Ben Muse

Economics and Alaska

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Who first said "There's no such thing as a free lunch?"

Michael Stastny does the research.

Pricing New York City taxi medallions

Andrew Chamberlain does the math.

How to get a job as an economics professor

Craig Newmark points to a list of 53 job search tips prepared by Michael Quinn - an assistant professor at Bentley College. Quinn got a job, so apparently the tips work.

The spirit of the list, as well as many specific points (" 13.) Make sure that your shoes are well-polished. Buy new shoes if necessary. You do not want to be wearing shoes that are scuffed (on the tops or the bottoms).") look like they'd be useful in applying for a wide range of positions.

What programming tasks can be outsourced to India?

Eduardo Porter reports on the limits some firms (and even U.S.-Indian entrepreneurs) have reached in outsourcing programming jobs to India, in today's New York Times.
    "Mr. Pradhan, who is Indian-educated, disagrees with critics who say that Indian-trained workers lack creative ability...

    But Mr. Pradhan agreed that the need for proximity to the final user of the technology does place limits on what types of tasks can be outsourced. "Whenever the pace of innovation is very rapid," he said, "is when the work should be done closer to the client."

    In the future international division of labor, Mr. Pradhan said, the production of the technology will be done in places like India, which can deliver it reliably at a low cost. What cannot be sent to India, he said, is the invention of new business processes and technologies.

    Conceiving inventory-management software that helps a retailer make the best use of electronic product tags, for example, might be something best done by system designers in the United States working closely with the retailer. Once such a system and its tasks have been mapped out, though, the software code could be written by programmers in India.

    ...Innovative business processes result from "an understanding of the business that happens when people get into a room and talk to each other," Mr. Pradhan said. "That is very difficult to outsource."
The creativity problem is not due to inherent limits on Indian creativity. It is due to the problems programmers face in a rapidly changing environment when, because of distance, they have an unavoidably limited knowledge of customer needs. Daniel Drezner quotes some other parts of the article.

Property rights in parking

Russell Roberts at Cafe Hayek reports on $160,000 parking spaces in Boston and private definition and enforcement of property rights in curbside parking in Chicago.

"The Book of My Enemy Has Been Remaindered"

Jane Galt takes time for poetry.

New Zealand's reforms of the 1980s

I've worked as an economist in fisheries management since the early 1980s. New Zealand reformed its fisheries management in the mid-1980s as a part of a broader package of political reforms.

An important component of the fisheries reform was a thorough-going implementation of individual fisherman's or enterprise quotas. They subdivided their existing allowable harvests among fishing operations, giving each operation considerably more control over its harvests. They made the allocations tradable, making it possible for more efficient operations to buy up the quota of less efficient operations.

This was a pretty radical change and I think it had a world wide impact. I remember how exciting it was in the late eighties, to hear that it was being done and to learn the mechanics of doing it. (If you'd like to learn a little more about individual fisherman's quotas (or IFQs), Lynne Kiesling points to the web page of the IFQs for Fisheries Project in a post today. The project is a joint educational and lobbying effort of the Environmental Defense, the Property and Environment Research Center (PERC), and the Reason Public Policy Institute.)

But the fisheries reforms were only one part of a radical reform program. Maurice McTigue was apparently one of the ministers in the government that implemented the reforms. He recalled what was accomplished in a speech at Hillsdale College this past February.
    "...When a reform government was elected in 1984, it identified three problems: too much spending, too much taxing and too much government. The question was how to cut spending and taxes and diminish government's role in the economy. Well, the first thing you have to do in this situation is to figure out what you're getting for dollars spent. Towards this end, we implemented a new policy whereby money wouldn't simply be allocated to government agencies; instead, there would be a purchase contract with the senior executives of those agencies that clearly delineated what was expected in return for the money. Those who headed up government agencies were now chosen on the basis of a worldwide search and received term contracts - five years with a possible extension of another three years. The only ground for their removal was non-performance, so a newly-elected government couldn't simply throw them out as had happened with civil servants under the old system. And of course, with those kinds of incentives, agency heads - like CEOs in the private sector - made certain that the next tier of people had very clear objectives that they were expected to achieve as well.

    The first purchase that we made from every agency was policy advice. That policy advice was meant to produce a vigorous debate between the government and the agency heads about how to achieve goals like reducing hunger and homelessness. This didn't mean, by the way, how government could feed or house more people - that's not important. What's important is the extent to which hunger and homelessness are actually reduced. In other words, we made it clear that what's important is not how many people are on welfare, but how many people get off welfare and into independent living.

    As we started to work through this process, we also asked some fundamental questions of the agencies. The first question was, "What are you doing?" The second question was, "What should you be doing?" Based on the answers, we then said, "Eliminate what you shouldn't be doing" - that is, if you are doing something that clearly is not a responsibility of the government, stop doing it. Then we asked the final question: "Who should be paying - the taxpayer, the user, the consumer, or the industry?" We asked this because, in many instances, the taxpayers were subsidizing things that did not benefit them. And if you take the cost of services away from actual consumers and users, you promote overuse and devalue whatever it is that you're doing.

    When we started this process with the Department of Transportation, it had 5,600 employees. When we finished, it had 53. When we started with the Forest Service, it had 17,000 employees. When we finished, it had 17. When we applied it to the Ministry of Works, it had 28,000 employees. I used to be Minister of Works, and ended up being the only employee. In the latter case, most of what the department did was construction and engineering, and there are plenty of people who can do that without government involvement. And if you say to me, "But you killed all those jobs!" - well, that's just not true. The government stopped employing people in those jobs, but the need for the jobs didn't disappear. I visited some of the forestry workers some months after they'd lost their government jobs, and they were quite happy. They told me that they were now earning about three times what they used to earn - on top of which, they were surprised to learn that they could do about 60 percent more than they used to! The same lesson applies to the other jobs I mentioned.

    Some of the things that government was doing simply didn't belong in the government. So we sold off telecommunications, airlines, irrigation schemes, computing services, government printing offices, insurance companies, banks, securities, mortgages, railways, bus services, hotels, shipping lines, agricultural advisory services, etc. In the main, when we sold those things off, their productivity went up and the cost of their services went down, translating into major gains for the economy. Furthermore, we decided that other agencies should be run as profit-making and tax-paying enterprises by government. For instance, the air traffic control system was made into a stand-alone company, given instructions that it had to make an acceptable rate of return and pay taxes, and told that it couldn't get any investment capital from its owner (the government). We did that with about 35 agencies. Together, these used to cost us about one billion dollars per year; now they produced about one billion dollars per year in revenues and taxes.

    We achieved an overall reduction of 66 percent in the size of government, measured by the number of employees. The government's share of GDP dropped from 44 to 27 percent. We were now running surpluses, and we established a policy never to leave dollars on the table: We knew that if we didn?t get rid of this money, some clown would spend it. So we used most of the surplus to pay off debt, and debt went from 63 percent down to 17 percent of GDP. We used the remainder of the surplus each year for tax relief. We reduced income tax rates by half and eliminated incidental taxes. As a result of these policies, revenue increased by 20 percent. Yes, Ronald Reagan was right: lower tax rates do produce more revenue..."
I learned about this from Zimran Ahmed at (Selection reprinted by permission from IMPRIMIS, the monthly journal of Hillsdale College - The speech is a pretty interesting read. I'm not expert on the broader New Zealand reform package. I don't know to what extent McTigue may be glossing over defects in a process with which he was closely associated. I'd also be curious to know more about how these policies have evolved since the reform period.

Terrorism and the cost of staging the Olympics

Skip Sauer (The Sports Economist) draws on a Washington Post story and estimates that terrorism has "increased the cost of staging the Olympics by close to $1 billion."

Do trade preferences help developing countries?

A country that imposes tariffs on imports deters supplies from abroad, increases the prices paid by its consumers, and increases profits for its producers.

Sometimes, developed countries will give poor countries a break on tariffs, allowing some exports from these countries to enter at reduced tariff rates. Producers in the poor country would enjoy the higher prices in the developed country, without paying the higher tariffs required from other foreign suppliers. This "preferential access" can encourage the location of industry and the creation of jobs in the poor country.

The U.S. African Growth and Opportunity Act (AGOA), is an instance of this sort of tariff break. Last week the Boston Globe carried a story (by Carter Dougherty) on the impact of AGOA on Lesotho. The thrust of the story was that AGOA has been good for Lesotho, creating industry and jobs, but that these will be lost if a key provision of AGOA is not extended.

In general, the potential impacts of preferential tariff arrangements are more complex. Vernon Topp, of the Australian Bureau of Agricultural and Resource Economics (ABARE), outlines the potential downsides in "Are trade preferences helpful in advancing economic development?" (I appreciate Peter Gallagher letting me know about Topp's paper.) Topp is really skeptical about the use of these preferences. Key elements of his critique:
  • The preferences tend to be underutilized. Perhaps because the costs of learning about them, meeting their conditions (for example, limits on foreign content), and working with them, are often greater than the benefits.

  • Poor country producers get a high price for their exports to the developed country. The high price for the exports would attract poor country resources into the production of that good. If the country puts a disproportionate number of its industrial eggs in a single basket, it may become more vulnerable to economic shocks.

  • The people who benefit from the preference are likely to be the people who own the fixed resources needed to compete in the industry at the time the preference becomes available. If the land that can be used is in fixed supply, or the licenses needed to compete are in fixed supply, the owners of these inputs should receive the bulk of the benefits. New entrants would have to buy access to these fixed resources in order to enter the business. Their potential future profits would be incorporated into the price they pay for entry to the business. The benefits from the program go to the people who were in when the program was set up. People who buy in later pay for the future benefits they will receive.

  • Note that the capitalization of the benefits of the preferences into the land, increase its market price and increase the cost of land to the nation's other industries. The increased costs could reduce the competitiveness of these industries in other export markets, and reduce national diversification even more.

  • The firms that are receiving the artificially high price for the export good would have relatively weak incentives to keep their costs down. Firms that might not be able to compete profitably at world prices may be drawn into the business. The poor countries high cost producers would not be able to compete outside of the protected market of the preference granting importer.

  • Poor workers are unlikely to be beneficiaries of these programs. Only the poor who own land or capital will benefit. Other poor will only benefit if the "direct beneficiaries" of the program buy consumption goods and services from the poor with the additional income they earn from the preferences. The benefits of this "trickle down" effect will be even smaller if the owners of the capital and land live in other countries and spend their income at home.

