economists warn that the new loans are essentially a gamble that home prices will continue to rise at a brisk pace, allowing the borrower to either sell the home at a profit or refinance before the principal payments come due.

The loans are attractive because their initial monthly payments are tantalizingly low -- about $1,367 a month for a $320,000 mortgage, compared with about $1,842 a month for a traditional 30-year, fixed-rate loan. If home prices fall, though, borrowers could lose big.

These loans have really caught on in the last five years. The article says that five years ago these loans only represented two percent of the metro D.C. market; now it’s more like one-third.

These loans make it possible for people to afford more expensive homes. If there are no more homes in the inner suburbs, then the net effect of these new loans is to drive demand to the right and the price of homes straight up. That’s good for people like me who already owned a home but it means that there is much more risk of a sudden housing market collapse.

These new loans mean more leverage. More leverage means a greater probability that a relatively small decline in housing prices will wipe out the homeowners’ savings and force them into bankruptcy. A large number of bankruptcies coupled with a large loss in homeowner equity would probably mean a big recession.

Is this 1929 again?

I have to wonder if the government should regulate the amount of risk people take. We outlaw gambling in most states. Other forms of speculation are like gambling. If one person gambles and loses, it’s his own problem. If one hundred million people gamble and lose it’s everybody’s problem. This is a fundamental problem of moral hazard. Society needs to make sure that others are not going to shift their risk onto society’s shoulders.

Maybe these new interest-only loans are just too risky for society.

Saturday, May 28, 2005

Academic Imperialism Part II

Yesterday I wrote this piece on Academic Imperialism. I asked Alex Tabarrok of Marginal Revolution his opinion on this subject:

I'm sorry to bother you but I do not have trackback and I wanted to point you to a piece I wrote called Academic Imperialism.

It relates to your post on the Dubner Effect. I believe that if Emily Oster's research is considered economics, this indicates that economists are laying claim to the subject of epidemiology. There is obviously overlap between epidemiology and economics but this research crosses the line into an area I call academic imperialism.

Prof. Tabarrok kindly wrote back. He said:


(I’m paraphrasing).

I have to admit, he has a point.

Then Emily Oster commented on my post in the comment section:

It's worth noting that the original research pointing to the sex-ratio hepatitis B connection is from the mid 1970s, and no one in epidemiology connected it to the missing women until this work.

That’s a very good point.

Then she wrote:

Also -- in terms of working with the epidemiologists -- I have spent a huge amount of time interacting with people in related fields about this paper. I think that's incredibly important when working across fields. And they have, by and large, not seemed threatened at all.

I wrote:

If you say that epidemilogists are not threatened by the encroachment of economists then maybe they are inferior people and economists should lay waste to their field. I hadn't considered that.

Btw, Emily, best of luck in your career. I'm sure you will do well.

I read over Emily Oster paper, which you can find here, and it is definitely quality research.

I have no doubt that econometricians can do epidemiology much better than epidemiologists could. Much of epidemiology is really health care economics. Epidemiologists are not sufficiently trained in econometrics to adequately estimate models in which the disease involves an element of human choice - e.g. the AIDS epidemic where risky behavior helps spread the virus.

Here’s the question: Should economists simply take over epidemiology simply because we can do it better? Is this like the free market where any firm can enter another market if they think the firms in that existing market have a poor technology?

The bottom line, I would rather have Emily Oster do an AIDS model than an epidemiologist.

Aphorism of the Day

"Conservative academics have long attacked "postmodernist" philosophies for questioning whether "truth" exists at all and claiming that what we take as "truths" are merely "narratives" woven around some ideological predisposition. Today's conservative activists have become the new postmodernists. They shift attention away from the truth or falsity of specific facts and allegations -- and move the discussion to the motives of the journalists and media organizations putting them forward. Just a modest number of failures can be used to discredit an entire enterprise."

-from Assault On the Media by E. J. Dionne Jr. in the Washington Post. [link via Crooked Timber.]

Yesterday I Nailed a 24 Karat Commie

Okay, that’s a bit of an exaggeration. Actually I helped catch a Communist Party politician in India in a half-truth, and now he is feeling a little blogospheric heat. Of course he’s from India and heat doesn’t bother him much.

The story is well chronicled in three posts on Amit Varma’s India Uncut: post 1, post 2, and post 3.

Let me summarize. In Amit’s post 1, he writes:

Akshaya Mukul of the Times of India reports that one of Nepal's Maoist chiefs, Baburam Bhattarai, is currently a guest of the Indian state, and recently had a meeting with Prakash Karat, the communist leader.

The reason why that is news in India is because Baburam Bhattarai is a suspected terrorist and is there is an Interpol red corner notice against Bhattarai for his arrest. Recently, the King of Nepal suspended democracy in Nepal in large part because of the struggle Nepal has had fighting the Maoist rebels that Bhattarai helps lead. He’s not exactly the kind of guy you want to have over for chai and biscuits.

Well, the next day, news comes out that Karat is denying the meeting (kind of). Here’s an excerpt from Amit’s post 2.

Yesterday I'd linked to a report by the Times of India in which they'd stated that Nepal's Maoist leader, Baburam Bhattarai, had recently met Prakash Karat, the communist leader. Well, Karat has denied today that any such meeting took place.

ToI had reported: "When contacted, Karat confirmed the meeting, although he did not share details."

Karat has said in a statement: "No such meeting was held."

One of them is lying. And I'd love for the truth to be out, and for the liar, whoever it is, to be held accountable. I hope the matter does not fizzle out here, and that there is an aftermath.

Amit is a friend of mine, so if he wants to know, then naturally I want to know. So I read the pieces. The Times of India piece says:

One of Nepal's top Maoist leaders, Baburam Bhattarai, is being quietly chaperoned around here by Indian intelligence agencies, which recently organised a meeting between him and CPM general secretary Prakash Karat.

Here’s Karat “denial” from the Hindu:

The report that "I have met a Maoist leader from Nepal in a meeting arranged by the Indian security agencies is untrue," Karat said in a statement here.

"No such meeting was held," he said.

Okay, what strikes you as odd about this denial? What’s missing? He could have just said, “I never met with Bhattarai.” He didn’t say this. Weasel word alert!

When politicians don’t want to fess up to something, they use the weasel words. All politicians of every persuasion do this. Think of Bill Clinton and Monica Lewinsky. I remember Clinton staring angrily into the camera and saying “I never had sex with that woman”… while he was pointing at Helen Thomas. You get the idea.

A wrote a letter to Amit and he posted it on India Uncut (thanks Amit, I’m always honored to be mentioned by the great blogger of India). Here’s the letter:

Actually this is what the Hindu wrote:

The report that "I have met a Maoist leader from Nepal in a meeting arranged by the Indian security agencies is untrue," Karat said in a statement here.

"No such meeting was held," he said.

This is the key phrase: "in a meeting arranged by the Indian security agencies".

Why did he have to add this phrase? [Probably] because he did meet with the Maoist leader but the meeting was arranged by someone else, not the Indian security agencies. The ToI got that part wrong. Karat is using this mistake to, in effect, deny any meeting.

Politicians are like lawyers; they are very sly with words.

Amit added: “Indeed. So did Karat meet Bhattarai or not? Why is nobody in MSM (yet) asking that question?”

Well, the Times of India may be reading India Uncut. In fact, I’m sure they do. India Uncut is effectively the Instapundit of India.

Here is Amit’s post 3:

The Times of India has now hit back:

[I]t was Karat himself who had confirmed the meeting to TOI. A careful reading of his statement would also indicate that he is only denying the role of intelligence agencies in arranging the meeting, not the event itself.

This was exactly in line with the stand that Bhattarai took. According to agency reports from Kathmandu, the Maoist leader has denied that Indian agencies organised the meeting but didn't deny the meeting itself. While they seem to be acting in concert, sources affirmed that the agencies, indeed, brokered the meeting.


