Two Bits of Economic News

Some interesting macroeconomic news came out recently, so I thought I'd pass it along:

1. India's economy grew at 8.9% last quarter. Wow. They can't keep that up forever, obviously, but the "Rule of 69" implies that they would double their national output in eight years at that rate!
2. Nigeria and Venezuela announced that they will cut oil production by 200,000 barrels of oil/day. This sounds like a lot, but since world oil supply was 84 million barrels/day during the second quarter of 2006 (source: EIA Table: World Oil Balance), it amounts to only a 0.24% reduciton in world oil supply. So don't worry, this probably won't mean any big changes in gas prices.
   

Does Money Make You Happy?

I came across two different answers to this question today in two different sources. I don't know the answer, but I do know that I would like more money, so revealed preference tells me "yes." Decide for yourself:

Yes, say Jonathan Gardner and Andrew Oswald, courtesy of Andrew Gellman:

One of the famous questions in social science is whether money makes people happy. We [Gardner and Oswald] offer new evidence by using longitudinal data on a random sample of Britons who receive medium-sized lottery wins of between £1000 and £120,000 (that is, up to approximately US$ 200,000). When compared to two control groups – one with no wins and the other with small wins – these individuals go on eventually to exhibit significantly better psychological health. Two years after a lottery win, the average measured improvement in mental wellbeing is 1.4 GHQ points.

No, say Daniel Kahneman, Alan Krueger, David Schkade, Norbert Schwarz, and Arthur Stone (working paper version), courtesy of Gregg Easterbrook, the Tuesday Morning Quarterback:

The belief that high income is associated with good mood is widespread but mostly illusory. People with above-average income are relatively satisfied with their lives but are barely happier than others in moment-to-moment experience, tend to be more tense, and do not spend more time in particularly enjoyable activities. Moreover, the effect of income on life satisfaction seems to be transient. We argue that people exaggerate the contribution of income to happiness because they focus, in part, on conventional achievements when evaluating their life or the lives of others.

Aquafina on a Plane!, the sequel

It's a victory for common sense (and social optimization) as the government has annoucned that liquids will once again be allowed on planes, starting on Tuesday. (Though still with some added restrictions meant to make it easier to screen liquids at security.) This irrationality of this restriction has been pointed out by many (including Steve Levitt and Bryce). Lifting it is a good thing.

Let's Not Get Ahead of Ourselves

Tonight, the NFL returns to New Orleans, as the Saints hosts the Atlanta Falcons on Monday Night Football. Listening to the radio this morning, I heard over and over again how this is a sign that New Orleans is well on its way back, that the city is doing great, etc.

While I will note that it is certainly nice that an NFL game can be played in New Orleans now, and even admit to the likely truth that having the team there gives some emotional boost to the people of New Orleans, I'm a little hesitant to jump in and join the crowds that is claiming that because professional football is back, everything is going great is New Orleans.

A recent editorial in the Times-Picayune highlights the situation in New Orleans as moving, but way too slowly:

More than 1 million people are living in metro New Orleans today, a statistic that is remarkable given the devastation wrought by the storm and its aftermath. Still, tens of thousands of our neighbors have been unable to return, and thousands more cannot live in their homes.

There is $110 billion in the pipeline for the recovery of the Gulf Coast, but only $45 billion has made it to people and projects here -- and much of that was for the immediate costs of rescue and triage. It is crucial to get the remainder of the money to the people and businesses who need it. It is vital, too, for the necessary resources to be committed to the long-term flood protection of greater New Orleans and the restoration of Louisiana's coastal marshes. Neither has happened yet.

CNN has more:

In many ways, the Hamiltons' New Orleans East neighborhood looks like Hurricane Katrina struck last week. Call it a theme in a city still reeling a year after one of the worst natural disasters in U.S. history.

According to the Brookings Institution, a Washington-based think tank, roughly a third of the city's schools, hospitals and libraries remain closed, as do half the city's public transportation routes.

Thousands remain displaced, either living in FEMA trailers or calling a new place home.
....

Parts of New Orleans scream recovery; others scream for it. On one side of the city, you can't find a gas station intact. On the other, all three of Larry Flynt's Hustler clubs are blinking on Bourbon Street.

"We are a tale of two cities," said Mary Beth Romig, spokeswoman for the New Orleans Convention and Visitors Bureau. "We have a long way to go in those residential neighborhoods."

However, much of uptown, downtown, the French Quarter, and the business, Garden and Warehouse districts -- all areas that draw out-of-towners -- was "spared from the flooding and they're all thriving now," Romig said.

The city lost about half of its convention business this year, but it should be up to about 75 percent next year, and "things are looking much better for 2008 and beyond," she said. "In many ways, we are back; we just need to get the word out."