With respect to this last point, the Globe story suggests that many workers in Lesotho benefit more directly from AGOA's tariff preferences:
    "If the fabric rule is not extended, people like Chen's employee Litabe will feel the worst pinch. Litabe earns about $89 per month sewing labels, while others in the factory make as much as $121. Though measly by American standards, the job gives Litabe an annual income of $1,068, roughly double what the World Bank calculated as Lesotho's per capita income in 2002.

    About 52,000 other people in Lesotho enjoy similar income levels thanks to AGOA..."
Rethabile Masilo commented on a post of mine last week, and suggested the same thing:
    "A lot of people in Lesotho have jobs because of the legislation and the bringing down of trade tariffs. These same people today are able to go home and face their families, because today they can buy basic foodstuffs and so on. These same people are,on the other hand, often maltreated and subjected to bad working conditions by factory owners that are in Lesotho precisely because of Agoa. It's hard to embrace Agoa, yet harder, even, to dismiss it and seek its withdrawal."
The first point above noted that the complexity of the tariff and preference arrangements might pose a barrier to their use. The Globe story suggests that the cost of using these provisions may be high:
    "...American officials note that the government of Lesotho played an important role in making AGOA work. It built factory space that companies could then lease, and by working closely with the US Customs service to follow detailed American import regulations.

    But the presence in Lesotho of experienced managers like Chen was crucial, because they understood the garment sector, which is governed by a Byzantine array of rules, and which requires timely sourcing of raw materials and punctual delivery to demanding customers..."
Look at the role of foreign direct investment:
    " Many Taiwanese began small-scale manufacturing in Lesotho two decades ago. Chen arrived in 1989.

    When the US law came into force, she was able to seize the opportunity in a matter of months. She merged her company into the operations of Carry Wealth Holding, a Hong Kong-based company that provided capital to expander her operations in Lesotho. Chen soon nearly quadrupled the size of her factory in Lesotho..."

What is the solution for poor airport security?

Mindles Dreck thinks that it depends.

Modern Whaling on Alaska's Arctic coast

The Anchorage Daily News has begun running a series of excerpts (free registration required) from a new book by Charles Wohlforth, The Whale and the Supercomputer.

Today's selection focuses on the Inupiat (one of the groups often called Eskimos) of Barrow and sea ice. Inupiat whalers travel miles out onto the ice, and use it as a platform to harvest whales in open water. But the ice doesn't just sit there, it is dynamic. Enormous masses of ice can crash together creating man-killing ice quakes and opening watery gaps between the men and shore. Hunters often have to break camp in minutes and race miles for safety. One of these races is described in today's excerpt.

There's a lot in this excerpt, including an explanation of how the Inupiuq language facilitates work and survival on the ice, and why Inupiat hunters stop a lot and look around (hint: man isn't necessarily the top level predator out there), and the ways Inupiat traditions of respect for older people work themselves out among the hunters.

The Daily News will have another excerpt each day this week.

Wohlforth has set up a web site for the book. with many photos and additional text, including photos not in the book, and the text of an article from Orion magazine.

How do the supercomputers come into this? The book is meant to be more than a description of Inupiat whaling. Wohlforth's goal is to describe the cultures of scientists and Inupiat, as they come face to face with the impact of global warming in the north country.

Parenthetically - I've had several posts on whaling in the last few weeks. Other recent posts include a description of 19th Century Aleut whaling methods, a description of 19th Century U.S. whaling enterprise organization, and a link to a post by Tyler Cowen on stone age Korean whaling.

Roots of recent anti-Americanism

Political scientist Walter Russell Mead traces the some of the roots of recent anti-Americanism to events in the 1990s, including a French strategic decision that U.S. power was too great, and the Clinton administration's response to the East Asian financial crisis of 1997, in an interview with Bernard Gwertzman of the Council of Foreign Relations:
    "...the groundwork for a lot of the anti-Americanism that has flared in the last few years was laid in the 1990s.

    I always assumed Bush's personality and policies were largely responsible for the anti-Americanism. [Gwertzman - Ben]

    The French had already made the decision in the 1990s that American power was too great and France needed to resist it. I think Bush gave them some opportunities. But the French strategic decision to reduce American power and build a multipolar world evolved from the foreign policy that was emerging in the 1990s. And in East Asia, the United States is blamed for not doing much to help those nations out after the 1997 financial crisis. A lot of the anti-Americanism in South Korea was really inflamed by that, and continues to be a factor to this day. The utter collapse of Indonesia and the new anti-Americanism that you see and the opportunity for radical Islamic groups to gain strength in Indonesia have their origins in the catastrophic consequences of both the collapse itself and the reaction to it.

    What was the Clinton administration's reaction to the East Asia crisis?

    It supported the International Monetary Fund in very tough adjustment programs. What people said at the time was that when Mexico collapsed in 1994, the Clinton administration proposed a very generous bailout. And then when it happened in East Asia, it was very tough. Most people would agree the Clinton bailouts did not help in Asia..."

New Alexander Hamilton Biography

"By the time Alexander Hamilton was my age he'd been dead for three years." (to paraphrase an old Tom Lehrer joke). In that time he'd been a successful businessman, chief aide to General Washington in the revolution, served in the constitutional convention, written his share of the Federalist papers, served as Secretary of the Treasury and laid the foundation for U.S. commercial greatness, practiced law in New York, and more. His new biographer, Ron Chernow, describes his life as a "a case study in the profitable use of time."

David Brooks gives this new biography, Alexander Hamilton a good review in tomorrow's New York Times.

The pivotal point in Hamilton's civic biography came at Valley Forge:
    "At Valley Forge, Hamilton saw how fundamentally weak the nation was, how lacking in the sort of productive capacity one needs to wage a war or survive as an independent nation. This was the formative insight that shaped his career."
This led to his achievements as Treasury Secretary:
    "His greatest achievements came as Treasury secretary. He was confronted by an economically weak and fractious nation. He nationalized the debt, binding the states together and creating the fluid capital markets that are today the engine of world capitalism. He was working at a time when many around him had an entirely static view of economics. They scorned credit, banks and stock markets, and considered manufacturing the least productive form of economic activity..."

Insurance, moral hazard, and 18th/19th Century Chinese famine relief

Carol Shiue of the University of Texas at Austin discusses the moral hazard issues raised by Chinese famine relief programs in the 18th and 19th Centuries in the March, 2004 issue of the Journal of Economic History. See "Local Granaries and Central Government Disaster Relief: Moral Hazard and Intergovernmental Finance in Eighteenth- and Nineteenth-Century China." (Journal of Economic History (2004), 64:100-124 Cambridge University Press).

According to the abstract:
    "During the eighteenth and nineteenth centuries, the Chinese state attempted to administer famine relief partly through a nationwide institution of local granaries. This article explores regional variations in the performance of this institution to understand the reasons for its ultimate breakdown.

    The evidence suggests granary storage levels were systematically lower in provinces that received more frequent central government disaster relief; and an unintended consequence of disaster relief was that it modified local incentives for self-insurance and led to an incompletely resolved moral-hazard problem. China's experience provides an instructive example of the long-term dynamics present in intergovernmental policies."
(I divided it into paragraphs for readability.)

A version of the paper may be found at Shiue's web site. The site has a lot of other working papers dealing with economic development and Chinese development.

Shiue's January 2004 working paper, “The Political Economy of Famine Relief in China, 1740-1820,” looks like it complements the paper above. From the abstract:
    "In pre-industrial economies, people often faced unpredictable and catastrophic risks from crop failures brought on by erratic weather patterns, pests, and epidemics. In China, tax exemptions and tax postponement, as well as local state sponsored granaries were used to forestall and curtail the impact of food crises.

    Relatively little is known about how the application of these two types of relief measures evolved over time across provinces. To study the conceptual issues involved, I present a simple model that separates resource constraints from agency problems. Under this framework, the decision to deviate from officially ascribed duties comes about because the terms of famine relief funding and the command and control structure of the state produces in a class of officials the rational incentive to deviate from the objectives announced by the center. Because similar incentives are perceived by officials of a certain class, their responses may be also similar, and this in turn, I suggest, may produce the kinds of macroeconomic patterns of storage and relief that are consistent with those that we observe in the data."
(Again, I broke this into the paragraphs).

Levitt on crime

A large part of what I "know" often turns out wrong. Steven Levitt proves it again in an essay in the new Journal of Economic Perspectives: "Understanding Why Crime Fell in the 1990s: Four Factors that Explain the Decline and Six that Do Not." (JEP 18(1): 163-190, Winter 2004). Among the six that do not (and which I "knew" did), the booming economy, the increased use of the death penalty, and the demographic changes.

U.S. crime rates fell a lot in the 1990s. From 1991 to 2001, murder rates dropped 43%. Violent crimes fell 34%. Crimes against property fell 29%. Why?

Six things that had little to do with it

It wasn't because of the strong economy. While property crime rates have been found to drop by about one percent for each one percent decrease in the unemployment rate, violent crimes are apparently unaffected by unemployment rate changes. The two percent decrease in the unemployment rate from 1991 to 2001 can only account for about 2% of the 29% drop in property crimes, and for essentially none of the change in violent crimes.

And it wasn't because of the declining proportion of young men in the population (demographic changes). An aging population produces fewer victims and offenders. However, this was offset during our period by two factors. An increase in the proportion of African-Americans in the population, a group characterized by relatively high numbers of victims and offenders, and the "echo" of the baby boom, which led to increases in the number of teenagers in the population. Levitt estimates an impact of no more than five or six percent for property crime, and nothing for violent crime. The demographic discussion was a little unsatisfying, since Levitt's conclusion of small impact results, in part, from conflating offsetting factors in the same impact item.

"Better policing strategies" had little to do with it. There hasn't been much academic research into the efficacy of novel policing strategies. Crime declines in New York appear to have begun before Mayor Guiliani began his reforms. Moreover, other factors, described below, can account for the bulk of the decline in crime in New York. Levitt thinks "the impact of policing strategies on New York City crime are exaggerated, and that the impact on national crime is likely to be minor." (P 173)

Evidence suggests that "higher rates of handgun ownership...may be a causal factor in violent crime rates..." (P 173) But that doesn't mean that gun control laws have been effective. Research has failed to document a relationship between gun control laws, gun buyback programs, or bans on handgun ownership or acquisition, and changes in crime rates. There are more guns than adults in the U.S., and a flourishing black market.

Legislation allowing people to carry concealed weapons may increase the potential costs to criminals, but the statistical evidence suggest these laws have had little or no effect on crime.