Their disclaimers now are easy to understand. There is an Interpol red corner notice against Bhattarai and he is expected to be arrested and turned in by Indian security agencies. If despite that, he is moving around here, and that too boldly enough to meet the boss of a top government ally, it is reasonable to believe that the agencies were winking at it all, if not colluding with Bhattarai.

Remarkable stuff.

Here’s is Amit’s excellent summary:

Now, here's what I find revealing: both Karat and Bhattarai did not deny the meeting itself; but they wanted people to believe that they did. Now, if they really didn't meet, then the ToI's riposte should lead to an umambiguous denial of the meeting from at least Karat, leaving no scope for confusion. If that is not forthcoming, then it will be safe to surmise that the meeting did take place. And it will also mean that Karat did not have the honesty and integrity to accept that he met Bhattarai, and to say, "So what? I can meet whoever I want." Courage of conviction, anyone?

Karat has two choices: dig himself a bigger hole by a flat-out denial, or clam up and look like a weasel. I expect him to do the latter. But even rank-and-file communists hate weasels.

This is a classic example of how blogs are changing the world of politics and holding politicians accountable. If Amit had asked this:

“One of them is lying. And I'd love for the truth to be out, and for the liar, whoever it is, to be held accountable. I hope the matter does not fizzle out here, and that there is an aftermath.”

ten years ago, no one would have cared. Today it gets a response. That’s blogger-power. That’s awesome.

Friday, May 27, 2005

Aphorism of the Day

"All humans realize they are loved when witnessing the dawn; early morning is the triumph of good over evil. Absolved by light we decide to go on."

- Rufus Wainwright (born 22 July 1973), Canadian-American singer-songwriter.

I got this gem from a Starbucks coffee cup. I felt good when I saw this, but I always feel good with a cuppa.

Don't Let Her Get Away Underware

This is silly (but a nicely done spoof). And Marginal Revolution fell for it. From the same people who brought you Autoblogger, (I'm guessing).

But really, wouldn't make more sense to have "Don't let him get away underware?"

Academic Imperialism

Perhaps you thought the age of imperialism is dead. The idea that one people, who consider themselves superior, could simply take over the territory of the inferior people – and this is perfectly justifiable by might makes right – belongs to an earlier, more barbaric, age. Not so. Imperialism is alive and well in academia. And economists are probably the biggest academic imperialists.

Economists have already laid waste to the entire subject area of sociology. If there ever really was a serious subject area of criminology, economists have plundered that as well. Politcal science is now economists’ social choice theory. And now economics is eyeing epidemiology. And maybe they want to take over the field of statistics as well.

There is an interesting article about a Harvard economics graduate student named Emily Oster in Slate, (via Marginal Revolution). The Slate article was written by the Freakonomics pair: Dubner and Levitt, (probably just by Stephen Dubner). The beginning of the article is interesting:

What is economics, anyway? It's not so much a subject matter as a sort of tool kit—one that, when set loose on a thicket of information, can determine the effect of any given factor. "The economy" is the thicket that concerns jobs and real estate and banking and investment. But the economist's tool kit can just as easily be put to more creative use.

Translation: what you are about to read is not what you would ordinarily consider to be economics, but because it was produced using economists’ superior techniques, it’s really good science. That paragraph screams: “Imperialism alert.”

The article explains the Emily Oster wanted to explain a mystery: why were so many women “missing” in Asia. There are more men than women. Economist and Nobel laureate Amartya Sen accused the Asian societies of killing these girls off by either neglect or selective abortion or even infanticide. This is a very weighty charge.

Emily Oster had another idea. Maybe these girls died because of an epidemic of Hepatitis B. The curious property of this disease, she discovered, was that it tended to kill off female fetuses more than male fetuses. By looking at the prevalence of Hepatitis B vaccine in an area, she was able to explain about half of these missing women.

Now I would not deny that this is good research. But is this economics? The first paragraph of Dubner’s article suggests that it is economics because it uses economic tools (econometrics). But statisticians and epidemiologists would call those same tools regression analysis. Economists didn’t invent regression analysis; we only improved it in areas that cover economics because the models become more complex when people make choices. But this is the point: people are not making choices in Oster’s model.

If I were a poohbah in the AMA, I would be raising a ruckus that economists are passing epidemiology (which is the study of diseases – medicine’s turf) off as economics. I would say, “If you want to call Emily Oster a good epidemiologist, fine, and she can submit her paper to the JAMA. But don’t call this economics. This is our turf, stay off!”

Well, maybe I’d be a little less blunt, and a bit more diplomatic, but you get the idea.

Thursday, May 26, 2005

Aphorism of the Day

"It is not permissible to know everything."

-Horace (Quintus Horatius Flaccus), (December 8, 65 BC - November 27, 8 BC). [via websophia.]

One has to be an adult to fully understand this.

Some Thoughts on Mass Transit

I came across an interesting blog the other day: Political Calculations (via Gongol). I suppose I’ve read a few posts on it before, but I never visited the blog to see what it had. It’s not exactly blog-candy. In fact, a lot of the posts are often way too long. But there are a lot of very good graphs and pictures there.

One post that caught my eye was this post on linear cities and mass transit. Washington D.C. has a mass transit system WMATA. I don’t use it because it isn’t convenient. It’s a mile from my home, it doesn’t go anywhere near my son’s school, and it takes a transfer and a shuttle for me to get to work. This is the fundamental problem with mass transportation, it is one-dimensional and it cannot very efficiently cover an ordinary two-dimensional city. If cities were arranged in line along the mass transit system, then maybe people could rely only on mass transit. Here’s Political Calculations’ explanation of a wild idea by an Italian architect for the Arizona desert:

So, to make public transportation viable as the primary means of transport for an entire city, cities themselves need to be designed to closely follow a single transportation corridor. This is where the concept of Solare: A Lean Linear City comes into play. Born in the mind of Paolo Soleri, the leading architect behind some very ambitious urban reconsiderations, including the Arcosanti (unfortunately this website is defunct) project near Cordes Junction in central Arizona, SOLARE has been conceived as a "continuous urban ribbon" especially designed for China. Soleri's linear city concept consists of:

Two main parallel structures of thirty or more stories extending for kilometers to hundreds of kilometers.... Each [urban] module can accommodate a population of about 1500 people and the spaces for productive, commercial, institutional, cultural, recreational, and health activities.

The fundamental economic problem associated with linear cities and mass transit in general is that it makes the land near the mass transit very expensive. A real estate agent that I know told me that there is a 20 to 30 percent premium on homes that are right on a mass transit line. This means that the benefits of mass transit don’t go to the users, they go to whoever was lucky enough to own the land that was adjacent to the mass transit line when the line was announced. Forcing people to live near the mass transit line will mean forcing people to pay too much for their housing.

But here’s another idea: should we really count the mile walk to the metro station as part of the commute? We all need exercise and a mile walk to and from the metro station would be an easy way to fit some exercise in. I might consider it if my son’s school were anywhere close to a metro line.

Wednesday, May 25, 2005

Aphorism of the Day

"If you can’t explain it simply, you don’t understand it well enough."

-by Albert Einstein (March 14, 1879 – April 18, 1955). [from websophia.]

Why Are Indians Sports Underachievers?

India has a population of over one billion people but India usually comes up empty when it comes to sports. In the Olympics, no Indian has ever won an individual gold medal and it has been decades since India won a team gold medal. In soccer, India regularly loses to some country no one ever heard of. In tennis, India was all-abuzz that Sania Mirza won a single round in the Australian Open. In cricket, India has produced some legendary sportsmen (Tendulkar, Dravid, Kumble, Gavaskar, Kapil Dev), but they are more likely to lose to puny Zimbabwe than to win against small but mighty Australia. Why is this?

In the spirit of Tyler Cowen’s Marginal Revolution, I will outline some possibilities:
1. All of the people who settled in India thousands of years ago were short and un-athletic.
2. The people who settled India were great athletes at one time but years of marrying cousins damaged the gene pool.
3. Indians eat a poor diet, low in protein.
4. Indians have poor footwear. This damages their feet.
5. Indians really are good at one sport. That’s why there’s one billion of them, (duh).
6. The Indian government runs sports in India. The Indian government makes a mess of everything it touches.
7. Indians are not that into sports. If software engineering were an Olympic event, Indians would kick some serious butt (metaphorically speaking).
8. Indians are not that into sports other than cricket. Cricket supremacy in Indian culture robs all other sports of promising athletes.
That’s enough.

