--Art Carden

Greg Mankiw has an intriguing post about whether Harvard could or should leave Massachusetts in response to a proposed MA plan to tax large university and college endowments. Mankiw wonders specifically whether the University should create "Harvard South" in another state. I would think Rhode Island would be a natural choice; according to Google Maps, Providence is only about an hour south of Cambridge, and though I've never been there I've heard it's very nice. That raises another interesting question: would colleges and universities be able to shake down state and local governments for subsidies the way pro sports franchises have been able to do? How would Division I sports factor into the bargaining? Given that private schools would have more mobility than public schools--I doubt my alma mater could credibly threaten to move to Atlanta, Seattle, or Los Angeles--how would this change the distribution of resources going into higher education? Perhaps most importantly, how would donors respond? Comments are open if anyone has any ideas (or offers for mortgage refinancing or no-limit Texas Hold 'em).

--Art Carden

I gave a speech last night to the Phi Beta Kappa Association of the Mid-South on "Lessons from the Great Depression" and promised my hosts that I would post links to my sources and other resources on DOL. I summarized the received wisdom on the Depression (inept monetary policy) and then we talked briefly about credit expansion during the Q&A. Resources are below. NB: right after I saved this entry the first time, I saw James Hamilton's post from this morning asking "what if we'd been on the gold standard" today. It's now included among the links.

Read More »

--Wilson Mixon

Read More »

--E. Frank Stephenson

Matt Ryan explains.

NB--One of the commenters on Matt's post points out that the time people were willing to stand in line for a cheap pizza indicates they value their time at $3-4 per hour. Something to keep in mind next time someone whines that raising the minimum wage is necessary to avoid exploiting workers. Maybe minimum wage advocates should advocate price floors for pizzas.

--E. Frank Stephenson

In the same vein as Art's recent post on cross-price elasticity of demand:

Howard Gendron stopped driving his 28-foot cabin cruiser on Rhode Island's Narragansett Bay two years ago because gas prices were up and his waterborne gas hog sent his fuel costs "out of sight," he says.

But the mechanic had to satisfy his love of water, he says, so he bought a 21-foot Sea Ray with better mileage. "We downsized," says Gendron, 44, of Warwick, R.I.

Even so, the smaller boat was no match for recent gas prices. "We're not even putting it in this year because of the cost of fuel," he says.

Boaters and jet-ski owners are feeling the pinch of rising gas prices. Some are trying to sell their boats. Others are changing their habits. Instead of gunning their engines at high speeds, they're slowing down or drifting.

They're shortening trips or just hanging out in marinas, says Scott Croft, spokesman for the 650,000-member Boat Owners Association of the United States. He calls himself the "poster child" for boaters' reaction to gas prices.

MarineMax, which calls itself the country's largest recreational boat retailer, saw same-store sales fall 28% in the quarter ending in March compared with the same quarter last year. Glenn Sandridge, vice president for marketing, says gas prices don't affect consumer decisions as much as concerns about the overall economy.

Gendron, who has been trying unsuccessfully to sell his cabin cruiser, says both of his boats will sit in his backyard this year. "You cannot give a boat away up here."

--Art Carden

I learned from the comments in Steve Horwitz's post on Hayek that today is also the birthday of University of Missouri economist Peter G. Klein. From the Mises Institute's excellent repository of online media, here's Peter speaking on a bunch of topics (scroll down a bit for his talk on "The Economics of F.A. Hayek"). Here are some of his articles published or distributed by the Mises Institute. Here is his website at the University of Missouri, with a link to his work on institutions, entrepreneurship, and the firm. Peter was kind enough to arrange for me to give a talk at CORI in Fall 2005; that led to a fruitful collaboration with Harvey James.

--Art Carden

From Hayek's Nobel lecture:

"We know...the general conditions in which what we call, somewhat misleadingly, an equilibrium will establish itself: but we never know what the particular prices or wages are which would exist if the market were to bring about such an equilibrium. We can merely say what the conditions are in which we can expect the market to establish prices and wages at which demand will equal supply. But we can never produce statistical information which would show how much the prevailing prices and wages deviate from those which would secure a continuous sale of the current supply of labour."

Here's Dilbert on a similar issue.