Increased use of the death penalty wasn't very important. Executions are rare, and only take place with a long lag after the crime: "...the likelihood of being executed conditional on committing murder is still less than 1 in 200..." Death rates from other sources are often higher for people "engaged in illegal activities." It's hard for Leavitt to "believe the fear of execution would be a driving force in a rational criminal's calculus..." Moreover, given estimates of the deterrence effect of an execution (a reduction of six or seven murders per execution) the increase in death penalty use from 14 in 1991 to 66 in 2001 would only account for a reduction of 300 or 400 murders: "a reduction of 1.5 percent in the homicide rate, or less than one-twenty-fifth of the observed decline in the homicide rate over this time period..."

Four things that had a lot to do with it

What worked best was putting people in jail. The U.S. prison population per capita increased enormously during the 1990s. People in jail were not in a position to commit crimes. Moreover, statistical evidence shows that prison has a deterrent effect. Drawing on statistical evidence, suggesting an elasticity of murder and violent crime with respect to punishment of -.30 and of property crime of -.20, Levitt thinks increased prison populations can account for 12% of the reduction in murder and violent crime in the 1990s, and of 8% in the reduction in property crime.

What worked next best was abortion.

The statistical evidence suggests that, as the first generation subject to liberalized abortion laws reaches maturity, crime rates for the age group drop compared to the rates for earlier generations. Levitt ascribes 10% of the percentage change in crime to the liberalization of abortion laws in the 1970s. Levitt argues that unwanted children, who would be neglected and abused during their upbringing, and who would contribute disproportionately to crime rates, are being aborted in disproportionate numbers.

Editorial note. Levitt doesn't argue for abortion as a policy here. He makes a scientific observation related to cause and effect.

The number of police came next. Statistical analyses have found an inverse relationship between the number of police and the level of crime. An elasticity of -0.4 (a 1 percent increase in the number of police reduces crime by four-tenths of a percent) falls within the range of estimates. The number of police increased 14% during the 1990s; given the elasticity, this should have reduced crime by 5% to 6%.

Finally, crime rates dropped as a crack cocaine "epidemic" that peaked in the early 1990s receded. This epidemic was associated with high murder rates among black males under 25. This rate almost tripled between 1985 and the early 1990s, and then dropped by about half by about 2000. Most of these murders appear to have involved crack distribution - I assume as gangs competed for the profits. The evidence suggests to Levitt that the reduction in crack related murders cut the murder rate by 2% to 6%, reduced violent crime by possibly 3%, and had little impact on property crimes. This part of the discussion was a little unsatisfying, since I'm not clear about what led to the reduction in the intensity of the crack epidemic. Was it due to some of the other ten factors discussed in the paper? I don't know.

Revised with several additional remarks on 4-24-04.
Revised again to add inexplicably missing death penalty paragraph 5-30-04

Why is Africa so poor?

Anthony Daniels reviews The Shackled Continent by the Economist's African correspondent, Robert Guest.
    "...Robert Guest, the Economist's African correspondent, tries to answer these perennial questions [several questions about Africa's poor economic record - Ben].

    On the whole, he succeeds. The main problem in Africa is that personal advancement is possible almost exclusively by the political route: to become rich, or even minimally prosperous, you have either to seek political power yourself, or at the very least cultivate and become a client of those in power.

    For many years, the whole purpose of education in Africa, from the pupil's and student's point of view, has been to obtain a position in government from which to extort and expropriate from others...

    The more African bureaucrats and politicians extort and expropriate, the less there is to extort and expropriate, which makes the competition for power ever more desperate and violent...

    Mr Guest is less good at explaining why such a political culture should have taken root in Africa..."
I learned about this from Institutional Economics.

Stone age whaling

Tyler Cowen posts on the evidence that stone age Koreans were whaling 8,000 years ago.

Cost-benefit analysis and the Corp of Engineers

Ed Lotterman describes the history of cost-benefit analysis of navigation improvements on the upper Mississippi.
    "...In 2000, the Army Corps of Engineers, which operates the system, proposed a $1.2 billion dollar project to rebuild five locks on the Mississippi and two on the Illinois River to the newer 1,200-foot standard. They produced a study showing that the projected benefits exceeded the costs.

    A career Corps analyst blew the whistle, however, relating that he had been pressured to cook the books to produce a favorable report. The Army's Inspector General found this had occurred and a National Academy of Science study concluded that the Army Corps study was, in fact, deeply flawed. One general retired prematurely and the project was temporarily shelved.

    Now it is back. The cost has nearly doubled, to $2.3 billion, and there is not even the fig leaf of a cooked study to justify the expenditure. The Bush White House does not support spending this money, but the Corps of Engineers has powerful friends in Congress and a propaganda machine that would put the Nazis' Joseph Goebbels to shame..."

When good vacations go bad

Ninety years ago, on April 21, 1914, the Navy and Marines siezed the Mexican port of Veracruz on President Wilson's orders. John Christian Barber, a young (my guess is his early 20s) Englishman, was traveling through Mexico in the Spring of 1914, and was present in Veracruz during the attack.

Here is his first hand account from his unpublished diary (I've put this here as a pdf file since at nine pages it's long for a post).


The dictator Porfirio Diaz was overthrown in 1911. His successor, the reformer Francisco Madero, was overthrown in a coup and murdered by one of his generals, Victoriano Huerta, in 1913. Madero’s murder led to a renewal of the civil war that had overthrown Diaz.

Pancho Villa figured in the 1910-1911 revolution that had overthrown Diaz. With the murder of Madero he allied himself with the Constitutionalist opposition to Huerta, led by state governor Venustiano Carranza, The Constitutionalist armies forced Huerta’s resignation in July 1914.

In the U.S., President Wilson was hostile to the Huerta regime and favored the Constitutionalists. Tampico was a city on the coast of Mexico to the north of Veracruz and under federal control. On April 9, a small U.S. Navy shore party accidentally entered a restricted area in Tampico. They were arrested by Federal troops but released almost immediately. The Wilson administration, which was not sympathetic to Huerta, made an issue of the arrest.

Shortly after, Wilson learned that a shipment of arms, destined for Huerta, was to be unloaded at Veracruz. He ordered the navy and marines to seize Vercruz and prevent the transshipment. The port was taken on April 21 and 22.

Here is a more detailed version of the story of the attack on Veracruz.

Jack Barber

Jack Barber was traveling in Mexico in the Spring of 1914. He spent a very agreeable March visiting his uncle, William Gleadell, and Gleadell’s family in Mérida, Yucatán. At the end of March, he and the Gleadells left the heat of Mérida, traveled through Veracruz to the family’s home at Jalapa – the capital of the state of Veracruz. Barber was caught in Veracruz when the city was attacked and occupied by the U.S. Navy and Marines on April 21.

The selections from Barber’s diary in this post cover the period April and May 1914. Barber arrives in the port of Veracruz, is caught in the city fighting, sails to Galveston on a refugee ship, and ultimately arrives in Philadelphia during preparations for a service for two Philadelphia sailors killed in Veracruz.

In August 1914, a great war began in Europe. Barber joined the Liverpool Scottish regiment, and was killed in action at Hooge, Flanders, in 1915.

Revised 4-21-04 and again on 4-22-04..

Social and environmental impacts of technological change

Geitner Simmons posts on historian Pekka Hamalainen, and his research on the impact of the horse on the Plains Indian ("The Horse's Disruption of Plains Indian Society").

The introduction of the horse had a tremendous impact on Plains Indians productivity, but Hamalainen argues that it also led to social unheaval and environmental damage. Some good quotes in Simmons' post.

Hamalainen's essay sounds like a good read but only part is available on the web. These are enough to lay out the thesis, but not the details.

Is it true economists "don't play well with others?"

Robert Frank looks at this question, among others, in his new book What Price the Moral High Ground? (Princeton University Press, 2004). Observation tells Frank that people cooperate more than you'd expect them to if they were completely self-interested His book is an examination of "...the spontaneous emergence of pro-social behavior." The goal is to suggest institutions that will encourage appropriate cooperative behavior.

In Chapter 9, Frank describes several studies on the impact of studying economics on cooperation. One of the studies was conducted by Frank himself, along with Thomas Gilovich and Dennis Regan.

Frank and his co-authors had the students in their experiment play a "one-shot" prisoner's dilemma. Each game had two players. Each player had two choices- cooperate or not-cooperate (defect). If both players cooperated, each would get $2. If neither cooperated, each would get $1. If one player cooperated and the other didn't, the person who cooperated would get nothing, while the person who defected would get $3.

If you were going to play this game, you would always be better off if you defected, no matter what the other player does. If the other player cooperates and you defect you get $3 as opposed to $2. If the other player defects and you defect, you get $1 as opposed to nothing. The other player faces the same incentives, both of you know it, and both of you know you both know.

Frank and his co-authors found that economics majors didn't cooperate as much as non-economics majors. Economics majors defected about 60% of the time, while non-economics majors defected about 39% of the time.

In some of the games students had been allowed to make promises of cooperation to each other if they chose. In other games they were not allowed to. In the games where the promises were allowed, cooperation went up and was very similar for both economics majors and non-economics majors.

In games were promises were not allowed, economics majors defected far more (72% of the time) than students with other majors (47% of the time).

Are persons who major in economics more aggressive and naturally less cooperative than persons drawn to other majors? Or are economics majors "taught" non-cooperation during their studies? Frank and his co-authors looked at how cooperation patterns in the games changed between underclassmen and upperclassmen within economics and non-economics majors. An increase in defection among economics majors, but not among non-economics majors might suggest that economics majors learn to defect.

Underclass defection was much higher for economics majors than non-economics majors. Defection rates fell for both groups as they aged, but they fell far more for non-economics majors.

Frank's conclusion:
    "For students in general there is a pronounced tendency toward more cooperative behavior with movement toward graduation, a trend that is conspicuously absent for economics majors. On the basis of the available evidence, we are in no position to say whether the trend for noneconomists reflects something about the content of noneconomics courses. But regardless of the causes of this trend, the fact that it is not present for economists is consistent with the hypothesis that raining in economics plays at least some causal role in the lower observed cooperation rates of economics."
Revised 4-20-04

How to get a date

Jacqueline Mackie Paisley Passey, blogger and student of economics, offers some frank and practical advice for men looking for dates through online personal ads. Social scientists will notice #3:
    "3. Give her adequate information in the first email for her to assess your potential as a mate. You want to know what she looks like -- most of you won't respond to an ad unless there's a picture or physical description, right? Well, she wants to know about your access to resources. Mention your career, educational background, where you live, if you own your own home, etc. Women tend to date and marry up, so you're more likely to succeed with women of a lower income, educational level, or class than you. (Most online personal ad services profiles include fields for occupation, income, education level, etc. so you can filter for women at your level or lower in these areas.)