I don't want to bring everyone down, but I hope that while ESPN is celebrating the return of football to New Orleans, and all the positive emotions that brings with it, that they take the time to highlight all the work that is left to be done. It would be a shame if the all the attention on the "recovery" and the football game causes people to think that everything is ok in New Orleans. The CNN article above really highlights the contrast in New Orleans; since the football and the journalists covering it will be in the less-affected areas of the city, I'm afraid this won't happen and instead we'll see stories on the contrast of the Superdome, from the squalor of the days immediately post-Katrina to the renovated NFL home is today, giving the impression that all is good in NOLA. Let's not forget that there is still lots of work to be done.

Counselor-O-Matic

The NY Times has a recent article covering the use of online "dating" services which are meant to help match college applicants to schools. The article tells the story of Annie Allhoff, who is a freshman at Pomona College in Claremont, CA. Annie had never even heard of Pomona when she was looking at schools, but learned about it after going through the matching algorithm at Counselor-O-Matic. This seemed interesting enough, so I thought I'd take it for a whirl myself, trying to remember what I was looking for in a college when I applied way back in the nineties. (This was harder because I had to come up with SAT scores, which (a) I don't remember and (b) have been rescaled twice since I took them in high school.)

Anyway, I went through the process, pretending to be a high-school senior deciding where to apply. The program asks about your grades, class rank, high school name, location and geographical preferences, courseload, activities, possible majors, interests in clubs, sports, etc, feelings about male/female ratio, etc. It's a lot of questions, but I'm sure that all of this helps the match. Here's what came out for me:

Good Matchs:

1. Gettysburg College
2. New York University
3. Trinity College
4. Boston College
5. Brown University

Reach Schools:

1. Pomona College
2. ?? (This one came up blank... some bug in the program, I guess)
3. Dartmouth College
4. UCLA
5. Georgetown

Safety Schools:

1. UMass-Cambridge (just kidding)

1. Washington College
2. Marlboro College
3. Marist College
4. St. Lawrence University
5. Clark University

Some things of note:

• NYU came up at #2, even though I specified I wanted a school with an ice hockey team, and I ranked an urban environment as undesirable. So I wonder what is driving that placement?
• The extended Good Match schools include many schools I looked at, as well as Brown, the school I attended. So, kudos.
• However, Wellesley College in Wellesley, MA came up as a good match. This is probably not a good match, as Wellesley would never take me, since I am not female. (And clearly marked myself as male in the survey.)
• Overall, though, it was fun. I think I may do it again, stating what my current preferences would be (if I was 18 and knew what I know now, mainly that I would want to study economics).
  

Drink to Your Success

A new study, backed by the Reason Foundation, a libertarian think-tank, and authored by Bethany Peters and Edward Stringham, claims to discover why drinkers earn more than non-drinkers, which is apparently a well-established fact. (I had no idea.) Here's the abstract:

A number of theorists assume that drinking has harmful economic effects, but data show that drinking and earnings are positively correlated. We hypothesize that drinking leads to higher earnings by increasing social capital. If drinkers have larger social networks, their earnings should increase. Examining the General Social Survey, we find that self-reported drinkers earn 10-14 percent more than abstainers, which replicates results from other data sets. We then attempt to differentiate between social and nonsocial drinking by comparing the earnings of those who frequent bars at least once per month and those who do not. We find that males who frequent bars at least once per month earn an additional 7 percent on top of the 10 percent drinkers’ premium. These results suggest that social drinking leads to increased social capital.

Wow. That's an amazing result, and suggests that we should all meet up for a drink this weekend. But, wait, you say. Where's the evidence of causation? Couldn't it just be that social people have more social capital and also drink more, rather than their hypothesis that drinking more leads to being more social? Good point, and the authors even note something similar to it:

Whether abstainers choose not to be as social or whether organizers of social occasions involving drinking exclude abstainers is unclear.

Great, so they note this issue and surely will provide some sort of instrument to control for this, right? Wrong. Here's the author's take on their regressions:

We therefore estimate the following equation:

Yi = γXi+ βAi + δBi + εI

where Y is the log of real earned income by individual i; X is a vector of personal and demographic characteristics; A is the drinking dummy variable; and B is the social vs. nonsocial drinking dummy variable.

The drink dummy comes from this question:

The survey question on alcohol asks respondents, “Do you ever have occasion to use any alcoholic beverages such as liquor, wine, or beer, or are you a total abstainer?” From this question we create a dummy variable where drinkers have a one and abstainers have a zero.

and the social vs. nonsocial drinking dummy comes from this one:

The survey also asks respondents the frequency with which they go to a bar or tavern. Choices include the following: almost every day, once or twice a week, several times per month, about once per month, several times a year, about once a year, never, and don’t know. From this question we create a variable indicating whether an individual frequents a bar or tavern at least once per month.