--Wilson Mixon

Chicago's city fathers (stepfathers?) have stepped up to save South Side denizens from the obloquy that might attach to buying precription drugs for $4, according to this report.

Wal-Mart got the word from city officials last month that Mayor Richard Daley doesn't want to risk a messy showdown with unions over Wal-Mart—like the big-box store battle of 2006—while Chicago is still in the running as a host city for the 2016 Olympics, according to people familiar with the matter. The International Olympic Committee is slated to make that decision in October 2009.

--Art Carden

On this, F.A. Hayek's 109th birthday, Steve Horwitz offers his favorite Hayek quote:

The curious taxsk of economics is to demonstrate to men how little they really know about what they imagine they can design.--The Fatal Conceit, p. 76

Steve offers further comments. I'm giving a talk this evening entitled "Lessons from the Great Depression," and I think I'll make use of Steve's favorite quote.

--Art Carden

1. I've really come to enjoy Jill Sobule's performances on TED (probably my favorite website). Last night, I downloaded her "Live at Joe's Pub" show, attractively priced to move at $0.00. The sound quality is great, and it's been a fun listen so far.

2. I took another step toward getting in touch with my inner Tyler Cowen today. Mike and I went to A-Tan's for lunch. I'm certainly no food expert, but we enjoyed it and will probably be back. The wonton soup was especially good, and Mike reported that the hot & sour soup was also excellent. Mike got right to the heart of the my failure to recognize the relevant conditional probabilities in our end-of-meal exchange over fortune cookies:

Me: (reading Mike's fortune) "A shooting star tonight brings good luck tomorrow." So does this mean that a shooting star will certainly appear tonight and then bring you good luck tomorrow, or is it conditional, saying that you will have good luck tomorrow if there's a shooting star tonight?

Mike: It's conditional. It's also conditional on fortune cookies not being a load of crap.

--E. Frank Stephenson

Calling his effort "Operation Chaos," Rush Limbaugh has been urging Republicans to cross over and vote for Hillary. There are competing claims about how successful his effort has been (here and here), so I decided to exploit variation in the Indiana and NC primary rules to see how much influence Limbaugh had on yesterday's results.

Here's the key idea--Indiana has an open primary but NC does not permit Republicans to vote in the Democrat primary (unaffiliated voters can). Moreover, NC had a contested primary for the GOP nomination for governor that would serve to keep NC Republicans in their own election.

So I estimated a regression model for the percent of the vote received by Hillary in NC and IN counties. RHS variables include the black percent of the population, the percent of the population between ages 16 & 24, the percent of the population over 65, the percent of the population that is male, and per capita income. The model also includes a dummy variable taking a value of 1 for IN counties--this variable should pick up any support for Hillary that is not explained by the other variables thereby making it a crude measure of the Rush effect.

So what do the results find? The Indiana dummy has a coefficient of 0.53 meaning that on average Hillary got a about one-half percentage point larger share in Indiana than would be explained by the control variables. The point estimate is not statistically significant (t = 0.43). The regressors perform as one would expect, except the percent male has no effect (either in magnitude or significance).

My student worker Katie compiled data for me and is compiling more as I type. Look for updates later.

BTW, Limbaugh has just come on. He is claiming credit for tilting IN to Hillary and playing audio to that effect from John Kerry. My results suggest otherwise.

--Robert Lawson

Justin Ross channels David Ricardo re: Chrysler's idea to cap gas prices at $2.99 for three years for anyone buying one of its cars.

Lets say you believe the weighted average of gas prices over the next 36,000 miles of 3 years to remain at $3.61 and you get that $355 in savings for each of the next 3 years. At a 5% discount rate, that is $967 in net present value. We can safely assume then that demand will push the price of a Chrysler buy or lease up around $1,000. However, applying the Winner's Curse from game theory, those who most overestimate the price of future gas prices will be the ones making the actual purchases by out-bidding all others, meaning they will likely pay more up-front than those who would just pay the market gas prices over the next 3 years.

--Edward J. Lopez

City Journal has a retrospective of of the 1968 student protests, most notably the May 1968 Paris unrest. Six accomplished contributors talk about the political, sexual, journalistic, and other cultural inheritances of the 60's. I don't pretend to know a lot about those days; I'm barely a sixty-niner myself (born with 33 days left in the decade). But these six essays leave me with the impression that the events of 40 years ago had an influence that was narrow and misdirected. See below the fold for my top three excerpts. The whole thing is worth a read. Hat tip, Emilio Pacheco.