    ...You're attracted to health, youth/fertility, and sexual fidelity and we're attracted to money and status. Evolutionary psychology -- deal with it.
Most of these deal with signalling and exchange of information.

Hyperbolic discounting at A Random Walk

Taggert, at A Random Walk, posts a set of links to items on hyperbolic discounting in "Discounting the Future"

Investing in the good things government has to offer

Ben Franklin was appalled at the rent seeking he saw as an observer of British elections in the spring of 1768:
    "Tis thought that near two millions will be spent in this election. But those who understand figures and act upon computation say the Crown has two millions a year in places and pensions to dispose of, and 'tis well worth while to engage in such a seven years lottery though all that have tickets should not get prizes."
(From H.W. Brands, The First American, page 407.

NAFTA Tribunals

NAFTA's Chapter 11 contains provisions allowing investors from one country to obtain redress for violations of NAFTA provisions by one of the other countries party to the agreement (U.S., Canada, and Mexico). Canadian trade lawyer Todd Weiler provides some background on his web page (click on the "NAFTA Claim Info" button on the left of his page).
    "A NAFTA claim [under Chapter 11] is a legal complaint submitted by a NAFTA Investor who has suffered loss by reason of a breach of certain NAFTA provisions by a NAFTA Party. The claim is heard by an international tribunal, normally composed of three members appointed by the Investor and the NAFTA Party being sued. Tribunals are formed under the Investor?s choice of commercial arbitration rules laid out by either the World Bank (through its International Centre for the Settlement of Investment Disputes ? the ICSID) or by the United Nations Commission on International Trade Law (under the UNCITRAL Rules).

    After hearing arguments from the Investor and the three NAFTA Parties (i.e. the government being sued for breach of the NAFTA plus the other two governments ? if they choose to intervene), the tribunal will issue its written decision (known as an ?award?). If the tribunal finds in favour of the Investor, the government found in breach of its NAFTA obligations will be ordered to pay compensation to the Investor for the losses it suffered as a result of the breach..."
Today's New York Times has a story headlined: "Nafta Tribunals Stir U.S. Worries. The thrust of it is that tribunals created under NAFTA create a threat to the U.S. consititional order.
    "Tribunals like the one that ruled on the Massachusetts case [a case described earlier in the story - Ben] were created by the North American Free Trade Agreement, and they have heard two challenges to American court judgments. In the other, the tribunal declared a Mississippi court's judgment at odds with international law, leaving the United States government potentially liable for hundreds of millions of dollars.

    Any Canadian or Mexican business that contends it has been treated unjustly by the American judicial system can file a similar claim. American businesses with similar complaints about Canadian or Mexican court judgments can do the same. Under the Nafta agreement the government whose court system is challenged is responsible for awards by the tribunals.

    "This is the biggest threat to United States judicial independence that no one has heard of and even fewer people understand," said John D. Echeverria, a law professor at Georgetown University...

    The availability of this additional layer of review, above even the United States Supreme Court, is a significant development, legal scholars said.

    "It's basically been under the radar screen," Peter Spiro, a law professor at Hofstra University, said. "But it points to a fundamental reorientation of our constitutional system. You have an international tribunal essentially reviewing American court judgments."
Brad DeLong provides some perspective at his blog today. He's very critical of the Times story, which he characterizes as a "scare" piece. During the course of a detailed analysis of a case described in the Times story, he points out that the NAFTA tribunals are not appeals courts:
    "...It has no power to set aside the Mississippi verdict. It has no jurisdiction over the O'Keefes [a Mississippi family involved in the controversy - Ben], and cannot command them to repay a cent of the settlement they have won. The independence of Mississippi's courts is not threatened. The NAFTA tribunal is judging between the Loewens and the U.S. government: has the U.S. government lived up to its treaty obligations to provide foreign investors honest and uncorrupt courts? So far the answer appears to be that the Mississippi court took a serious dive, but that the Loewens still lose because they are not properly foreign investors."
    "...these NAFTA tribunals are not review courts, not appeals courts. They do not set aside judgments. Nobody who wins a case in the U.S. has anything to fear from these NAFTA tribunals. No Mississippi court has anything to fear from these NAFTA tribunals--the awards it makes stand, and the flow of this year's campaign contributions to judges from lawyers who have won verdicts over the past decade continues as well. All these tribunals do is to give some possibility of recourse to those foreign investors ground fine by the wheels of America's courts if and only if they can persuade judges like Mikva, Mason, and Mustill that injustice has been done."
Public Citizen takes a dimmer view of Chapter 11 on their web page.

Revised 10:30 PM, 4-18-04

How likely is a country to have a state religion?

Robert Barro and Rachel McCleary look for national characteristics associated with the presence of a state religion in a new National Bureau of Economic Research (NBER) working paper. The abstract:
    "For 188 independent countries in 2000, 72 had no state religion in the years 2000, 1970, and 1900; 58 had a state religion at all three dates; and 58 had some kind of transition. Among the 58 transitional countries, 12 had two transitions, 4 of which (former Soviet Republics in Asia) involved two forms of state religion.

    The probability of having a state religion in 2000 or 1970 depends strongly on the status of state religion in 1900 but much more so for countries that experienced no major change in political regime during the 20th century.

    Communist governments tend not to have state religion only one Communist country (Somalia in 1970) had a state religion in the usual sense. However, a past history of Communism does not have much influence on the probability of state religion.

    Greater concentration of religious adherence is positively related to state religion, and most of this relation seems to reflect causation from religious concentration to state religion, rather than the reverse. Theoretically, state religion is more probable when the population adheres to a monotheistic religion. We find this effect for Muslim adherence, but the relationship is not robust. State religion is less likely in sub-Saharan Africa, possibly because of the intense competition for converts in this region among the major world religions.

    The probability of state religion does not differ significantly between former colonies and non-colonies but is higher for British colonies than for Spanish and Portuguese colonies. Variables that have little effect on the probability of state religion include per capita GDP, country size, and the extent of democracy, civil liberties, and the rule of law."
See "Which Countries Have State Religions? (NBER w10438) April, 2004. (I broke the abstract into paragraphs.)


The African Growth and Opportunity Act (AGOA) reduced U.S. barriers to imports from most sub-Sahara African countries for the years 2000 to 2008.

Today's Boston Globe has a story by Carter Dougherty on the beneficial impact of AGOA on the clothing industry in Lesotho.
    "...That Litabe has a job at all can be chalked up to an American law, passed in 1999, that withdrew the quotas and tariffs that inhibited trade with the United States. The Africa Growth and Opportunity Act has become so well known that business and government leaders across the continent nod knowingly when someone pronounces the acronym: AGOA ("ah-GO-uh").

    The law is credited with stimulating industry in some of the poorest countries in the world. In a few countries, such as Lesotho's neighbor, Swaziland, the island nation of Mauritius, Uganda, and Botswana, factories have sprung to life over the past few years. Most of these countries have jumped into clothing manufacturing, but a few have sold other products in the United States, such as handmade baskets or environmentally friendly cosmetics..."
The story notes that some of this is threatened by a sunset provision built into the law:
    "...But the plant owners and workers in Africa say the good times could come to a screeching halt soon. A key provision of the American law, which lets African factories use fabric from Asia, expires Sept. 30, and plants like Shining Century are expecting bad news from retail giants such as The Gap and Kmart, which order their products from Lesotho months in advance...

    ...The rule embodied the hope that, during the first four years of AGOA, African countries would develop their own fabric industry to feed the clothing sector. In reality, Chen points out, it has not worked that way.

    Setting up this industry would be an expensive undertaking, requiring advanced machinery and skilled operators.

    Now, with the rule set to expire, Chen and others in Lesotho would have to either seek out nonexistent African-made fabric or use Asian material and lose the duty-free privilege that makes the American law worthwhile. Chen is under no illusions about what will happen.

    "We will lose," she said. "We cannot compete." She expects that African manufacturing will shift to Asia if the rule is not extended..."
Dougherty's story is a nice anecdotal piece about how the program has worked in Lesotho. A casual web search didn't turned up academic work evaluating the success of the program. Anyone have a suggestion?

The legislation Dougherty refers to, the AGOA Acceleration Act, or AGOA III, was introduced on April 1, 2004 as HR 4103. AGOA III includes provisions to extend the AGOA through 2015, and
    "...extends 3rd country fabric provision for three years, from September 2004 until 2007, including a phase down of benefits in year three. Under current law, least-developed AGOA beneficiary countries can use third country fabric in qualifying apparel until 2004. This flexibility was included in AGOA I, because few of these countries have fabric-making capacity. The LDCs have expressed a strong desire to extend the third-country fabric provision, because sufficient fabric-making capacity still does not exist in the region, and because the countries are expecting a significant drop in orders with the elimination of world-wide apparel quotas in 2005."
The link above provides considerably more detail on the background of the legislation and its other provisions.

Review of the new OMB peer review guidelines

Chris Mooney reviews yesterday's new Office of Management and Budget (OMB) guidelines for the peer reiview of regulatory science.

Controlling trade in endangered species

The Progressive Policy Institute reports on the problems with the use of international trade measures to protect endangered species, in its "Trade Fact of the Week." Among other things, some countries just don't have the administrative capacity to cope:
    "...But implementation [of national obligations under the Convention on International Trade in Endangered Species (CITES) - Ben] can be difficult, since conservation agencies are often small and weak when pitted against business interests or larger ministries. One can only guess how Mr. Temor Shah Iqbal Yusuf, Lands Director in the Afghan Ministry of Agriculture, oversees bans and limits on trade in 37 raptors, six snakes, a wolf, seven cats, 58 other animals and eight plants..."
Moreover, control of trade in the endangered species themselves "is only a partial remedy." The author points to the case of sea turtles. Turtles are subject to CITES controls, and the U.S. tries to protect turtles by banning imports and domestic production of shrimp caught with nets that don't use turtle excluder devices. But:
    "...But despite CITES restrictions and wider use of TEDS, worldwide turtle counts keep falling. The number of nesting leatherback females has dropped from 115,000 in 1980 to 34,500, and the Kemp's Ridley remains at risk of extinction. Why? The turtles' most profound challenges appear to be local: fondness for turtle meat and eggs at mating time, and permanent destruction of nesting sites for beachfront property..."

OMB's new peer review guidelines

Today the federal Office of Management and Budget (OMB) released it's new guidelines for peer review of the science underlying rule-making.

I learned about this from Chris Mooney.

