For another example, consider trade barriers such as tariffs. There are good economic arguments to show that we would be better off if we went to complete free trade. That seems puzzling — if we would be, why don’t we?
The answer is provided by public choice theory, the branch of economics that deals with the workings of the political market. A tariff makes the inhabitants of the country that imposes it worse off but the politicians who pass the tariff better off, since it benefits a concentrated interest group at the cost of dispersed interest groups. More concentrated interest groups are better able to pay politicians to do things for them. Trade policy is optimized, but for the wrong objective.
David D. Friedman, “Why Improving Things Is Hard”, Ideas, 2014-07-08.
May 11, 2015
QotD: Tariffs are generally harmful, but persist anyway
May 9, 2015
Everybody panic! The robots are coming to steal our jobs!
Tim Worstall explains why we can easily disregard the calls to panic about the impending invasion of our new robotic overlords:
Essentially, what [economist Joe] Stiglitz is saying is that under certain conditions the advance of the robots means that we all lose our jobs and the capitalists, the people who own the robots, get to have all of the economy. And one can see his mechanism to get there: if robots become ever more productive then yes, we can see the idea that there will be more robots and fewer people employed by the capitalists and so on. But it’s still impossible for that end state to arrive: simply because we non-capitalists aren’t going to let it.
[…]
So, let’s recast that end state. There’s the 1% (the plutocrats, the capitalists, whatever) and then there’s us, the 99%. Robots become ever more productive and we the 99% all lose our jobs working for the capitalists. Hmm, tant pis in one telling of this story because as Karl Marx pointed out that’s a precondition for true communism, that we overcome the scarcity problem. But even leaving that aside what is going to happen next?
That 1% owns all the robots and gets all the production from them. We, the 99%, have no jobs and thus no incomes. We cannot purchase any of that robotic consumption from the capitalists. This is the very point that Stiglitz is making, that the capitalists will own and consume 100% of the robotic output. Well, yes, OK, but what are we the 99% going to do? This new peasantry: do we all just wander around the fields until we keel over from starvation? No, quite obviously we don’t. Sure, the robots are more efficient than we are, produce things for much lower prices. But we don’t have any of the currency with which we can buy that production. So, what are we going to do?
May 7, 2015
Vancouver – where “happiness” doesn’t co-relate with “quality of life”
Reducing the realities of life in a given city to a quick numerical value or data point on a chart requires you to ignore subtleties and local influences. Last month, Mark Collins linked to this article by Terry Glavin on what the “quality of life” numbers for Vancouver actually conceal:
If the Economist Intelligence Unit’s annual top 10 world cities rankings are what you’ve been relying on, you probably weren’t surprised last month when the global human resources outfit Mercer tagged Vancouver on its Quality of Living index as the best city in North America. But you might have been surprised this week when Statistics Canada released a study showing that, by a variety of indices, Vancouverites are the unhappiest people in Canada, falling dead last among the residents of 33 cities across the country.
We like to think of Lotusland’s grand metropolis as a place where people ski, sail, ride their bikes, swim, and hike though lush rainforests, all in the same day. But StatsCan’s annual survey of median household income in Canadian cities routinely puts Vancouver close to the bottom of the heap on that same list of 33 cities, and in January the Demographia International research institute ranked Vancouver second to last in a global survey of 378 cities on its Housing Affordability Survey.
Vancouver’s median household income in 2014 was $66,400, while the city’s median home price was 10.6 times higher: $704,800. Only Hong Kong fared worse, and just barely. Hong Kong also tops Vancouver, again only barely, as the property investment bolt-hole most favoured by Mainland China’s loot-laden millionaires. For years, we’ve been instructed to pretend that this is somehow mere coincidence. You can’t get away with talking to Hong Kongers like that, but Vancouverites take it sitting down.
In happier places like Saguenay, Sudbury and Thunder Bay, there’s manufacturing, dairy farming, forestry and mining, and there’s a high degree of neighborliness and civility. But Vancouverites make most of their money from increases in the real estate value of whatever property they might be lucky to own. This tends to skew any real sense of hometown belonging, and nothing quite so rattles the cages as loose talk about the elaborate, federally-sanctioned swindle that has been keeping the bubble inflated all these years.
Commodity Taxes
Published on 27 Jan 2015
In this video we cover taxes and tax revenue and subsidies on goods. We discuss commodity taxes, including who pays the tax and lost gains from trade, also called deadweight loss. We’ll take a look at the tax wedge and apply what we learn to the example of Social Security taxes.