Now for some comments:
1. This is absurd. It might explain why Andaman Islanders are sports underachievers but not a region the size of India.
2. Not everyone in India marries his or her cousin. Maybe this practice should be discouraged, nevertheless.
3. Lots of Indians eat meat and diet is not an issue for the large Indian middle class. Vegetarians can become excellent athletes.
4. This may have been true 50 years ago. Today the middle class can afford excellent footwear.
5. Yes, but I wasn’t talking about that.
6. This might explain the Olympic failure, but not tennis and cricket.
7. Maybe there’s some truth here, but Indians really like cricket.
8. Definitely there is some truth here. But it begs the question: why are Indians cricket underachievers? That looks like another post.

E-Mail Transfer Payments to Stop Spam

Richard Posner of the Becker-Posner Blog complains about e-mail spam. He writes:

Spam imposes costs (without offsetting benefits) of two kinds. First, most of it is of no interest whatsoever to recipients and some of it is downright offensive; hence receipt imposes a cost. … Second, the cost of filtering out spam (the demand for such filtering being further evidence that spam imposes net costs on most of the people who receive it) to the computer industry, and of “binning” in in hard drives and servers, is already in the billions of dollars a year, for which the spammers don’t pay.

The always-interesting Half Sigma comments about it and links to a previous post he made on the same subject.

I have a simple solution to the spam problem. The e-mail providers should simply charge the e-mail user a fee – maybe 25 cents – for each e-mail sent. The money would not go to the e-mail service or the government (leave them out of this) but to the recipient. If you send as many e-mails as you receive, it evens out, and e-mail is still free. If you receive tons of unsolicited e-mail, you are compensated for this bother. If you are a spammer, it becomes very costly to do business.

The big e-mail providers can easily switch to this kind of service overnight by asking the users to set up a money account when they open an e-mail account. They might ask for a one-time set-up fee of $10, which would pay for 40 e-mails. People like me would still have $10 in their accounts because we receive as much mail as we send. And if you discontinue service, the provider refunds your money.

Now suppose that you had to pay 25 cents to leave a comment on a blog. It would certainly cut down the number of comments, but it might improve the quality. I might actually comment more on the blogs that I like as a simple way of putting a coin in the hat. But I doubt anyone would ever comment on my blog.

Tuesday, May 24, 2005

Aphorism of the Day

"He who feeds the dog, owns the dog."

So if you don't want to lose your rights, watch out what you ask for.

Are Hybrids the Car of the Future?

At Randall Parker’s Futurepundit, [link via Instapundit], there is an interesting discussion of the future of hybrid cars. I wrote about how I did not like the subsidies given to hybrid cars before, but I think that I would test drive a hybrid if I were in the market for a new car. Hybrids look like nice technology.

Futurepundit links to an interesting Christian Science Monitor article on hybrids. What I find curious is that articles on hybrids always emphasize the fuel economy, but I think the biggest selling point of a hybrid is the acceleration. From what I hear, these hybrids can really get up and go when you need to. For city driving, the ability to beat the car in the lane next to you is all-important. This alone justifies the $4000 to $5000 premium you would have to pay to get a hybrid over an ordinary car.

Another very intesting issue associated with hybrids is the possibility using the power grid for some of the hybrid’s electric power. The cost of off-peak electricity is at least one-sixth the cost of generating electricity with a gasoline-powered engine. Current hybrids don’t exploit this potential, but they may do so soon.

Futurepundit talks a bit about the rebound effect: the tendency for better fuel economy to lead to more miles driven. The economics of this could not be clearer: better fuel economy is never a factor in how many miles you drive. The opportunity cost of driving (your time behind the wheel) is much more valuable (at least by a factor of ten) than the fuel being consumed. What you might see is that people who decide to commute longer distances might decide that it suddenly is more cost effective to switch to a hybrid. Here, cause and effect are going the other way: the decision to drive more leads to buying a hybrid. Of course, if you just look at data, you might not tell the causation from correlation; econometricians run into this issue everywhere.

The fuel savings associated with hybrids might be disappointing for another reason: hybrid SUVs. People might decide that they can afford a gas-guzzler if it is a hybrid. This is the classic diet soda with your candy bar.

Like most new technologies, the hybrid is on a learning curve. The cost of these vehicles will go down over time and they will probably dominate the auto scene in ten years. But it is always difficult to predict the future: it could be that the learning curve for hybrids has already flattened out. As Paul Samuelson said about predicting: “If you want to predict the future, predict frequently.”

A Meat Substitute I Will Never Eat

Many years ago, I became vegetarian. I don’t any meat. In fact, I don’t eat anything that looks too much like meat. Curiously, I feel a strong sense of guilt and revulsion if I see a product that resembles meat too much.

So from Marginal Revolution’s markets in everything comes the world's worst meat substitute, (warning, clicking on the link leads to a very disturbing website). I dread going to a party where a guest says: “Oh yeah I tried some Hufu. It wasn’t too bad. I wonder what the real thing tastes like.”


It occurred to me that this has to be a pure fraud. No one could possible product-test this thing. No one could ever say: "It doesn't taste anything like the real thing." Like Tyler said: "I believe this to be tofu plus a clever marketing idea."

Monday, May 23, 2005

Aphorism of the Day

On the true meaning of Star Wars:

"Aren't they [the Jedi Council] a kind of out-of-control Supreme Court, not even requiring Senate approval (with or without filibuster), and heavily armed at that? As I understand it, they vote each other into the office, have license to kill, and seek to control galactic affairs. Talk about unaccountable power used toward secret and mysterious ends."

-by Tyler Cowen of Marginal Revolution.

Markets in Everything: Rent-a-Crowd

Perhaps Marginal Revolution should copyright their famous “Markets in everything” title but they passed on this item [from Sify via India Uncut]:

A former politician has launched a "rent-a-crowd" company to recruit people to cheer at party rallies and said he has been deluged by would-be recruits, a report on Thursday said.

"When all political parties and organisations are doing it discreetly, why can't we do it professionally?" the Hindustan Times quoted the company's founder Devarajan as saying.

The article goes to indirectly quote one of these would-be recruits:

"One said he would participate in any mode of agitation including violent ones, if he got a bottle of liquor and chicken curry every day," he said.

Note to Devaranjan: feed them before the rally, give them the alcohol after the rally.

I passed this little item to Tyler Cowen of Marginal Revolution to see if he would want to use it as one of his “Market in everything” posts, but he replied that he had posted on something like this before. Marginal Revolution has a nice google search on it. I typed in “rent a crowd” and got 33 hits, but no luck.

Who knows how they described their item and what it was about, but this is fundamentally different than the run-of-the-mill rent-a-crowd story. This Devarajan is openly announcing that he is renting a crowd. No one has done that before…because it’s so very stupid. How could hiring Devarajan’s rent-a-crowd service do anything other than discredit the politician? It would be much cheaper to accuse your opponent of hiring Devarajan than to hire him yourself.

I did a google search to see if there were other rent-a-crowd stories. Oh yes! There were 11,400 hits. From every corner of planet Earth there is a rent-a-crowd story. I did not read every one but I did read the first 15 to 20. Usually, it is some politician getting caught renting a crowd. It never seems to do the politician that rents any good. Here is a nice story from Indonesia in which the politician, in a moment of accidental candor, laments that, in effect, “They will yell for us today but vote for them tomorrow.” Of course. You can hire someone to escort you to dinner but you can’t hire someone to fall in love with you.