Read More »

--Craig Depken

As there are bad policies today concerning food, there were bad policies yesterday. From the May 6, 1908 NYT:

ST. PETERSBURG [Russia] - The Russian sugar industry centering at Kiev is passing through a serious crisis. it already has resulted in the suspension of payments by two of the great manufacturing and refining firms...The trouble in the sugar industry is due in large measure to restriction of exports; the production is far in excess of the Russian market.

--Craig Depken

Taxation can take a number of forms, but the most insidious are those that are non-monetary in nature. A good example comes from the May 6, 1908 NYT:

George H. Fearons, General Attorney for the Western Union Telegraph Company, addressed the House Committee on Inter-State and Foreign Commerce to-day in opposition to the bill introduced by Mr. Carey of Wisconsin to require telegraph companies to transmit with telegrams the time of filing messages and the time of putting them on the wire.

Mr. Fearons said that 60 per cent. of the telegraph business of the country was the transmission of information for Exchanges, Boards of Trade, and similar commercial bodies, 20 per cent. was newspaper matter, 15 per cent. railroad intelligence, and less than 3 per cent. "private and social telegrams."

He said that on the basis of 74,805,000 telegrams transmitted annually, the additional number of words imposed by the bill upon the Western union Company for transmission would be equal to 17,454,000 ten word-messages.

The extra messages would represent an in-kind tax because the marginal cost of an additional message was not zero - there were congestion problems, no doubt. Assuming the attorney was telling the truth, the 17+ million requred additional messages would represet a 23% increase in the number of messages sent. Western Union would likely have respond by sending fewer non-required messages.

I wonder what political interest group Rep. Carey was trying to appease: were there claims that Western Union sat on certain messages and gave preference to other messages, sort of a 1908-version of net neutrality? My hunch is that Rep. Carey was responding to a complaint from one or more "private and social" consumers.

If the Boards and Exchanges were anxious about timely delivery of information, given their market share of telegrams sent they would have been able to exert some pressure on Western Union to improve service. The same woudl have gone for the newspapers and the railroads.

I wonder if this bill, like many bills, was submitted to "protect the rights" of small-time consumers and in the process tax the heck out of the firm that provided a valuable service. This sounds a lot like many of the bad policies proffered today.

However, history shows that Western Union already faced competition: the postal service, the telephone, the wireless, and eventually the fax, and the Internet. It took a while but roughly 100 years later Western Union sent its last telegram.

--Art Carden

By Mario Rizzo and Glen Whitman, the cleverly-titled "Little Brother is Watching You: New Paternalism on the Slippery Slopes."

Their abstract:

The new paternalism claims that careful policy interventions can help people make better decisions in terms of their own welfare, with only mild or nonexistent infringement of personal autonomy and choice. This claim to moderation is not sustainable. Applying the insights of the modern literature on slippery slopes to new paternalist policies suggests that such policies are particularly vulnerable to expansion. This is true even if policymakers are fully rational. More importantly, the slippery-slope potential is especially great if policymakers are not fully rational, but instead share the behavioral and cognitive biases attributed to the people their policies are supposed to help. Accepting the new paternalist approach creates a risk of accepting, in the long run, greater restrictions on individual autonomy than have been heretofore acknowledged.

--Art Carden

I'm listening to Nine Inch Nails' Ghosts I, which they offered for free on their website a few months ago (the rest of the album, Ghosts II-IV, costs money). I was getting ready to write a short post on NIN's price discrimination scheme when I came across this article pointing out that their next album will also be available online for a price of $0.00. It's available now. I'd speculate on the economics of it all but Tyler Cowen already did it last year when Radiohead offered an album online for free. Cowen points out that free music online is a good strategy for artists that get a large share of their income from live performances--Wikipedia says that "on stage, NIN often employs spectacular visual elements to accompany its performances, which frequently culminate with the band destroying their instruments"--and for artists that want to expand their fan bases. I for one have never really been an NIN fan, but I will certainly take them up on their offer of free stuff, and the probability with which I will buy some of their earlier material is now substantially higher.