May 6, 2015
Applications Using Elasticity
Published on 27 Jan 2015
In this video, we take a look at real-world applications of elasticity, using the examples of slave redemption in Sudan and and the effects of gun buyback programs in the U.S.
May 4, 2015
In praise of “unfettered” capitalism
L. Neil Smith isn’t happy with the Pope’s latest anti-capitalist comments:
Just for the record, when private capitalism came into being, it was a revolutionary economic, political, and social system that has since fed, clothed, and housed — not to mention educated and cured — more individual human beings than any other system in history. When it appeared on the world scene in the mid-1700s, a person’s average life expectancy at birth — in London, the most advanced and civilized city on the planet — was about 20 1/2 years. A hundred years later, life expectancy was three times that number, and it is now approaching four times.
If only for those reasons (and there are many others), capitalism has been the target of centuries of relentless, vicious attack by evil parasites who wish to be perceived as humanity’s benefactors without actually benefiting anybody at all, Today, virtually every member of what the great essayist H.L. Mencken called the “booboisie” believe (you can’t really say “think”) that capitalism and capitalists are evil.
Capitalism’s gravest “sin” in this connection is that it has made more widespread and greater individual freedom available than ever before (even though in his abysmal ignorance — or ideological delirium — the Pope accuses it of imposing ” a new tyranny” that is “causing people to die”. That, of course, is why there are seven billion people in the world today, as opposed to a few hundred cold and starving millions when his gang of terrorists was running things.).
That is a critically important key to why capitalism is hated and reviled, and to who hates and reviles it. Watch the various enemies of capitalism on TV; Obama, Reid, Pelosi, Waxman, Feinstein, Bush, Hatch, Cheney. None of them are genuine advocates of freedom. There are political vermin in the world — all over the world, in fact, generally in positions of leadership — who hate, loathe and despise individual freedom, and will do absolutely anything to eradicate it. They achieve their leadership positions because no decent human being really wants anything to do with telling other human beings what to do.
The headline reads “Pope Francis rebukes unfettered capitalism”. When he says “unfettered” you can bet he means it literally; this is the heir of a gang of thugs who used to “change” people’s theological opinions with the rack, the whip, and red-hot pincers. You can also bet they’d be doing it today if they believed they could get away with it.
Petulantly, the man complains that the worship of wealth has become a religion in itself. There is lots I could say about that. I’ll limit myself to the observation that the wealth is really there; it manifests itself. In that respect, it’s hell of a lot better than the Imaginary Playmate he claims to speak for and wants us all to worship.
Elasticity and Slave Redemption
Published on 27 Jan 2015
Beginning in 1993, Sudan entered into a civil war, with one of the worst parts being that many people were kidnapped and sold into slavery. Humanitarian groups traveled to Sudan to redeem slaves by buying them out of slavery. Is this good policy? Did it work out, or make it worse? Let’s use elasticity to analyze the situation.
May 2, 2015
A revolutionary fix for California’s water problems – pricing
Last month, Megan McArdle pointed out that the state of California is reacting to the water shortages in one of the least effective ways by mandating rationing, rather than addressing the absurd under-pricing of the resource:
I’ve seen a lot of apocalyptic writing about California only having a year of water left (not true), and I’ve heard some idle talk about whether California can continue to grow. But California’s problem is not that it doesn’t have enough water to support its population. Rather, the problem is that its population uses more water than it has to. And the reason people do this is that water in California is seriously underpriced, as Marginal Revolution‘s Alex Tabarrok notes. While the new emergency rules do include provisions for local utilities to raise rates, that would still leave water in the state ludicrously mispriced. According to Tabarrok, the average household in San Diego pays less than 80 cents a day for the 150 gallons of water it uses. This is less than my two-person household pays for considerably less water usage, in an area where rainfall is so plentiful that the neighborhood next door to me has a recurrent flooding problem.
Artificially cheap water encourages people to install lush, green lawns that need lots of watering instead of native plants more appropriate to the local climate. It means they don’t even look for information about the water efficiency of their fixtures and appliances. They take long showers and let the tap run while they’re on the phone with Mom. In a thousand ways, it creates demand far in excess of supply.
Having artificially goosed demand, the government then tries to curb it by mandating efficiency levels and outlawing water-hogging landscaping. Unfortunately, this doesn’t work nearly as well as pricing water properly, then letting people figure out how they want to conserve it. For one thing, you can only affect large and visible targets, such as appliance manufacturers or lawns. For another, people will often try to evade your regulations — my low-flow showerhead came with handy instructions on how to remove the flow restrictor. And, perhaps most important, you limit the potential conservation to the caps. So people have an efficient dishwasher but don’t consider doing small loads by hand; they have a low-flow showerhead but don’t consider taking shorter showers. In short, no one is looking for ways to conserve more than whatever you’ve mandated. This may be enough to temporarily manage the current crisis, but it does nothing to set California’s water usage on a more sustainable path.