Talking to the public about regulation

Andrew Chamberlain (The Idea Shop) looks for economists who can talk about the economics of regulation without too much jargon. He finds three. This is a post about communication. Chamberlain wants economists to talk to the public more clearly.
    "...Most regular people don’t notice—or care about—how regulations impact daily life.

    Partly, this is economists’ fault. Many of us have forgotten that ideas—just like goods in the marketplace—need marketing. With just a little improved story-telling, economists can make a big difference in helping people see why regulation matters in practical, concrete terms.

    To pick an easy one: Once upon a time, air travel was an expensive luxury. Then in 1978, airlines got deregulated and everything changed. Ticket prices fell 40 percent. Suddenly, we witnessed something incredible: for the first time, low- and middle-income Americans could afford to see the world—something historically only available to the rich.

    Sure it leaves out a lot. But that’s what make it a powerful story. It contains no math. It doesn’t use the word “efficiency”. And it helps people who don’t care about economics see why regulation matters..."
Be concrete. Tell a story. Use words that resonate with people ("efficiency" isn't usually one). Read his whole post. Study his introductory paragraph (advice to self).

Doha Round maneuvers; European sugar

Doha Round maneuvers

Daniel Drezner reports on European Union efforts to preserve its Common Agricultural Policy (CAP) in WTO Doha Round trade negotiations by dividing the ranks of agricultural exporters and developing countries. Peter Gallagher posts on the same story.

European sugar

In the same post, Drezner also draws attention to a Financial Times story on a new Oxfam report critical of Europe's sugar policies. Financial Times reporter Guy de Jonquieres writes:
    "Oxfam accused the European Union on Tuesday of employing "economic sophistry" to conceal the true costs of its controversial sugar regime, saying the policy inflicted big losses on poor countries and reduced the value of EU development aid.

    A study* by the development organization said the regime, which boosts European sugar output by keeping prices at more than three times world levels and heavily subsidizing exports, mainly benefited a "cartel" of big sugar processors...

    The EU puts the annual budgetary cost of export subsidies at €1.3bn, but the study found it provided a further €833m a year in "hidden" support to cover the difference between production costs and export prices. Every €1 of EU sugar exported cost €3.30 in subsidies...

    Oxfam estimated the regime deprived Brazil, the world's biggest sugar exporter, of $494m (€414m, £272m) of potential export earnings in 2002.

    It put the costs to Ethiopia, Mozambique and Malawi at $238m since 2001. Mozambique's losses equalled a third of its development aid from the EU and its government's spending on agriculture and rural development. Malawi's losses exceeded its primary healthcare budget..."
Modified 4-15-04

"On the OMB Proposed Peer Review Bulletin"

The American Association for the Advancement of Science (AAAS) has adopted a resolution opposing the Office of Management and Budget's (OMB) new guidelines for peer review of the science underlying federal regulation.

Some of the most interesting remarks are in the footnotes. For example, footnote #4 suggests a distinction between policy-relevant and normal or curiosity-driven research:
    "According to Sheila S. Jasanoff, Pfozheimer Professor of Science and Technology Studies, John F. Kennedy School of Government, Harvard University, the OMB authors of the proposal fail to understand the difference between regulatory science and research science. "The reliability and success of regulatory, or policy-relevant, science cannot and should not necessarily be measured according to the same criteria as the reliability and credibility of ordinary research science, which is investigator-initiated or 'curiosity-driven.'; "[T]he success of regulatory science includes its capacity to provide timely answers to pressing policy questions; research science operates under no comparable time pressures. Correspondingly, the procedures used to ensure the reliability and credibility may reasonably differ from one scientific context to another." [Letter to OMB, page 2] Available at:"
I learned about this from Chris Mooney.

Here is a transcript of the National Research Council Peer Review Standards for Regulatory Science and Technical Information Workshop, held on November 18, 2003"

Revised 4-15-04

Optimal electric supply reliability

Are we really willing to pay the costs that would be involved to get a perfectly reliable (no blackout) supply of electricity? Do we all feel the same way about the "price-supply reliability" tradeoff? Lynne Kiesling addresses the tradeoffs in the course of reviewing the recent report of the U.S-Canada power system outage task force (which apparently lacked a "no action" alternative).

To some extent the theme is similar to one implicit in my "Value of statistical life" post just below: people are not generally willing to pay the cost of reducing risks to zero - or as close to zero as they can get by reducing every other aspect of life to its absolute minimum.

Kiesling exploits the fact that people differ in their "price-supply reliability" tradeoffs, to make some useful suggestions. For example:
    "Hung-po Chao and Robert Wilson suggested one approach, called “Priority Insurance,” in a 1987 American Economic Review article. The essence of the idea is to have the electric company pay consumers when the lights go out. A simple idea, but they add a twist: the electric company offers different qualities of service. For a higher price, you get a lower probability of being cut off when the system is short of power (and a higher payment from the electric company when the lights go out); pay a lower price, get a higher probability of being cut off (and a lower payment). Customers would actually be able to choose between price and reliability, based on the individual tradeoff they perceive between them."
In a subsequent post Kiesling returns to the reliability issue. You can increase system reliability by investing in infrastructure (a supply-side approach). But you can also increase system reliability by using price flexibility to exploit the different needs of different people for system reliability (a demand-side approach).
    "Dynamic pricing harnesses the dramatic improvements in information technology of the past decade to provide price signals that reflect variations in the actual costs of providing electricity at different times of the day. These same technological developments also give consumers a tool for managing their energy use. They can set electricity monitors to increase air conditioning temperatures if prices go above a certain amount, for example, or can shift manufacturing schedules to minimize electricity use during peak hours. Right now, with almost all U.S. consumers paying average prices (even many industrial and commercial consumers), consumers have little incentive to manage their consumption and shift it away from peak hours during the day.

    That inelastic demand leads to more capital investment in power plants and transmission lines than would occur if consumers could make choices based on their preferences. Reducing peak use contributes to greater operational security, as fewer reserves are necessary to maintain reliability, and eases stress on adequacy planning, as the need for system expansion to support ever greater system peak loads is diminished.

    Both historical experience and laboratory experiments show that electricity customers do respond to price changes...

    Another approach to enabling consumers to contribute directly to reliability comes from efforts to turn demand response into a tool that transmission system operators can call on in their efforts to keep supply and demand constantly in balance. Research by Brandon Kirby and John Kueck, Oak Ridge National Laboratory, showed that a significant portion of the California Independent System Operator's spinning reserve requirement could be supplied from the California Department of Water Resources pumping load. The CDWR could stop pumps for brief intervals in response to specific short-term transmission system needs..."

Value of statistical life

Jim Holt (The Human Factor (New York Times, March 28); a copy of the article can be found here) doesn't think anyone "should be knowingly sacrificed for a sum of money." He apparently thinks this is implicitly what happens when a cost-benefit analysis places a value on a "statistical life."
    "How much is your life worth to you? On the face of it, that's an idiotic question. No amount of money could compensate you for the loss of your life, for the simple reason that the money would be no good to you if you were dead. And you might feel, for different reasons, that the dollar value of the lives of your spouse or children -- or even a stranger living on the other side of the country -- is also infinite. No one should be knowingly sacrificed for a sum of money: that's what we mean when we say that human life is priceless."
Economists don't know what the value of a human life is. Fortunately, there are very few public policy decisions that require information on the value of a human life.

There are, however, a lot of decisions that can change the risks of dying, and information on the value people place on these changes can be very helpful. Widening or straightening a road may reduce each driver's risk of an accident and death; forward positioning a rescue helicopter near a risky fishery can reduce each fisherman's risk of death if there is an accident; eliminating leaded gasoline can reduce each adult male's risk of death from cardiopulmonary disease.

While these individual risks may translate into a certain number of deaths in a given population, individuals themselves tend to face a relatively small risk, that will only be changed a small amount by the policy.

EPA guidelines on cost-benefit analysis define statistical lives:
    "This measure is the aggregation of many small risks over an exposed population. Suppose, for example, that a policy affects 100,000 people and reduces the risk of premature mortality by one in 10,000 for each individual. Summing these individual risk reductions across the entire affected population results in the policy saving 10 statistical lives. It is unknown who these ten people might be - everyone faces some risk of being affected - but the policy can be expected to prevent premature fatality for 10 individuals in the population." (Page 68)
Now, if you have information on the value each person places on a 1/10,000 reduction in the risk of their death, you can estimate the value the entire population places on the overall reduction in risk:
    "If 10,000 individuals are each willing to pay, for example, $500 for a reduction in risk of 1/10,000, then the value of saving one statistical life equals $500 times 10,0000 - or $5 million." (Page 87)
This "statistical life" isn't the value of a human life, it is a convenient tool for summarizing information on the value the people in a population place on a reduction in risk. However, Holt appears to mistake what statistical life is, for what it isn't.

Do you think human life is priceless? That's not the generally the issue. We are valuing risks of death. One difference: just because there is a risk of death doesn't mean that anyone is going to die. A policy change that reduces the risk of death to the individuals in a population has a value, even if no one would have died in the absence of the change.

So, where do these values come from? Holt's introduction suggests that the values are arbitrary, foisted on us by faceless government bureaucrats:
    "But the government set a price for it four years ago: $6.1 million. That's the figure the Environmental Protection Agency came up with when it was trying to decide how far to go in removing arsenic from drinking water. Arsenic can cause diseases, like bladder cancer, that will predictably kill a certain number of people. But reducing the arsenic in water gets more and more expensive as the poison levels approach zero. How many dollars should be spent to save one ''statistical life''? The answer, reasoned the people at the E.P.A., depends on how much that life is worth..."
Well, the "government" didn't just arbitrarily set that value - as Holt's remarks actually make clear a little later. Cost benefit analysts make inferences about how people themselves value these risks. After all, people are constantly making decisions about these risks. They make these decisions when they choose occupations, when they change the speed with which they drive, when they choose neighborhoods to live in, when they invest in safety features in their houses, when they behave more circumspectly in the dark. In each instance they balance the greater or lesser risk with the benefit or cost the change confers or imposes.

It seems reasonable to see if you can make inferences about how people value risks, and apply these values to policy decisions. The values people place on the risks they face can be inferred in a lot of ways. - inferences can be made from the wages people need to induce them to take additional risks, from the investments people make in additional safety (smoke or carbon monoxide detectors in homes), or from asking people how much they would have to be paid to take on additional risks or how much they would pay to avoid additional risks.

But in every case, there is an attempt to find the value people themselves place on more or less risk. Government or economists aren't inventing numbers they think should be appropriate - they're trying to find out what it is worth to people themselves to reduce the risks they face. There's something democratic about that.