Morning Cereal Yuk

This morning, I took out a bowl from the dishwasher and ate a bowl of cereal and it tasted just fine. Later when I went to unload the dishwasher I made an unfortunate discovery: no one had run the dishwasher (Yuk!). Now my morning cereal experience has two memories associated with it: one good memory of eating a nice bowl or cereal and another of eating from a dirty bowl. My experience might be a little similar to this lady’s experience, only with a whole lot less Yuk associated with it.

Sunday, May 22, 2005

Blogging as a Labor Market Signal

Like most of you, I spend a lot of time reading blogs. Most of the blogs I read regularly are very good (duh – who reads bad blogs?). The effort that goes into them is considerable, and the achievement of creating a successful blog that attracts regular readers is noteworthy. But here’s a question: does blogging tell us anything about the blogger’s labor market skills? If you have a blog, would you put that on your resumé? If you run a company, would you want personnel to check if an applicant has a blog? If she does have a blog and you choose to read it, what do you look for?

For most people that blog, their blog might be a bit embarrassing. A job applicant wants to look her best and a blog shows the applicant as she really is. She might come off as lazy (no posts for four months). She might come off as stupid if she fails to do a spell check on her writing. She might come off as a sour worker if she complains frequently about her job and co-workers. She might come off as opinionated (who isn’t in real life?). Or she might reveal an embarrassing secret: here is a classic example of a blog [link via Calico Cat] you would not want your boss to find, (explained in this Washington Post article [link via Gongol]).

But many blogs reflect very positively on the bloggers. They might highlight excellent writing skills and clear thinking. A group blog might signal an ability to be a team player. The creator of the group blog might be showing good organizational skills.

Obvious Skills

Some people’s skills are easily revealed through blogging. A blog is a natural way for someone with journalistic or editorial skills to showcase her skills. A friend of mine Amit Varma was a good but not well-known cricket journalist until he created India Uncut. Now he’s the most famous blogger in India. Just skim through India Uncut for a moment and see just how much he writes in a day, it’s incredible. His blog definitely reveals a lot of skills that would be useful in journalism.

Amit’s blog partner at Middle Stage, Chandrahas Choudhury is also a cricket journalist, but his skill is really book reviewing. His blog shows that he has the talent to review books for a major publication. He is also showing that he is skilled in the thankless job of manuscript evaluation.

A blog can also showcase web-design skills. One blog in particular that I think is a well-designed blog is Gongol. His blog showcase either Brian Gongol's web-design skills or his blog designer.

Entrepreneurial Skills

A successful group blog can have a real energy associate with it. A great group blog is like a business that is really successful, except there really isn’t any money in blogging. One group blog that I find very impressive is Sepia Mutiny. If you have never been there, this is one fine blog. Admittedly, their focus is narrow: South Asians in America. But Sepia Mutiny is a very professional-looking blog. Abhi Tripathy who is the founder of Sepia Mutiny shows that he can create (or help create) a very professional looking blog with the slickest design in the blogosphere.

He also has recruited (or help recruit) an A-list group of co-bloggers who all blog with the distinct Sepia Mutiny style. It is important to note that these bloggers do not meet regularly to discuss issues of strategy or style or whatever. In fact, Abhi claims he has never met some of his co-bloggers. How does he get them to adhere to the Sepia Mutiny style? When you think about it, many companies spend a lot of money sending their staff across country to attend meetings. They feel they have to meet in person to do business. The Sepia Mutiny bloggers never meet, and that works fine. Does Abhi know something about controlling a global enterprise that others should know?

Another blog that reveals a business skill of the blogger is Michael Kantor’s Half Sigma. The Half Sigma blog is sharp looking and Michael’s posts frequently on interesting topics: economics and politics. But Michael’s real skill is marketing. He really hustles. If he hasn’t found your blog, sorry but you’re nobody. He makes sure that Half Sigma is very visible by working hard to get mentioned by the bigger blogs. If you look at the bigger blogs that deal with economics and politics with comments or trackback, you’ll see a lot of Half Sigma. So Half Sigma really reveals that Michael has a lot of marketing skill, which is interesting because Michael isn’t in marketing.

Last week in the Carnival of the Capitalists, there was an interesting piece by Jim Logan on whether it was better to have either a great product and mediocre marketing or great marketing for a mediocre product. Here is a quote from Half Sigma’s comment:

"A mediocre product or service can be sold with a great marketing and sales effort. I don’t believe the opposite is true."

That sounds EXACTLY like something I would have said myself.

Now compare these two blogs: Warren Meyer’s Coyote Blog and Michael Kantor’s Half Sigma. I think that most people who are familiar with both blogs would say that Coyote Blog contains more quality content – especially more original content, (that's not a criticism of Half Sigma, Coyote Blog is really good). However, I think Half Sigma will soon be more popular. Half Sigma avoids long-winded posts, its more like blog-candy (I like blog-candy, remember this is Chocolate and Gold Coins). Michael responds to the people who comment on his site. Coyote Blog focuses more on quality readership than quantity readership. Coyote Blog is basically content to say in effect “if you find me, good, if you don’t it’s your loss not mine.” But Michael’s philosophy is “I put some effort into producing a good blog, I’ll put some effort into making sure people find it.” That’s marketing, and that’s a valuable skill.

Some Final Thoughts

I would never say that you could hire someone based solely on her blog. You need to look at the resumé and check out the references. But if two identical candidates interview for a job, the blog might contain helpful information to help tip the balance. I wonder if anyone who hires really thinks about that. And maybe we should all consider a little bit more on what our blogs are saying about us.


Abhi Tripathy of Sepia Mutiny informs me that fellow mutineer Manish Vij is the one who created Sepia Mutiny's awesome blog design. Manish is certainly signaling some web design ability.

Aphorism of the Day

"Imitation is the sincerest form of flattery"


Saturday, May 21, 2005

Aphorism of the Day

"Not everything that can be counted counts, and not everything that counts can be counted."

- perhaps (I have doubts but still a good quote) by Albert Einstein (March 14, 1879 – April 18, 1955). [via Conversations with Dina.]

About Us

About "Acme, Inc."

Company History
Since 1981, "Acme, Inc." has successfully designed and implemented numerous projects for commercial, industrial, and governmental clients throughout North America and abroad. Over the years, its success and growth can be attributed to flexibility, strong business partner alliances, and an extensive knowledge base. These attributes enable "Acme, Inc." to execute virtually any project on time and within budget constraints. …

If you don’t quite understand what Acme does, that’s the point. Gongol (an excellent blog) found this actual example of a typical company website “About Us” post.

I have often found similar company websites and wondered: “what do you do?” Why should it be that hard for company to explain what they do, after all, they do this for a living don’t they? The other thing I can never understand is why don’t these companies quote prices? Am I really going to do business with a business that is afraid to quote prices? If it is hard to state exactly what you service will cost, give an example. This gives the customer some information to work with.

If you expect your website to bring in customers, put some effort into it.

Silly Hindi Movie Plot

I don’t write hindi movie plots in general. I just thought of one and thought it was so cute that I would share it with others. The basic outline of the story is that there is a corrupt, buffoonish politician who eventually is imprisoned, (nothing remarkable about that). He installs his own simpleton wife as a figurehead so he can continue to rule his province from jail. Okay, anyone from India knows this story.

However, here is the charming twist: the wife actually has some sense. She has long suffered in marriage to her husband and is actually happy to take over and turn the tables. She gets rid of her husband’s cronies, makes some sensible decisions, and the province prospers. And her husband fumes from prison but there is nothing he can do. Throw in a little song and dance and that’s a good movie. Too bad reality isn't like that.

Really Bad Job of the Day

Here’s a curious item in the news: System turns hog waste into clean water.

Don Lloyd stepped up a ladder and dipped his empty bottle into a tank of water that six hours earlier had been flushed out of three nearby pens filled with thousands of hogs.

"There, that's pig water," Lloyd proclaimed as he held up the bottle and tipped it back for a thirst-quenching chug.

This a new technology for purifying water. That’s really good but it raises an interesting question. This product had to have been developed over several years and there must have been a lot of product testing along the way. How much would one have to pay the guy who sips the water and says: “No, you don’t quite have it. It still taste a little bit like…”

Friday, May 20, 2005


Could I use this on days like today when I don't have time to blog?
[Link from Crooked Timber.]