May 1, 2015
Statistical myths in California’s water shortage
Devin Nunes debunks the common claim that California’s farmers use “80 percent” of the available water in the state:
As the San Joaquin Valley undergoes its third decade of government-induced water shortages, the media suddenly took notice of the California water crisis after Governor Jerry Brown announced statewide water restrictions. In much of the coverage, supposedly powerful farmers were blamed for contributing to the problem by using too much water.
“Agriculture consumes a staggering 80 percent of California’s developed water, even as it accounts for only 2 percent of the state’s gross domestic product,” exclaimed Daily Beast writer Mark Hertsgaard in a piece titled “How Growers Gamed California’s Drought.” That 80-percent statistic was repeated in a Sacramento Bee article titled, “California agriculture, largely spared in new water restrictions, wields huge clout,” and in an ABC News article titled “California’s Drought Plan Mostly Lays Off Agriculture, Oil Industries.” Likewise, the New York Times dutifully reported, “The [State Water Resources Control Board] signaled that it was also about to further restrict water supplies to the agriculture industry, which consumes 80 percent of the water used in the state.”
This is a textbook example of how the media perpetuates a false narrative based on a phony statistic. Farmers do not use 80 percent of California’s water. In reality, 50 percent of the water that is captured by the state’s dams, reservoirs, aqueducts, and other infrastructure is diverted for environmental causes. Farmers, in fact, use 40 percent of the water supply. Environmentalists have manufactured the 80 percent statistic by deliberately excluding environmental diversions from their calculations. Furthermore, in many years there are additional millions of acre-feet of water that are simply flushed into the ocean due to a lack of storage capacity — a situation partly explained by environmental groups’ opposition to new water-storage projects.
April 30, 2015
Elasticity of Supply
Published on 27 Jan 2015
When is a supply curve considered elastic? What are determinants of elasticity of supply? Let’s compare Picasso paintings and toothpicks. Which has an elastic or inelastic supply? For which good could you increase production at a low cost? We also go over how to calculate the elasticity of supply, including using the midpoint formula.
April 28, 2015
Another misleading statistical quirk about US corporate profits
Earlier this month, Tim Worstall explained why the huffing and puffing over the increased share of corporate profits in the US GDP figures is misdirected:
There’s all sorts of Very Serious People running around shouting about how the capitalist plutocrats are taking ever greater shares of the US economy. This might even be true but one of the pieces of evidence that is relied upon is not actually telling us what people seem to be concluding it is. The reason is that we’re in an age of increased globalisation. This means that large American companies (we mostly think of the tech companies here, Apple, Google, Microsoft) are making large profits outside America. However, when we measure the profit share of the US economy we are measuring those offshore profits as being part of the US economy. But we’re not also measuring the labour income that goes along with the generation of those profits. It’s thus very misleading indeed to be using this profit share as an indication of the capitalist plutocrats rooking us all.
[…]
It’s possible that that rise in the profit share is actually nothing at all to do with the US domestic economy. If American corporations are now making much larger foreign profits than they used to then that could be the explanation. No, it makes no difference about whether they repatriate those profits, nor whether they pay tax on them: those foreign profits will be included in GNP either way. Note also that measuring the profit share this way is rather misleading. Yes, it does, obviously because this is the way we calculate it, mean that the profit share of GNP is rising. But we’re not including the labour income that goes along with the generation of those profits. That’s all off in the GNP (or GDP) of the countries where the sales and manufacturing are taking place. The only part of this economic activity that we’re including in US GNP is that profit margin.
[…]
Now to backpeddle a little bit. I do not in fact insist that this is the entire explanation of the increased profit share. It wouldn’t surprise me if it was but I don’t insist that it’s the entire explanation. I do however insist that it is part of the explanation. The sums being earned offshore by large American companies are large enough to show up as multiple percentage points of the US economy. So some of that change in the profit share is just because American companies are doing well elsewhere in the world. It’s got very little to almost no relevance to the American economy itself that they are. At least, not in the sense that it’s being used here, to talk about the declining labour share. Because these profits simply aren’t coming from the domestic American economy therefore they can’t have any influence upon the percentage of that American economy that labour gets.