There are lots of good questions about the use of the value of statistical life methodology. The technique is evolving. There's still a lot to learn. Estimates of the values people place on changes in risk are changing. Value of life-years may be more important than value of life. There are all sorts of issues raised by extrapolating values from one context to another or from one population to another. And no one I know, certainly no economist I know, thinks that an excess of aggregate benefits over aggregate costs is the only criterion relevant to policy decisions.

But, while VSL is a flawed tool, nevertheless, it is valuable.

There's some other commentary on Holt's essay here (scroll down) and here. In fairness, Holt alludes to additional problems - some I think are mistaken, some I think may have some merit. I've dealt here with with the two fundamental problems I have with his essay: mistaking the value of statistical life for the value of life, and what I see as his rhetorical device of misdirecting attention (at least early on) from the source of the valuation in inferences about the valuations of actual people.

How to bribe your way into a fancy restaurant.

On-going training in life skills department. Bruce Feiler reports (in the October 2000 Gourmet magazine) on a series of experiments conducted in New York
    "I've never bribed my way into a restaurant. I've never slipped a C-note or greased a palm. In truth, I've never even considered it. I've assumed, of course, that people do such things. I've seen my share of Cary Grant movies. I've heard ? and wondered whether such old-fangled gestures would work in the high-stakes, high-hype world of New York City restaurants. For everyday diners in Manhattan, cracking the waiting list at Nobu is said to be harder than getting courtside tickets for the Knicks. But is that true?

    Curious, I hatched a plan. I would go to some of the hardest-to-penetrate restaurants in New York armed with little more than an empty stomach, an iron-clad willingness to be humiliated, and a fistful of dough....

    My plan was to show up between 8:15 and 8:30 on varying nights of the week. I would go with a different companion each night. I would try to get a reservation by telephone that afternoon and go only if I were turned down. And I would carry a twenty and a fifty in my left pocket, and a hundred in my right pocket....

    ...A few people are lolling around in the foyer when my girlfriend and I step inside the door. I glance at the maitre d's podium and panic: There's more than one person standing behind it. To whom should I give the money? I approach haltingly and ask if they have a table for two. The man and woman appraise my appearance - black trousers, gray button-down Italian shirt, buckle shoes - and the woman looks at the man. He is obviously the person in power. "Perhaps we can seat you in about 20 minutes," he says in a manner that suggests it will be closer to an hour. We retreat to the bar.

    Seconds later the woman departs and the man is left alone. This is my moment, I decide. I reach for the twenty and positively bolt toward the podium. I crane my left arm around the side. "I hope you can fit us in," I mumble, and slip the bill into his hand. I am sweating; my heart is racing. "Oh. Thank you," he says. "Don't worry."

    Two minutes pass ? two minutes! ? and the woman approaches. "We can seat you now," she says, and leads us to a corner booth. "This is one of our best tables," she adds..."
Feiler summarizes his experimental results (ten useful "Tips on tipping") in a format that can be conveniently photocopied and kept in the wallet.

I learned about this from Alex Tabarrok.

The strategic use of "sound science"

Chris Mooney discusses the history of the use of the term "sound science" in debates about regulation, here and here.

Should we get rid of the corporate income tax?

Angry Bear thinks so.

Why didn't whaling ventures adopt a corporate organization?

In the early 19th Century, U.S. states began to grant corporate charters to large numbers of businesses. However, corporate organization never caught on among whaling businesses. Why?

Eric Hilts argues that corporations were not well equipped to cope with the principal-agent problems created by whaling enterprises. (Incentives in Corporations: Evidence from the American Whaling Industry, NBER w10403, March 2004).

U.S. whaling began in the 17th Century as small groups of colonists set out from shore after targets of opportunity. Gradually the business shifted to whaling ships with crews of 30 taking world wide trips lasting years at a time. Despite the 19th Century IT revolution, management of an enterprise like this would pose big challenges.

In the typical whaling enterprise a small group owned shares in the vessel. These persons delegated most management decisions to agents, who themselves had significant shares in the operations (" some ports the agents retained, on average, 44% of the equity in their vessels." Page 7). Moreover,
    "Other complimentary mechanisms were employed to create the necessary incentives for the agents. The relatively small number of owners, each holding a substantial share in the vessel, had strong incentives to monitor the agent's activities. In addition, most of the investors in whaling voyages lived in the same towns as the agents whose voyages they helped finance. Personal, and sometimes familial, relationships between the investors and the agents probably helped create additional incentives for the agent. Moreover...groups of investors tended to invest in voyages together, usually with the same agent. Thus the prospect of repeated interaction, and in particular, future investments, probably also created an important source of incentives for the agent, which complemented the incentives arising from his ownership share." (Page 8)
In the 1830s some whaling firms incorporated in an apparent effort to become more attractive to large numbers of small investors. But look at what happened to management's incentives. To a great extent oversight responsibility shifted from the investors to a board of directors. These, in turn, delegated management responsibility to an agent.
    " these corporations sought to become owned as diffusely as possible, the agent was not envisaged to be a major investor in the firm, and in fact usually held only a small stake. At least in one case, the agent's compensation came principally in the form of a fee of 2 ½ % on all expenses - the purchase of vessels, supplies, etc. - which created strong incentives for spending, rather than effort. The agent's role evolved into something like that of a professional manager, whosperformtives to preform his duties diligently and act in the interest of the shareholders arose chiefly from the monitoring of the directors and officers." (Page 11)
The corporate structure never became very important in the whaling business. The whaling industry survived into the later 19th Century, but "Of the whaling corporations that were chartered in the 1830s and early 1840s, none survived past the 1840s." (P 12)

Hilts thinks the reason is the different incentives faced by agents under the alternative forms of organization. He sought confirmation in a data set on 874 whaling voyages from 1830 to 1849; the data set covered almost 20% of the voyages during that time. For each voyage he calculated a productivity index. Statistical analysis of the relation between the index and voyage characteristics found that, both statistically, and practically, corporate voyages were less productive that non-corporate voyages. (As a practical matter, organization as a corporation had a greater adverse impact on productivity than the death of the captain on the voyage. Page 23).

Corporate voyages did differ systematically from other voyages in additional ways. They tended to be launched from smaller ports by persons with less experience. However, many managers operated under both corporate and non-corporate regimes. Hilts looked at the experience of these managers, and found that their productivity was less under the corporate form. "Thus the estimated effect is not due to the obscure ports in which the corporations were located - the managers' various voyages were all based in the same ports - or the lack of talent or experience of the manager." (P 29)

"Incentives in Corporations" is under copyright 2004 by Eric Hilt

Modern art and segregation

Virginia Postrel posts on the mid-century South in transition, its new architecture reflecting a modern aesthetic sense and traditional racial attitudes.

Microeconomic analysis of crime

Crime responds to incentives. Zsolt Becsi explains the microeconomics and draws some policy implications in this 1999 Atlanta Federal Reserve Bank Economic Review article: "Economics and Crimein the States.

I learned about this from Mahalanobis.

Cable television, bundling and price discrimination

"Why can't you choose your cable channels?". And why are you better off because you can't? Tyler Cowen explains it all.

World GDP and trade are growing

World GDP and trade have been growing for several years, but have a ways to go before the reach the pre-recession levels of the 1990s. Peter Gallagher reports here: "Growth bounces back... maybe more to come " Bonus feature - a view of Melbourne from the porch, here: "Early Autumn, Melbourne.

We're not big enough to be unilateral

Fred Bergsten argues that unilaterialism is not an option for U.S. foreign economic policy in his recent Foreign Affairs article, "Foreign Economic Policy for the Next President".
    "...As the sole military superpower, the United States may often be able to undertake unilateral initiatives for the sake of national security. But in economic policy, unilateralism is simply not an option. No government, Washington included, can ignore market forces. The European Union's economy is now as large as that of the United States, and the euro has begun to challenge the dollar for global financial leadership. The United States relies on foreign investors -- including the monetary authorities of competitor Asian economies -- to finance massive external deficits, and it depends on oil imported at prices set by producers in other countries. Cooperation is therefore a necessity in the realm of international economics. Indeed, because of the close connection between economics and other international issues, economic policy often restrains the unilateralist tendencies in U.S. foreign policy as a whole..."
Nicholas Kulish makes the same point in his new Washington Monthly article on the U.S. and the European Union, "Euro Brash":
    "...Conservative columnist Jonah Goldberg has popularized the phrase "cheese-eating surrender monkeys" to deride the French, but on one economic issue after another, it has been the United States that has raised the white flag. In December 2003, the Bush administration lifted tariffs on imported steel after Lamy [the European Union Trade Commissioner - Ben] threatened $2 billion in retaliatory tariffs on U.S. exports, targeting especially those produced in critical election states, such as oranges from Florida. Early this year, the administration had to back away from its unilateral demand for armed sky marshals on flights from Europe after strong resistance from E.U. member states.

    Increasingly, decisions made in Washington are being overturned by bureaucrats in Brussels. Three years ago, the U.S. Department of Justice approved the merger of U.S.-based G.E. and Honeywell, only to watch the E.U.'s competition commissioner effectively block the deal... Now the European Commission is at it again. In late March, it was expected to levy a fine and require Microsoft to do something that the U.S. government couldn't, or wouldn't: force the company to change its dominant Windows operating system. Where the United States ultimately failed to get Microsoft to give its customers equal access to non-Microsoft browser software, the European Union reportedly wants a version of Windows that gives customers access to competitors of the company's Media Player software.

    The war in Iraq taught a clear lesson: Unilateral foreign policy, especially one that ignores Europe, doesn't work. In the run-up to the invasion, the Bush administration gambled that it could isolate France and Germany and garner the support of the rest of the U.N. Security Council. Instead, "Old Europe" won the support of most of the other members, and America found itself fighting a bloody guerrilla war in Iraq largely alone. The same lesson now increasingly applies in the economic realm. More than previous administrations, the Bush White House has tried to make economic policy unilaterally... Yet from trade to taxation, antitrust to safety rules, the Europeans are proving to be powerful competitors who can work against our interests if we ignore theirs..."
Kulish sees the European clout stemimg from the size of the market (450 consumers to our 300 million after once it expands from 15 to 25 member nations) subject to a consistent set of standards, the importance of this market to the U.S., and the growing strength of Europe's continental institutions.

Howard E. Shuman and the Golden Fleece

Howard Shuman was an economist at the University of Illinois, when he took a position with Senator Paul Douglas in 1955. He worked closely with Douglas through 1968. In 1969, he took a position with Senator William Proxmire, with whom he worked until he retired in 1982. His text, Politics and the Budget combines analysis and history in a readable survey of U.S. budget policy and politics from the Budget and Accounting Act of 1921 through the mid-eighties.