Aphorism of the Day

"Nothing great was ever achieved without enthusiasm."

-by Ralph Waldo Emerson (May 25, 1803 – April 27, 1882). [Link from Websophia.]

Thursday, May 19, 2005

Rental Deduction

In a post about home ownership, Half Sigma (always an interesting place to visit) complains that renters subsidize homeowners. This is because the imputed rental value of owner-occupied homes is not taxed. In a fair world it would be. But there is no way that you change a rule like that today. About 69% of Americans own homes in the U.S. in part because of this enormous subsidy. Home values in the U.S. are enormously high because of this subsidy and people will want to protect their investment. Once the rules of the game are stated, you have to play by those rules, even if they’re dumb rules.

But Half Sigma is exactly right that this is a tax on the poor to subsidize the rich. One way to make the tax system fairer is to allow for a deduction for rent. This would maintain high home values (an important consideration) and would give a huge benefit to the poor.

Another proposal is to cap rent deduction and the imputed owner-occupied rental value at some level. I think you would have to do this by MLS code (in other words, by locality). The benefit should be capped to the 75th percentile in each MLS code. The government would simply compute this maximum rental deduction for each MLS code and tell you that you can only deduct this much from your taxes. Most people could live with this.

I would have to admit that making the rent deduction cap vary by MLS code is self-serving. I live in a very expensive MLS code. The 75th cap would not affect me. If the cap did not vary by MLS code, it would definitely affect me. Definitely, I have a bias here, but nevertheless I don’t like the idea that otherwise the people in Wyoming, where housing is cheap, will get a free ride on the good people of Fairfax County, where housing is expensive. Fairfax County produces more wealth and more taxes than all of Wyoming. Wyoming doesn’t need another tax break.

Wednesday, May 18, 2005

Aphorism of the Day

"That is exactly my point about jobs lost due to technological change or outsourcing or whatever. All of these usually result in a net benefit to economies, but to the fellow who has lost his or her job, it is tough. But in a truly free economy, there is enough opportunity for an enterprising person to find something else to do. Also, redundancies are fairly easy to predict and prepare for, unless one is self-deluded. Or has the terrible attitude that the world owes them a living. Nothing of the sort. If you're useful, you'll be used, and paid for it. If not, you won't. So stop moaning.

In fact, go start a blog or something."

From India Uncut, China hits the sari market, by Amit Varma.

Protectionism in Textiles

In today’s Washington Post, there is an article by Jeannine Aversa about how Bush administration is concerned about cheap textile imports from China and their plans to “protect” the market.

Trade tensions between the U.S. and China escalated Wednesday when the Bush administration said it will set new limits on the amount of clothing that China can ship to America.

It was the second time in five days that Washington announced such quotas, acting on complaints that a surge of Chinese apparel was hurting U.S. companies.

The article contains a classic bureaucratic doublespeak:

Commerce Secretary Carlos Gutierrez said Wednesday's decision "demonstrates the administration's continued commitment to America's textile manufacturers and their employees."

The United States, he said, "will enforce our trade agreements to ensure that U.S. companies get a fair deal as they compete in the global marketplace."

This is a fair deal for whom? It certainly isn’t a fair deal for consumers. We’re only to happy to discount any fairness towards the working poor around the world. This is a sweet deal for a few people who are losing in global marketplace. Over time, these people will find new jobs that will be more productive. That’s a given because their current jobs are obviously unproductive because the free market is eliminating them.

No one owes these people job security. If you can’t make a go of you current career: Go start a blog or something. It’s no fair messing up the free market to help a few people. And these people will lose their jobs over time anyway.

Another point here: isn’t the Republican Party supposed to be the free trade party? I guess not. I wonder why no party wants to protect consumers from the politicization of trade? That’s the kind of protectionism I would like.

Aphorism of the Day

"What does it matter if you live 8 miles or 8000 miles away? Everyone is next door on the Internet."

from Earning in Dollars, Spending in Rupees.

Earning in Dollars, Spending in Rupees

My wife emigrated from India 15 years ago. In these 15 years, she has gotten an education, married and started a family, and started a very successful career. In many ways she is a typical American success story. She makes ten or twenty times more money than she would have if she had stayed in India.

But there is a downside to being an immigrant. Living in the United States is extremely expensive. We make more money than we dared to dream, and it is never enough. Housing here (in Northern Virginia) is so expensive that even a 1000 square foot shack that sold for $3000 in 1953 now costs $500,000. The mind boggles at such a ridiculous increase in price. And if you want to have your house cleaned here, it might cost $80 to $120, depending on the size of the house.

The other downside of being an immigrant is that she misses home. At this point, she can never go home because there is no “home” to go back to: everything has changed. She misses spending time with her parents. She misses hearing people speak her native language. She misses just watching silly Indian movies with friends who can laugh at the silliness.

The ideal situation is to neither to earn in dollars and spend in dollars, nor to earn in rupees and spend in rupees. The ideal situation is to work each day in the U.S. (or U.K., Canada, Australia, etc.) and go home each evening to India. You can eat your favorite alloo tikki chat. You can have your proper chai. You can enjoy an India-Pakistan cricket match with dozens of your best friends. And you’ll have money for anything you want. You could have the best of both worlds.

With the Internet, it is now possible (in theory) for workers in India to telecommute to jobs in the U.S. I’m not talking about lousy call center jobs, but real careers doing satisfying work. Many workers in the U.S. already telecommute several days a week. Working with people who never come in to work is more challenging, but if the wage is low and quality of work is high, this work arrangement is doable. The need is for entrepreneurs in the U.S. and in India to match employers with people with skills. And it is necessary for people in India to acquire the kinds of skills necessary to work in the global marketplace.

My belief is that blogging is a useful business skill. It is a way for people to communicate clearly their ideas to others without speaking to them face-to-face. Once you have that skill, what does it matter if you live 8 miles or 8000 miles away? Everyone is next door on the Internet.

Tuesday, May 17, 2005

Aphorism of the Day

"Hard students are commonly troubled by gowts, catarrhes, rheums, cachexia, bradypepsia, bad eyes, stone, and collick, crudities, oppilations, vertigo, winds, consumptions, and all such diseases as come by over much sitting; they are for the most part lean, dry, ill-colored; spend their fortunes, lose their wits, and many times their lives; and all through immoderate pains and extraordinary studies."

-Robert Burton, Anatomy of Melancholy, 1621 [link via Aphorisms, Quotations, and Wisecracks.]

For students: cheer up, summer break is coming!

The Greatest Americans

At Half Sigma (always an interesting place to visit), there is a debate going on about who should make a list of the 100 greatest Americans. Apparently the Discovery Channel is profiling a list of their 100 greatest Americans and Prof. Bainbridge has critiqued it. First of all, you cannot produce a list like this without including many people of dubious credentials and without excluding many people who most would regard as tremendous American achievers. It is virtually impossible to compare the accomplishments of America’s greatest baseball player and America greatest doctor.

Norman Borlaug

Here is a nice wikipedia article about possibly the greatest American you never heard off. Here is Norman Borlaug's foundation website. He was responsible for the great green revolution that allowed India to become self-sufficient in food production and allowed millions of Indians -and other third world counties-to leave the villages to find more production work in the cities. India’s economy is very definitely a work in progress, but the change is happening and Norman Borlaug has had a big impact in that part of the world. He won the Nobel Peace Prize for his work in 1970.

Warren Buffet

If you can beat the S&P 500 by 10% in one year, you are pretty lucky. If you do it year after year for 40 years, your name is Warren Buffet. He is America’s economic planner: he does the hard work of deciding how the market should price our goods. Economic theory suggests there should not be a Warren Buffet, but there he is. A free market allows a remarkable person like Warren Buffet to make our economy run more smoothly by accurately pricing our assets. And he’s kept all of that wealth in the market so that the good work he does just expands over time. He has made a lot of money for a lot of people. I should have bought Berkshire Hathaway (his company) stock 20 years ago. I can’t afford it now.