This does, of course, have public policy implications. If the above is the whole and total reason for the fall in the labour share of GNP then obviously we can raise the labour share of GNP just by telling American companies not to make profits in foreign countries. Which would be a completely ridiculous thing to do of course. But given that that would indeed solve this perceived problem, and also that it’s a ridiculous thing to do, means that the worries over the problem itself are also ridiculous. So, we don’t actually need a public policy response to it.
April 27, 2015
Calculating the Elasticity of Demand
Published on 27 Jan 2015
Elasticity of demand is equal to the percentage change of quantity demanded divided by percentage change in price. In this video, we go over specific terminology and notation, including how to use the midpoint formula. We apply elasticity of demand to the war on drugs, and more broadly to the prohibition of a good when it has an elastic demand.
April 25, 2015
There’s a reason SF writers tend to invent ways to travel interstellar distances quickly
At Real Clear Science, Ross Pomeroy sings the praises of an early publication by the pre-Nobel academic Paul Krugman:
Paul Krugman is a Nobel Prize-winning economist, a respected professor at Princeton University, and an outspoken liberal columnist for the New York Times. But first and foremost, he is a huge nerd, and proud of it.
Back in the sweltering summer of 1978, Krugman’s geekiness prompted him to tackle a matter of galactic importance: the economics of interstellar trade. Then a 25-year-old “oppressed” assistant professor at Yale “caught up in the academic rat race,” Krugman crafted his “Theory of Interstellar Trade” to cheer himself up. Krugman’s jocularity is evident throughout the paper, which was published online in 2010, thirty-two years after he stamped it out on a typewriter. Early on in the article, he even pokes fun at his chosen profession:
“While the subject of this paper is silly, the analysis actually does make sense. This paper, then, is a serious analysis of a ridiculous subject, which is of course the opposite of what is usual in economics”
The key problem with interstellar trade, Krugman writes, is time dilation. When objects travel at velocities approaching the speed of light — roughly 300,000 kilometers per second — time moves more slowly for them compared to objects at rest. (For a great explainer of this effect, which is tied to Einstein’s theory of special relativity, check out this video.) So the crew of a space-faring cargo ship might experience only ten years while thirty years or more might pass for the denizens of the planets they’re traveling between. How then, does one calculate interest rates on the cost of goods sold? Trading partners will undoubtedly be many light-years apart and trips will last decades, so this is a vital issue to resolve.
Since the speeds of vessels will undoubtedly vary, but both planets should be moving through space at close enough velocities where time dilation wouldn’t be a factor, Krugman contends that the interest costs should be tabulated based on the time shared by the two planets. But what about those interest rates? Won’t they differ? Not necessarily, Krugman argues. Competition should lead them to equalize amongst interplanetary trading partners.
Elasticity of Demand
Published on 27 Jan 2015
How much does quantity demanded change when price changes? By a lot or by a little? Elasticity can help us understand this question. This video covers determinants of elasticity such as availability of substitutes, time horizon, classification of goods, nature of goods (is it a necessity or a luxury?), and the size of the purchase relative to the consumer’s budget.
April 24, 2015
Relative and absolute poverty
We in the west are so rich, in historical terms, that we are losing our grasp on what poverty really has been for the majority of humankind for the majority of our recorded history:
People generally just don’t get what poverty actually means. This is a charge often enough aimed at me and people like me, well off white guys who pontificate upon economics. But those making that charge often enough don’t actually understand what real poverty means. So, here’s a nice example of it. There’s a campaign in New York to insist that SNAP (ie, food stamps) should not be cut. Views on that can vary either way: I’m generally in favour of a larger welfare state than the one the US has at present so I’m probably against such a cut. But that’s a political point and not the one I’m interested in here. Rather, I want to point out just quite how rich someone getting food stamps is on any global or historical basis.
Yes, you did read that right: how rich someone getting food stamps is. As one example, the food stamp allocation in New York State appears to be $29 per person per week in a family receiving the full possible allocation. That, on its own, is a yearly income of $1,508 and that’s an amount that puts you, on its own, in the top 50% of all income recipients in the world. No, really, you can look that up with this little calculator. More than half of humanity is poorer than someone who only gets the New York food stamp allocation.
All of which gives us an interesting little look into the difference between absolute poverty and relative poverty. For, obviously, the people who are receiving food stamps in New York are those we consider to be poor in our own society. And in our own society, they are indeed poor, as Adam Smith pointed out with his linen shirt example. It’s not necessary for a working man to have a linen shirt, he’s not poor because he cannot afford one. But if you live in a society where you are considered to be poor if you cannot afford a linen shirt, and you cannot afford one, then in that society you are of course poor. This is relative poverty, more usefully known not as a measure of poverty but of inequality.