In 1987, Shuman was interviewed by Donald Ritchie, an associate historian in the Senate's Historical Office. The result: 618 indexed pages of oral history available at the Historical Office's website. Here Shuman recalls the history of Proxmire's famous "Golden Fleece" award:
    "Ritchie: That leads to the question of the "Golden Fleece" awards.

    Shuman: I knew that was coming up!

    Ritchie: What was the history of the Golden Fleece?

    Shuman: It's a very simple history. It really begins with the first thing that happened to me when I came to work for Senator Proxmire. I came to work for him early in January of 1969, and the previous December, I think it was the tenth or the twelfth, during a recess of the Senate he held a hearing. He loved to hold hearings during the recesses, between Christmas and New Year, between the 10th of December and Christmas, or on a Saturday, anytime when the press was desperate for news. In fact, I remember one time we had a report which we issued between Christmas and the New Year for the Joint Economic Committee, when almost no one was in town except the senator. I think every camera and every press person in town was there. He held the press conference to release the report, but the press conference was held a day or so before the release date, so they'd have time to read it, absorb it, and write their stories. So there was no immediate news that day. After the senator had finished detailing the report, what was in it, and so on, one of the newspaper people got up and said: "Senator, can't you say something else? We're desperate for news!" The senator knew this and took advantage of it.

    He had held a hearing in December on the C-5A airplane at which Ernie Fitzgerald had testified. Critics say that Ernie came up and blabbed out that there was a two billion dollar overrun on the C-5A and was disloyal to the Air Force. Ernie doesn't deny that, but that isn't quite what happened. What really happened was that Richard Kaufman of the Joint Economic Committee staff had been briefed at the Pentagon on the C-5A, and had just stumbled, during the briefing, on the fact that there was a two billion dollar overrun. So when Ernie came up to testify, he was asked about that. I went back to read the record, because I put it in the book. But if you read the record you'll find that Ernie demurred, several times. He wasn't about to confirm it. So finally, Proxmire put it to him that there is a two billion dollar overrun on the C-5A, to which Ernie finally answered yes, which was truthful. He wasn't going to lie. Ernie is a hero, and I think deserves all kinds of credit, and has been fired and rehired, and Carter campaigned that he was going to reinstate him, and then got in and refused to do it; Ernie deserves a lot. Very few people have the guts and the fortitude to do what he's done. But still, if you go back and read the record, he wasn't that much of a hero at the initial stage.

    Well, Proxmire asked me, very early, in January, whether he should continue with this issue. I said, "Yes, you must." Two billion dollars is something people cannot understand. They cannot see, feel, and touch two billion dollars. It's just too much. But when it was personified by the Air Force firing the poor guy who told the truth and blew the whistle that was real live stuff. What the senator was trying to do was cut waste at the Pentagon and to make the Air Force procure more efficiently. Now it was personalized by Ernie. That's exactly the kind of issue you want to deal with.

    We tried to adopt that principle to government waste in general. So we decided to try to personalize the issue by examples of the biggest, the most ridiculous instances of wasteful spending for the month. We originally held a contest in the office to get a name for it. I didn't win it, two other people came up with the name "The Golden Fleece," which is a double entendre. There was a golden fleece in Greek mythology. Who was it, Jason and the golden fleece? It also has the entendre of fleecing the public. So it was a very good name.

    I was responsible for editing and getting out the fleece every month, from about '74 when we started, maybe '75, until 1982 when I left. I wrote about a third of them, and I was responsible for and edited all of them. One of the things I kid about as the consummate administrative assistant is that when the senator was sued for one of the golden fleeces, even though I had been responsible, my subordinate who drafted it and the senator who okayed it, were sued. They didn't sue me. Now, it takes a certain amount of bureaucratic expertise to survive that situation! They were the butt, the senator and the subordinate. Seriously, it was inadvertent that they were sued for $8 million, not me.

    But its purpose was to try to draw attention to issues that otherwise people didn't notice. I would like to give one example. There is a man in Washington by the name of I.F. Stone. I.F. Stone wrote a newsletter, which made great news and was a big contribution to public information about all sorts of subjects, because he merely went through the public documents of Congress, the hearings, and wrote about things that other people missed. Now, the press is in a sense lazy. The press likes a fight, conflict, so they spend great effort before an issue is finally resolved, when the big issue is in committee or on the Senate floor, writing about who's going to win, who's going to lose. They write very little about the substance of the bill, but they do write about the fight, who's winning, who's losing on Civil Rights, on a whole variety of issues, on the B-1 bomber, the MX missile. But where the power is, where the money is, in the appropriations committees, which is really the place that funds the programs and where the policy is carried out, the
    press almost doesn't cover it.

    So here was Proxmire who from time to time was chairman of the Appropriations subcommittees on foreign aid, HUD and independent agencies, and on Health and Human Services. He's also on the defense subcommittee of the Appropriation Committee. But the press doesn't come to the hearings. They are seldom involved in what happens in the mark-ups, which are now public. They are very lazy. After the initial fight is over, they forget it. Well, the Appropriations subcommittee is where policy is made. It's the source of policy. Proxmire would cut or increase the budget of HUD, or the space agency, or some defense item, and the press would pay no attention to it at all. The budget is the priorities document. We couldn't get their attention focused on this. So the fleece of the month's purpose was to try to get some attention on these areas which were essentially overlooked by the press in the Appropriations Committee, which were of such magnitude that people couldn't see, feel or touch and understand them, unless there were good examples. The fleece served that purpose very well.

    It had quite a good effect. After the first year, I did a survey, because people would say, "Well, does it do any good?" I did the survey to find out what, if anything, had happened as a result of our criticism. We found out that in two-thirds of the cases, it may have been three-quarters, eight or nine of the twelve, that in fact either the practice that we'd complained about had been changed or modified, or the fleece had some other major effect. There was one effect that it had which was not such a good effect: the National Science Foundation, which was then putting out relatively small amounts of money for what seemed to us to be very silly projects -- why people fall in love, and things of that kind, whether fish that got drunk on tequila or on gin were the more vicious, really ridiculous types of things. What they did was to go through their awards, and in order to keep us from finding ridiculous examples, they changed the names. They didn't change what they did, they merely changed the name. But contrary to the charge that was made against us that we merely picked up things that had a stupid name, we never picked something merely because of the title. We often found things that had rather silly names but which in fact seemed to be quite good projects, and we did not give them the fleece of the month, unless there was some really good reason to do so.

    Ritchie: Did you ever in retrospect regret a fleece?

    Shuman: No, not even the one we got sued on. In fact, I feel more strongly about the one that we got sued on than almost any other. We did not make an error. There was no error of fact or substance there. One of the things that happened with that fleece (and I can say this because it's part of the record, I'm now quoting the record of the court) was that the fellow who received the grant -- we didn't give it a person, we gave it to the agency, so the person who got the fleece was the National Science Foundation, not the person who received the grant. We said the Science Foundation was at fault for giving such ridiculous sums of money to the person who got them. The person who got the grants had
    been fired from his job for some of the same things we complained about.

    I have no regrets about any one of them, because they were accurate. Over the number of years that I was involved in it, we almost never made a mistake. The only factual mistake I can remember -- there were two, and I can only remember one -- was that we got the city wrong. The person who got the grant was from one city in Indiana, and the research took place elsewhere, and we got the cities mixed up. But apart from that we almost never had a factual error. The one I enjoyed a great deal hit very close to home. I play tennis about five times a week. I live in North Arlington. Within a mile or two of my house there must be fifty public tennis courts, and I play on them all the time. There was an article in the suburban press about a study that the National Science Foundation had funded for a small amount of money, five, eight, ten thousand dollars, to find out why people get angry on the tennis courts. The researcher set up a very elaborate study: there was a survey of tennis players. The researcher hired a psychiatrist to interview people. She did all the things behavioralists and the psychologists do, and she ended up finding that the reason people got angry when they were at the tennis courts was that more people wanted to play tennis than there were courts to play on!

    When I first saw it, I thought it was a hoax. So I called the reporter, and he said, no, this isn't a hoax. Then I called the researcher, and the researcher was very excited about the work. I really felt rather badly about it, because she was so enthusiastic about her piece of research. But nonetheless we did give the fleece to the grant that went to Arlington. It pointed up one of the things that was wrong with the way the Foundation (in this case it was the Endowment for the Humanities) gave the money. They gave the money to the State of Virginia without asking the state what it was going to do with the money. Virginia got its share of the money that went out to the 50 states. Then it was of no concern to the Endowment what happened to those funds. Now, the Endowment made the argument, and there was some sense to it. They said, think of the administrative costs if we have to follow up on what the states do with every small ten thousand dollar grant. But the small grants add up to a lot of money -- one-hundred twenty-five or thirty million dollars I think they were getting per year at that time -- over which the Endowment relinquished jurisdiction and over which they said they were not concerned or interested in what happened. We pointed that out.

    Ritchie: It certainly was a tremendously successful public relations tactic. It always made the newspapers.

    Shuman: It always made some of the newspapers. The Washington Post sometimes did not print it. Often the Washington Post printed the fleece not as the original story but the criticism of the story by the agency who received it.

    Ritchie: Why do you think that was?

    Shuman: I think they felt it was beneath their dignity. If they had found it, it would be a good story, but for some senator to find out something that was newsworthy and to put it out once a month was sort of interfering with their business and they weren't really going to acknowledge that. Also, the story was written by their staff person, who covered the agency getting the award. And that person, in order to protect sources often gets co-opted by the agency he or she covers. I never asked them, because I learned very early not to complain to newspapers about what they did or didn't run, because they always have the last word. In fact, when we were sued, the first story to appear was the rebuttal by the
    person who got the grant. And the reason for that was that I think the Detroit Free Press or the Detroit News got our release, say on a Saturday morning, which was for a Monday morning release, and on Saturday afternoon they called the researcher and said, "Here's what's being said about you. What about this?" He gave his reply, and they printed his rebuttal. His rebuttal to our fleece was the story that was put out first. We read it as the rebuttal to our fleece, which had not yet appeared. I never thought he was maligned as a public figure because his reply preceded any allegation we made. It was like Alice in Wonderland, "Verdict first, evidence later."

    Ritchie: Do you think that some of the papers may have reacted that way because they thought it was a stunt? Because the senator was doing this on a regular basis?

    Shuman: They might have.

    Ritchie: That they might have been suspicious of something that looked overtly like a public relations operation?