Paul Samuelson

America has been blessed with many great Nobel Prize winning economists but I single out Paul Samuelson. As an economist, his accomplishments in all areas of economics are enormous. But maybe his single greatest accomplishment was writing the standard economics textbook for the last 57 years. His textbooks taught the world market economics. When the world was drifting into the abyss of socialism, he was a major force keeping the flame of classic market economics going. I think the best tribute to Paul Samuelson came from a Soviet planner who decided to read Samuelson’s Economics to learn about market economics. Unfortunately, I don’t have the exact quote but it went like: “When I read his book I realized that market economics was not just a different form of economics, it was economics.” That’s the power of ideas and clear thinking.

Incredibly, both Samuelson and Borlaug won their Nobel Prizes in 1970. That was a great year for the Nobel Prize. Downhill since then!

Monday, May 16, 2005

Aphorism of the Day

"If you only support the freedom to do intelligent things, print truthful stories, and do “the right thing”, you really don’t support freedom at all. Freedom means freedom to make mistakes."

[from When Should the Press Self-Censor?.]

When Should the Press Self-Censor?

Suppose you are the editor of a big news organization and you have an explosive story that you know will get many upset. You are pretty sure the story is true, but it is hard to vet. You also know that many people around the world – people who hate America and have contempt for respect freedom of the press – will become violently upset by the story you are about to publish. To what extent should you self-censor the news you are about to print because people who neither share our values nor love our freedoms might riot over the news you will print?

This is precisely the situation that Newsweek was in. They chose to publish their story. Demagogues in the Islamic world whipped up a frenzy of anti-American rioting. At least 15 people died. And now Newsweek has to recant the story because they cannot verify it.

Many conservative bloggers have come out to criticize Newsweek. They are only too glad to twist the knife in the MSM. Bloggers like Michelle Malkin, Black Five, and even Glenn Reynolds have come out with arguments that Newsweek was partly (or wholly) to blame for the deaths of those people killed in riots.

This is shameful. It is perfectly reasonable to criticize the reporting of Newsweek. But to blame them for the rioting is to suggest that Newsweek should self-censor their news to avoid upsetting the sensibilities of people who neither love America nor respect the first amendment. This is the antithesis of freedom of the press. For bloggers to side with the zealots who would gladly flush our U.S. Constitution down the drain because it gives them the opportunity to stick it to the MSM is contemptible. Either you support freedom of the press or you don’t. If you only support the freedom to do intelligent things, print truthful stories, and do “the right thing”, you really don’t support freedom at all. Freedom means freedom to make mistakes.

It is easy to criticize the quarterback on Monday morning. What is hard to do is to support the rights of people whose politics you disagree with.

I don’t want zealots from the Islamic world or anywhere else determining what goes in my news. I want the editors to make that decision. I fully support their right to publish whatever they think if fit to print.

I want to thank the excellent blog Half Sigma for raising this issue and pointing to the links above. You should read his post. Also read LHM’s excellent post in which he lays the blame for the riots on the rioters instead of our press.

Sunday, May 15, 2005

Aphorism of the Day

"He who owns the stick owns the buffalo...and drinks all the buffalo milk."

-Traditional from India. [link via Spontaneous Order and India Uncut.]

Kite Flying in India

I read an interesting post the other day from one of India’s most popular bloggers, Kiruba Shankar, about kite flying in India. It sounds like great fun:

I remember as kids, we would collect bottles, put them into a cloth bag, and mash it fine with stones. We would then mix it with glue and apply the glass paste (called 'Manja') on a special thread we'd get from the 'Master's Potti Kadai'.

The challenge is to cut the opponent Kite's thread (This duel is called 'Deal'). And when you do cut it, and if luck and winds are your side, you get to collect the opponent's Kite as trophy.

Sigh! Those were the good times. And all those memories came gushing back to me as I held the kite yesterday.

Children in India traditionally fly kites and play with tops. I have an Indian top and it is extremely challenging to use. The fun comes from developing the skill. These are wonderful examples of human capital in the production of leisure.

The only fun my son makes is in constructing Lego toys. When we buy toys for our children, we increase the GNP but we do not increase their skills. To paraphrase an old saying: “Buy a toy for a child and you bring joy for a day. Teach a child a fun skill and you bring joy for a whole childhood.”

I need to take him kite flying. I don’t know about the Manja though.

Carnival of the Capitalists is Up

The Carnival of the Capitalists is up a day early at Anyletter. Please note his blogroll (I'm loving it). Andrew Hughes is a nice fellow who has written to me a few times. He hasn't been blogging recently and I was a bit concerned that maybe he was not fully prepared to do the COTC.

Well, he did a very nice job. Good job, Andrew.

My post is here.


Bummer, you can only see his blogroll if you go to his homepage.

Cheating the Bagel Guy

There is a fellow who comes by our office to deliver bagels. He leaves out an honor box. People are expected to leave a dollar in the box. Some don’t. He sometimes leaves notes out requesting that everyone be honest.

First of all, it is quite scandalous that some people with six-figure incomes or nearly six-figure incomes cannot find a dollar bill to pay for a bagel. The fact that the bagel is not worth a dollar is immaterial. If you eat it, you must pay for it.

Half Sigma ponders why some people would cheat the bagel guy. This is one of the issues that economist Steve Levitt addresses in his new book Freakonomics. Steve Levitt thinks that the incentives for cheating are greater in a larger firm. Half Sigma believes that small firms have happier, and therefore more honest, employees. There is no doubt that Levitt is right (he’s an economist). Sorry Half Sigma, but economists think differently.

Suppose that ten percent of workers are dishonest, but they won’t cheat if the price of cheating is too high. In an office of ten people, you will likely have only one cheat. This cheat will know that cheating will be detected and the other nine employees will know that there is at least an eleven percent chance that the cheater is the guilty party. The cheater isn’t really getting away with her crime completely. Also, the cheater was 100 percent responsible for creating an unpleasant work environment. The crime isn’t worth a stale bagel, so no one cheats.

Now suppose that there are about 20 cheats in an office of 200 people. What is the marginal impact of the 20th cheat? What really is the difference between 19 cheats and 20 cheats? No one really notices. The cheater is a classic free rider. Free riding is very tempting when no one suspects you of being the free rider.

So the bagel guy should deliver bagels to every floor with a box on each floor. The cheat will be the one who seems to always go to another floor to eat bagels.

Saturday, May 14, 2005

Aphorism of the Day

"Clear thinking requires courage rather than intelligence."

-Thomas Szasz (b. 1920) [from Econlog.]

The Free Rider

My son was going to his first chess tournament yesterday. The flier said that he needed to have a chess clock. I forgot about that.
My wife reminded me on the morning of the tournament that he needed a clock.
“Would any clock do?”
“No, it is a special clock. I will find a store and bring it to you at the tournament.”
My wife and I went on-line to see what stores might have chess clocks.
“Why wouldn’t a regular clock work?”
“It is a special clock that has two buttons. When one player makes a move, he pushes the button and his opponent’s clock starts.”
“Do both players need a clock?”
“No, they just use one clock.”
“Then free ride. Pah, why didn’t you tell me that before? I could have eaten breakfast.”
So what is the equilibrium of the who-brings-a-clock-to-the-tournament game?

Why Do Liberals Have Fewer Children?

The always-interesting blog Half Sigma has a link to some interesting analysis by the magazine American Conservative showing the correlation between support for President Bush and family size. It turns out that there is a very predictable relationship there: big families liked Bush. Half Sigma wondered why this is so and gave some possibilities.

My guess is that this is really driven by the preference of women. Women who have the ambition to be the perfect wife and mother are likely to have big families. These women are likely to come from traditionally conservative backgrounds and/or think traditionally conservative themselves. Naturally, if a woman wants to stay at home and be a mother, it shouldn’t surprise people that she would want to have many children, because it is hard to justify staying at home for just one child.