Afternoon Update: I downloaded "The Slip" (NIN's new album). After one listen, it's certainly worth the price. I enjoyed it, but I think "Ghosts I" is better with a probability of about 0.6 or 0.7, if for no other reason than that it's instrumental and provides decent background music for writing.

--Michael Munger

If I may....a new essay on externalities.

It may be of interest to some readers here at DoL.

--Robert Lawson

Volvo Promises an Injury-Proof Car by 2020. Yikes! In this driver's personal opinion, most Volvo drivers are already menaces on the road. I hate to imagine what they'll be like when they can drive without risking personal injury!

Personally, I'd reduce accidents (and injuries and deaths) this way:

Related issues:

[1] This idea that increasing safety will cause us to behave more recklessly is generally attributed to Sam Peltzman. Here's a study on safety/accidents/deaths in NASCAR.

[2] Here's a short story about how people would drive if they could do so without risking injury, which was the inspiration for my favorite Rush song Red Barchetta.

[3] Most people I know attribute the steering wheel idea to Gordon Tullock though I've heard also that it came from Armen Alchian. The idea of increasing overall safety by making things more risky is getting some traction. I was just reading a book by a mountaineer in which the author (Joe Simpson of Thouching the Void fame) mentioned the steering wheel concept.

[4] For an application of this idea to mountaineering, see this paper by Clark and Lee.

HT: Dave Reed

--Wilson Mixon

Applied research, I'm sure.

A Japanese civil servant has been demoted for viewing pornographic websites more than 780,000 times during office hours over a nine-month period. [...] Despite his frequent porn viewing, none of his colleagues noticed his activities.

The man's superiors discovered his extensive porn site visits after his computer became infected with a virus [...].

So, how can you tell when a bureaucrat is doing his/her work? Preliminarily, I'm guessing that this one wasn't.

--Lawrence H. White

On Wednesday the Federal Reserve reduced its target for the fed funds rate to 2.00%, the latest in a series of reductions that started from 5.25% in September 2007. In its April 28 editorial entitled “The Fed’s Bender” (also linked to by Frank Stephenson below) the Wall St. Journal refers these target rate reductions as “easy money,” “easier money,” and “the Fed's decision to open the general monetary spigots”. Normally rate-cutting and monetary expansion do go hand in hand. An injection of new base money shifts the supply curve for fed funds rightward and, given a constant demand curve, drives down the price.

But in the present case, the Fed is not vigorously expanding the monetary base. Here, courtesy the St. Louis Fed, are the data for the adjusted monetary base:

2007-03-01 813.857
2007-09-01 820.020
2008-03-01 825.613

The base is up only 1.4% over the last twelve months, only 0.6% over the last six months. (Above figures are the Board of Governors adjusted base; the St. Louis adjusted base tells the same story.) These numbers suggest that the Fed’s rate adjustments are not driving the market’s fed funds rate down by injecting base money, but have largely been following the market rate down. The demand curve for fed funds must be shifting inward, because the supply curve is hardly shifting outward.

Some of the broader monetary aggregates are growing. M1 is flat. But M2, which has shown a fairly stable velocity in recent years, is up about 7 percent over a year ago. This is consistent with market forecasts of higher price inflation. (MZM is up about 15 percent, but its velocity has been dropping.) Why the M2 money multiplier (M2/base) should be rising in this way is unclear, but the current growth of M2 (or MZM) is not due to Fed injections of base money.

Standard monetary policy rules seem to give a mixed picture. McCallum’s Rule for base money growth, as tracked by the St. Louis Fed, indicates that recent Fed policy has not been very expansionary: recent base growth has been consistent with a price inflation rate of only 1%. On the other hand the Taylor Rule for the fed funds target, with PCE inflation currently running above 3%, indicates that the current fed funds target is much too low to be consistent with 1% inflation, and even too low to be consistent with 4% inflation. But the Taylor Rule, at least in the form tracked by the St. Louis Fed does not incorporate any adjustment for shocks to the demand for fed funds (independent of inflation and real GDP). This may explain why it seems a poor guide at present to inferring the degree of monetary ease.

--Art Carden

This example has "Fall 2008 exam question" written all over it.

NB: The "cross-price elasticity of demand" meme in the blogosphere is from Pigou Club founder and Harvard economist Greg Mankiw, who periodically posts on news stories about how people change their consumption in the face of changing gas prices.