    Shuman: Well, I think they thought that. But so what? They do it all the time, and they don't think anything is wrong with it. If it were news, they printed it, believe you me they printed it. And we had access to sources that the papers didn't have. Most of our stuff came from digging deep into the subject matter of our Appropriations Committee. We had people around on the Joint Economic Committee and on the Appropriations Committee staff and in our own office who kept an eye out for these examples. And if we saw something that was interesting, we could command the papers. We could ask the agency for the details behind it; we could get the original contract, which we did, and which we read, and from which we quoted. We had the basic information, and that's why we were so accurate. But that was information that no one else could get. So, I make no apology for it at all.

    Ritchie: Just the other day, Senator Proxmire was asked what he was going to do with the golden fleece after he retired, if he was going to will it to another senator. He said actually he was thinking about taking it with him, and he hoped that he could continue the tradition..."

Lynching is out of style

There is a lot I don't like about evolution of customs in the world I live in. I don't like the vogue for bad language. I don't like the increasing exploitation of sex in the media. Etc. But whenever I'm tempted to whine about these trivial things, I only have to remind myself that in the U.S. we have given up lynching. The world is getting better in important ways.

Don Sensing reminded me just how bad things once were in a post placing the recent events in Fallujah into a longer-term perspective:.
    "...the lynching of a black man named Will James in Cairo, Ill., in 1909. James was accused of murdering Miss Anne Pelley. Townspeople murdered James on the city's Commercial Avenue beneath electric lights. I'd guess from the photo there are several thousand spectators there.

      The rope from which James was hung broke before he died. His body was then "riddled with bullets," dragged by rope for a mile to the alleged scene of the crime, and burned in the presence of ten thousand spectators. According to the New York Times, five hundred "women were in the crowd and some helped to hang the negro and to drag the body."

    After James was burned, his half-burned head was mounted on a pole and put on display in Candee Park.

    As atrocious as the mob in Fallujah was, we'd best recognize that the line between civilization and mob is thin. If honest, we must admit that the mutilation of the security guards' bodies there and the public spectacle made of them was not very different from literally decades of such deeds done here in America by Christian people.

    To ask why some Fallujans committed the atrocity is to ask the wrong question. Better to ask of ourselves why we no longer do, for it is our restraint from such cruelty for several decades that is historically unusual. Mob lynchings here did not instantly cease, but they did cease fairly suddenly. What suppressed the mob in America? That's one thing of many we need to teach Iraq..."
A first rate post. My only reservation is that I'm not sure that this is something that can be taught by one people to another.

Revised 4-7-04

The IT Revolution (the 19th Century IT Revolution)

The 19th Century saw a revolution in information technology. Robert Shiller identifies the following innovations:
  • The cost of paper for record storage drops as a paper making machine is invented in 1800, and the use of wood pulp for making paper is introduced in 1865.

  • The cost of data transmission drops when standardized envelopes are introduced in 1849, and as "street addresses proliferated in the late nineteenth century..."

  • The cost of making copies drops with the invention of the letter press in 1780 ("Letters...were placed before the ink was fully dry between the tissue-paper pages of a blank book, and the book closed and placed in a letter press, which pressed the pages tightly together. The special ink used to write the letter left a mark on the blank page, thereby generating a copy, which, although backward on the tissue paper, could be read normally from the other side."), of carbon paper in 1806, and photographic document copying in 1900.

  • "The invention of the typewriter in 1868 was significant not only for the increased speed of data entry but also for the increased reliability of typewritten records..."

  • Industry for producing forms emerges in the 19th Century; carbon forms available by the 1880s.

  • Document sizes become standardized.

  • In the 1880s and 1890s development of mechanical calculators "sped the operation of the addition of numbers by about six..."

  • Filing systems improved (Dewey Decimal system introduced in 1876).

And then, there is the vertical file:
    "The vertical file with the associated cardboard file folders appeared at the 1893 world's fair, the Columbian Exposition in Chicago, where it won a gold medal..."

    Before the introduction of the vertical file "...the dominant storage facilities were pigeon holes in desks, wooden drawers where documents would be lain on top of each other, and letter boxes kept on shelves. Large documents were typically folded over quarto or octavo, and a description of the content was written on the outside of the folded document. Groups of documents were sometimes tied together with ribbons and strings. One could look in a pigeonhole or drawer or shelf for the document that one needed by sorting through the octavos and reading the descriptions. This method of storage, however, was not efficient, and the need to remove documents from a stack to read the descriptions subjected the documents to risk of loss or damage."

    The vertical file incorporated "...a significant innovation, a wheel and rail support system for the drawer that allowed a deep file drawer to be pulled out all the way, to access the backmost file folder, without the drawer falling out of the file cabinet. The system has a double wheel, riding in a track, with a two-for-one ratio, so that when the file drawer is fully extended, the supporting rail is half extended, allowing support of the drawer when extended from the cabinet. With such solid and reliable drawers, the files could be four or five drawers high and thirty inches deep, making effective use of limited wall space."
All of these technical innovations were accompanied by innovations in the organization of records management: "...bureaucracies advanced to create more efficient human organization for improved management of records..."

Modern finance, which depends on management of "Tens of millions" of records depends on these technical and management innovations.

(Robert Shiller, The New Financial Order. Risk in the 21st Century, the start of chapter 5, and associated endnotes.)

Economic analyses of federal regulatory proposals

"Between the idea and the reality, between the motion and the act, fall the environmental, cost-benefit, and small entity analyses." T.S. Eliot didn't write exactly that ("falls the shadow"), but it applies to federal regulation.

Various statutes and executive orders require environmental analysis, cost-benefit analysis, economic analysis of the impacts of a regulation on small businesses, governments, and non-profits, and more, before a good (or bad) idea can become regulatory reality. Most of these requirements are informational: a regulation isn't generally precluded because it may fail a cost-benefit analysis, or have an adverse impact on small entities.

These statutes and orders are an attempt to deal with a principal-agent problem. Civil servants focus on a problem defined by their agency mission. Highway administrators want to build highways - they believe in highways, and their constituency groups also want highways. But the public has a wider range of interests. They want to build highways, but they want to protect the environment as well, and they want to provide opportunities for small businesses. These analysis requirements attempt to force agencies to face some of these other, broader issues.

The lineage of the cost-benefit requirement can be traced back to the Nixon Administration. It took its modern form early in the first Reagan administration in Executive Order 12291. This served through the Reagan and Bush administrations and was superseded by E.O. 12866 early in the Clinton administration. Despite Reagan-era liberal concerns that cost-benefit analysis was simply a tool to prevent needed social and environmental regulation, the Clinton administration continued the practice. The new Bush administration has not replaced E.O. 12866 - it did introduce new guidelines for 12866 analysis last fall.

Does the cost benefit requirement do any good? Winston Harrington and Richard Morgenstern ("Evaluating Regulatory Impact Analyses") survey the literature on the different ways of approaching this question. This survey was prepared for an Organization for Economic Cooperation and Development (OECD) conference on evaluation of regulation last fall.

Are the analyses done well (presumably a bad analysis won't accomplish much good)? Do they have the basic things you should find in a good analysis (a selection of alternatives, an executive summary? This is an "extensive content test.") Do they not only have the requisite parts, but are the parts well done? ("intensive content test"). Are their predictions borne out? (an "outcome test"). Do they make a difference in the nature of the regulatory process outcomes? (a "function test"). More to the point, do they improve the functioning of the regulatory process? (a more demanding version of the function test).

Richard Hahn and Patrick Dudley do an "intensive content" test in this recent AEI-Brookings Joint Center for Regulatory Studies report, "How Well Does the Government Do Cost-Benefit Analysis?". They review 55 EPA studies from 1982 to 1999 to see to what extent they include the basic elements of a good analysis. Hahn and Dudley focus on analyses of economically significant regulations - those with costs or benefits over $100 million a year.

Hahn and Dudley found that:
  • Not all studies included estimates of total costs; costs to industry were reported more often than costs to federal and state governments.

  • Benefit estimates were not presented as systematically as cost estimates; benefits were less likely to be monetized.

  • Comparisons of costs and benefits (through net benefit or cost effectiveness analysis) were often not made even when they could be made: "Of the rules in the sample that monetized benefits, only 54 percent calculated net benefits. Of the rules in the sample that quantified benefits, only 69 percent calculated cost effectiveness or net benefits." (page 11)

  • The percent of analyses including at least one alternative dropped from 89% in the Reagan administration, to 74% in the Clinton administration. It was uncommon to calculate net benefits or cost effectiveness for alternatives.

  • There was no clear trend in the quality of the analyses across the administrations
A useful 79-point checklist in the appendix shows the elements Hahn and Dudley would like to have seen in these analyses.

Harrington, Morgenstern and Nelson performed an "outcome" test in the RFF discussion paper "On the Accuracy of Regulatory Cost Estimates." This is a nice article - I posted on it in October 2002 in "Do government economists make mistakes?".

Harrington and Morgenstern survey literature on "function testing." They note that an examination of individual documents for the presence of alternatives suggests that the document was meant for use in designing the regulation. Absence of alternatives (or alternatives that are obviously strawmen) suggests not.

Statistical studies relating the characteristics of analyses to regulatory outcomes may also be helpful. Do the regulations differ systematically with characteristics of the regulatory analysis? This may suggest that one affects the other, although whether for better or worse may be unclear. Harrington and Morgenstern point to two studies. One found that higher quality analysis was associated with more stringent (although not necessarily better) environmental regulation. A second found that analysis "had at best a slight effect on cost-effectiveness."

Case studies may also identify relations between analysis and regulatory outcomes. Meta-analyses of lots of case studies can begin to suggest patterns. Harrington and Morgenstern point to a volume of case studies of EPA regulation (Morgenstern, Richard D. editor. Economic Analyses at EPA: Assessing Regulatory Impact). The authors of these cases studies - generally "closely connected with the regulatory process they were writing about" - felt that the analyses had improved the ultimate regulations by leading to changes that reduced costs or increased benefits. A clear lesson from these studies was:
    "...the critical importance of timing to the usefulness of RIAs [cost-benefit analyses - Ben]. Several case-study authors mentioned the fact that many RIAs are not initiated until after the regulatory process is well under way, often after the preferred alternative has been selected...In this situation, the usefulness of the RIA is obviously undermined. Worse, it puts pressure on the analyst not to deliver bad news about benefits and costs, especially abut the preferred alternative, leading to cynicism about the role of RIAs in the regulatory process. Most analysts believe the RIA should begin before the regulatory process begins, in order to develop information useful in decisionmakng."
Minor editorial revisions 4-14-04