On the other hand, women who want a career might find that having a large family is impractical. They might prefer one of maybe two children, or they might not want children at all. Children of working mothers are very expensive: they require day care and after school care. Children require lots of time, and working women just don’t have lots of time. It makes sense that career-ambitious women will have fewer children than stay-at-home moms. It also makes sense that career-ambitious women might be less likely to be the traditional Christian type that is the bedrock of the Republican Party. These career-ambitious women are probably more likely to be liberal because liberal women are more likely to think of success as having a career.

All of this would suggest that the nation will become more conservative over time. However there is another possibility: there may be a strong correlation between large family size and children that think their mothers are boobs.

Aphorism of the Day

On leverage:

"Give me the place to stand, and I shall move the earth."

-Archimedies (287 -212 b.c.). [from wikipedia.]

Leveraging Charity

I have to admit that I really love free stuff. I love the Internet because it’s free: no New York Times for me. I blog on Blogger even though it looks cheap because it’s free. I drive for miles to avoid paying a toll on a road: there’s something about a road that wants to be free. I love the Smithsonian, which is only a few miles from my home, because it’s really nice and (you guessed it) its free. Sometimes I even eat the free food/garbage that coworkers leave out by the coffee machine even though I know I shouldn’t eat it (but its free).

I like public goods. I think one of the five most exciting times in my life was watching Neil Armstrong land on the Moon. I love visiting national parks. I like roads and bridges and dams. I don’t like television but when I do watch it I watch public television. I do spend money to send my boy to a private school, but I fully support the idea that education should be based on the benefits to the child not the earnings ability of the parent.

In theory, there is no reason why any of these things cannot be funded by a private charity instead of the government. In fact, it might be possible to transform most of our government agencies into private organizations funded by charity. All we have to do is contribute to charity. If everyone contributes 20% of their income to charity, charities would have plenty of money to fund all of our public good. So you should do that.

But I won’t. I like free riding (because its free). If it is a choice between spending on the greater good and taking my little boy to Disneyworld, the greater good will suffer. I know my attitude is contemptible but I studied too much non-cooperative game theory to think any other way. I should feel guilty about it and I have scheduled a moment 30 years from now to experience a great sense of remorse, but I don’t have time for that right now.

It’s not that I don’t contribute anything to charity. Maybe I contribute 1 or 2 percent of my income to charity, like most people. But I’m not going to contribute 20 percent voluntarily; I need to be coerced.

The Idea

Here’s the idea: maybe we can change the tax rules so that we can leverage our existing charitable contributions from the 1 to 2 percent range to the 10 to 20 percent range. Ronald Reagan did that in a small way in 1981 when he changed the tax rules so that charity would be tax deductible. If your marginal tax rate is 33%, then it now takes only 100 dollars of your net income to make a contribution of 150 dollars, so your charitable contribution is leveraged a bit. But what if the tax rule was that for every 1000 dollars you contribute to charity, you could deduct 900 dollars not from your income but from your tax obligation. It would only cost 100 dollars from your net income to make a charitable contribution of 1000 dollars.

I don’t know about you, but I think my attitude towards charity would be completely transformed by a system that allowed me to make 1000 dollars in charitable contribution for the cost of 100 dollars in net income. I really love spending other people’s money. This is kind of like that, only without the guilt because it’s really my money. I know I would spend this money much more wisely than the government would, and I’m sure 90% of Americans could too.

Perhaps I would take the easy way and contribute most of my money to an organization I trust to redistribute the money effectively, but ultimately, it would reflect my choices, preferences, politics, and prejudices. In effect, almost all of my money would be spent in ways that depended primarily on the opinions of two people: my wife and me. And that’s how it should be.

I might contribute to politics, because now my money could actually make a difference. The special interests would see their influence divided by a factor of ten: I like that. Maybe intelligent people could then run for office: is Tyler interested?

The best thing about such a system is that it would really work to improve the efficiency of the production of public goods. Charities would be in fierce competition with each other to produce results or else people will not fund them. It will create a free market in public goods. I really like that idea.

Some Caveats

Now I will address the nay-sayers: yes it will work. Let me anticipate the objections and address them one by one:

How do we define charity? How do we know that this money will not just go back to the individual?

There are three categories of private spending: spending on immediate family, charity, and pure waste. We can make sure that money claimed as charity must be donated anonymously to an organization not controlled by the family of the individual. Also, a third party must verify all donations. Your bank can verify your donation and make the donation on your behalf anonymously.

Another criterion for being a valid donation is that your money should represent only one-tenth of one percent of the total charitable receipts of the charity. This way, your donation is just a drop in the bucket. Only ten cents of every 100 dollars will go back to you.

Some people will spend their money unwisely.

Yes. I guarantee it. There is a word for this: liberty. A free people are free to be stupid. Some people will donate their money to a charity that will try to convert Catholics in Latin America to “Christians”. This sounds positively ridiculous to me. But I know that people over time might learn to be less stupid. Governments already spend money on stupid things and politics guarantees that the government only gets dumber and dumber over time. When do you expect the government will finally realize that farm subsidies are stupid?

It is important to note that charity comes partly from your net income. This gives the individual a strong incentive to become wiser over time. It’s like a partner in a firm who puts up some of her own money into a venture: it changes the motivation considerably.

Charities might discriminate: we have to regulate them

Most people will not contribute to charities that are bad citizens. The few charities that are bad citizens will have very little influence. Consider a charity that only helps white people. Other charities will completely nullify their influence by donating exclusively to the people the bad charity doesn’t help.

People will spend the money on religion

Is this bad? Some people might think so but I don’t, even though I’m not too religious. I figure a person who is genuinely believes that he is beholden to a higher being - even if he is delusional – is more likely to be honest than someone who is rationally beholden only to special interest. I believe the religious charities would do a far better job helping the poor than the job the government currently does. And any charity, religious or otherwise, will have to deliver the goods over time or see revenue fall.

The money would be allocated poorly because most people don’t know how much money is necessary to do certain things

Over time, the money would be allocated much more effectively because people can sense when some cause is under funded or over funded. In any case, most people will trust their money to general charities that will do the hard work of determining how the money should be allocated. There is little chance that a genuine need will be overlooked. In fact, the market in charities will give incentives for charitable entrepreneurs to come in to satisfy a need for a public good that no one ever thought of before. For example, a charity might fund a service that repairs pot holes every night as soon as they form – saving millions of dollars in vehicle damage every year.

People will contribute to charities close to home, ignoring poor areas

Some people will contribute to national charities but many will try to keep the money as close to home as possible so that they will feel the benefits of this spending. That is a good thing. People will be using their own knowledge of the local needs to fund a charity that can satisfy that need.

I might contribute some of my money to the school where my son goes. I cannot contribute much without violating the one-tenth of one-percent rule. The reason why I send my son to that school is because it is really nice. I want others to benefit from this school. With more money, they could open another school, in an area not served by good private schools. I would be using my knowledge of local schools to help spread the best ones. And when you think about it, this is one way to do the vouchers that everyone could live with.

People will game the system by allocating all of their money to a pet project

You cannot escape free riding behavior completely. Some people will decide the charitable market serves the public well except maybe one area, and they will allocate all of their money in that one area. I’m not sure if that is a real problem or not. If it turns out to cause real problems, we can figure out a system of mild regulation, but I would rather not go there if it weren’t necessary. Most people will act in the best interest of society if others strongly disapprove of anti-social actions. I would prefer to let everyone be his or her own judge about how his or her money should be spent.

Charities will waste their money lobbying the government

I think this one really bothers me. I think we would have to spell out that any charity getting this money should not be lobbying the government. The charity is supposed to be the money, not influence the money.

Some Final Thoughts

This is a very long post and I thank anyone who made it through to the end. I have read some very interesting proposals for privatizing certain government institutions. Alex Tabarrok wrote about assurance contacts for guaranteeing that certain charitably funded projects are completed or the money refunded (of course, if the money is anonymous it cannot be refunded but you can specify the default organization). Different River has a nice suggestion for how charity can use trademarks to replace the FDA in regulating medicines. My suggestion for leveraging charity fits in with these ideas nicely.

The whole idea is to replace the tyranny of the majority with the sovereignty of the individual. I think that would be really cool.

Maybe there will be a charity that pays people to blog (an example of pure waste?). Every blog will will get a penny for every page view. In a week I could earn enough to buy a cup of coffee. Free coffee: I love it!

Thursday, May 12, 2005

Aphorism of the Day

"Socialism is the equal distribution of poverty."

-Anonymous. [Link via Websophia.]

Aphorism of the Day

"The Internet today is perhaps the single most libertarian institution on the planet. It is utterly without heirarchy, being essentially just one layer deep and a billion URL's wide."

By Coyote, [aka Warren Meyer.]

Tuesday, May 10, 2005

Aphorism of the Day

"The first opinion that occurs to us when we are suddenly asked about anything is not usually our own, but only the current opinion belonging to our caste, position, or family; our own opinions seldom float on the surface."

by Friedrich Nietzsche (October 15, 1844 – August 25, 1900). [Link from infonectar].

Real Estate Commissions

There is an interesting post on Marginal Revolution about the commissions that real estate brokers charge. Alex Tabarrok wonders why these commissions (combined buyer and seller agent) are steady at 6%. In Washington D.C., where prices having going up, we would expect to see that competition amongst the real estate agencies would drive down these fees. Instead, we see more agents entering the field and competing for the same client pool, but no reduction in the fees. This would be inefficient rent seeking because a smaller number of agents could do the same work for a lower overall price.

I argued in the comment section that the most likely reason that these agencies don’t reduce these fees is that they recognize that they are playing a classic Bertrand price competition game. In such a game, if any player lowers the price, all players will have to match it, and all players will lose profits. So players realize that they are better off just doing what everybody else is doing. This is especially true in a profession like real estate where potential competitors often have to cooperate. Keep in mind that the buyer’s agent has to negotiate with the seller’s agent, so yesterday’s competitor might be someone he or she needs to work with tomorrow. They don’t want to slit each other’s throats.

But there is another mystery about real estate commissions: who decided that a fixed percentage of the home sale price was a good basis for determining the commission? Consider this example: you have a house that your agent knows should sell for about $400,000 but it might sell for $390,000 or for $410,000. So if he works really hard, he will get a commission of 3% of $410,000, which is $12,300, but if he slacks off he will get only $11,700. He would rather get 12 commissions of $11,700 than 11 commissions of $12,300. With this kind of incentive, it is obvious that the agent only wants to sell your house as quickly as possible for the lowest price he can persuade you to accept. He is motivated in exactly the wrong way.

A more sensible way to motivate real estate agents is to base the commission closer to the value added of his services. He knows he can sell your home for 95% of $400,000, so he says: “I will guarantee that your house will sell for more than $380,000 and I will keep 60% of anything above $380,000.” If the house sells for $400,000 like he expects, he will get $12,000, which is 3% of the house value. But now he is much more motivated to push the price well above $400,000. Anything over $400,000, both the agent and the homeowner win.

Aphorism of the Day

"In a country well governed, poverty is something to be ashamed of. In a country badly governed, wealth is something to be ashamed of."

by Confucius (traditionally 551 BC – 479 BC). [Link via world of quotes.]

The Leaky Balloon

A blog that is quickly becoming one of my favorites is Half Sigma. He posts often and he posts about things that interest me: economics and Northern Virginia where I live. One theme he continually hits upon is that the housing market is a bubble that is about to burst:

On a military base this week in the Washington DC area, I overheard two Lieutenant Colonels having a conversation.

“I can’t see how housing prices could go down in this area, all the government jobs means demand will always be high,” said one Lieutenant Colonel to the other.

This is the type of wishful thinking you hear every day in the DC area. I look forward to the day when all these idiots lose everything when the bubble bursts and their houses plummet in value.

Read this post here, and his previous posts here and here.

I believe that the Lieutenant Colonel above is probably senses what other people here sense: the demand for bureaucrats in this administration has increased. It is funny how the Republicans have become the big spenders now they’re in power. Here is someone who fails to see the humor in this. In any case, the increase in quantity and the salary of bureaucrats is one reason why housing demand in Northern Virginia has increased, and I don’t see that going away soon.

However, the market for housing depends both on supply and demand. In the short run, supply is fixed because there is no land available anywhere in Fairfax County, Arlington, or Alexandria. But this tremendous increase in housing prices – housing prices have more than doubled in the last six years since I came here – has made it very profitable to construct new housing. Keep in mind that the cost of building a new home really hasn’t gone up much in the last six years. So if people can now afford homes worth $1.5 million dollars, homebuilders can build a really nice house for that money. All they need is a little land, and they can produce a commodity that is much more desirable than the homes that currently sell for $1.5 million.

I just said that there was no land available, but there is always land available. There are many homes around that were built 50 years ago and are in very sad shape today - and even these cost $500,000. Tear them down for $100,000, build a wonderful new home for $800,000 and your can sell it for maybe $1.5 million. It isn’t quite as easy as that because that home would be next to two other homes in very bad shape. The homebuilders need to negotiate with a dozen homeowners at a time. It a little serendipitous to make such a deal, but does happen over time.

Down the road from our home, a homebuilder did exactly that, and they are building a half-dozen single family homes for $1.5 million right on Gallows Road (a major thoroughfare) just two miles from Tyson’s Corner: Fairfax County’s downtown. Who can afford these homes? People who have homes worth $1.0 million which they bought years ago and now have a lot of equity. They can put $700,000 down and still the mortgage will kill them, but they are willing to do it because housing has always been a good investment. But they don’t realize that this trick of knocking down homes and building new ones is getting more profitable over time and this will eventually saturate the market. A couple of years from now, homes like that will probably sell closer to the cost of producing them, which might be $1.2 to $1.3 million.

The market isn’t bubble, it is a balloon, and the balloon is beginning to leak.

Sunday, May 08, 2005

Aphorism of the Day

In business, a challenge is good. It’s the place where the money is buried.

Saturday, May 07, 2005

Aphorism of the Day

“Free scares me. Free is light on the wallet but heavier on something else.”

by Rahul Bhatia of Green Channel.

Public Policy and Human Nature

At the interesting and under-read blog The Middle Stage, Amit writes about the naturalistic fallacy and its extension to public policy. An example of the naturalistic fallacy would be to say something like: “Such-in-such is unnatural, and therefore wrong.” For example, it is unnatural for six-year-old boys to like broccoli, but there is nothing wrong in offering, and nothing wrong if he accepts (but don’t expect it!).

However, Amit argues that there is no naturalistic fallacy when it comes to public policy. The phrase: “Such-in-such is unnatural, and therefore poor public policy and it's bound to fail” is a perfectly sensible statement. Amit writes:

While human nature should certainly not be the basis of morality, should it play a part in public policy? I believe it should. Instead of Herzog’s test statement, consider the following sentence:

_____________ is unnatural and therefore impractical.

Can the blank here be filled in for the sentence to make sense? I think so. One example: “communal sharing of property”.

Any political system that requires us to behave in a manner contrary to human nature is likely to fail. For example, EO Wilson once said of communism: “great idea, wrong species”. He thought it would have worked for ants, who are wired differently.

Capitalism, on the other hand, is the perfect system for humans because it mirrors the manner of our evolution perfectly. John Maynard Keynes once said of Charles Darwin's The Origin of Species that it was “simply Ricardian economics couched in scientific language”, while Karl Marx wrote to Friedrich Engels that it was “remarkable how Darwin recognizes among beasts and plants his own English society with its division of labor, competition, opening up of new markets, ‘inventions’, and the Malthusian struggle for existence.” Stephen Jay Gould described natural selection as “essentially Adam Smith's economics read into nature.” (These three quotes are from Matt Ridley's fine book, The Origins of Virtue.)

It's a great essay, read the whole thing.

So if your public policy depends on six-year-olds eating broccoli for success, forget it.