The regression results show that the coefficients on A and B are positive and significant for men and that A is positive and significant for women. (The coefficient on B for woman is essentially the same as for men, but with a larger standard error that makes it statistically insignificant. For some reason, though, the authors focus on their being a real difference between the social effect for men and women, even though the point estimates are essentially the same, a point Andrew Gellman takes them to task for.)

How can we interpret these results? Really, they say nothing more than people who drink (and visit bars) earn more than those that don't. The authors' claim that drinking and visiting bars increases is an investment in social capital and thus leads to higher wages is a possible explanation, but it can just as well be that people with more social capital (and thus higher wages) for other reasons are more likely to drink and to visit bars.

I can't understand why the authors do not try to disentangle the drinking variable (A) from the social drinking variable (B) in some way. I don't think anyone thinks that drinking alone will help your wages (Bethany Peters certainly doesn't), but the authors don't try to seperate the two variables in any way. I imagine that the two variables are highly correlated and thus throwing them both in a linear OLS regression can cause all sorts of troubles. Furthermore, the General Social Survey that they use for their data certainly has other variables available that might help pin down the size of an individual's social circle apart from alcohol consumption. Using data like this might help them isolate the effect of drinking apart from other factors that increase/decrease social capital. As it stands, though, their results are a mess that seem like what you might see in an undergraduate's class project or a bad undergraduate thesis.

(Note: The paper was also recently published in the Journal of Labor Research; I can't access the article, but a working paper version (PDF) at Stringham's website suggests that it is essentially the same and has these same problems.)

It's an outrageous claim that they are making that these results "prove" that drinking causes you to earn higher wages. They don't prove anything by running OLS regressions on simultaneously determined variables which also suffer from ommitted variables. And while there is a plausible link between social drinking (due to its social nature) and higher wages, that doesn't even start to explain their bizarre finding that drinking alone "raises" wages by 10%. That should have been a bright, flashing sign telling that their regression is not capturing what they think it is. Instead, the results are being help up by the Reason Foundation as policy advice:

Most importantly, restrictions on drinking are likely to have harmful economic effects. Not only do anti-alcohol policies reduce drinkers’ fun, but they may also decrease earnings. One of the unintended consequences of alcohol restrictions is that they push drinking into private settings. This occurred during the Alcohol Prohibition of 1920-1933 and is happening on college campuses today. By preventing people from drinking in public, anti-alcohol policies eliminate one of the most important aspects of drinking: increased social capital. From this perspective, anti-alcohol campaigns can be considered harmful to individuals and the economy as a whole.

Yikes. Of course, their results show that even drinking alone, in private settings, increases your income, so anti-alcohol policies aren't too bad. This doesn't even seem like a strong enough policy prescription. Why don't we have the government pass out free beer at city hall? That way, everyone can drink (+10% wage) and drink socially (+6% wage) and we'll all be happy. Just as long as we don't all drive home....

ETA: Bryce shows that, as we speculate here, conditional on not yet being a drinker, having a larger social network at time T is correlated with becoming a drinker before time T+1 and T+2.

The Key to Winning an Election

Following up on other potential electronic voting problems, Slashdot points us to this:

"As if Diebold doesn't have enough to worry about! On the Freedom To Tinker blog, Ed Felten, one of the co-authors of the recent report 'Security Analysis of the Diebold AccuVote-TS Voting Machine', reveals an even more bizarre finding related to the initial report. It turns out that you can gain access to an AccuVote-TS machine using a hotel minibar key. In fact, the key in question is a utilitarian type used to open office furniture, electronic equipment, jukeboxes, and the like. They might as well hand them out like candy."

So, it seems that there is a literal *key* to winning an election. Yikes.

Social Opportunity Cost

The New York times today runs an article on the split lives of New Yorkers who spend much of their summers in the Hamptons.

This Labor Day weekend, as on so many Labor Day weekends past, Mr. Lipnick said, his family and their friends exchanged phone numbers and promises to meet for dinner in the city during the off-season: “They said, ‘We’ll get in touch over the winter,’ and we said, ‘We’ll get in touch over the winter.’ ”

The wise will not sit waiting by the phone.

The article explains how many New Yorkers have summer friends in the Hamptons and winter friends in the city, and that even when those summer friends live on the same block in the city, the two worlds don't meet. The author presents some possible explanations for this "strange" phenomenon:

1. People just don't have time for more friends in the city.
2. Class issues:

   “There’s a classless situation here,” said Jeff Evans, general manager of Lake Naomi, a country club community in Pocono Pines, Pa. “People often don’t know what other people’s occupations are and they don’t care. The distinctions might be more of an issue if they got together during the fall and winter.”

3. Summer friends are people you don't really like:

   “Sometimes you realized that having a common experience was great but that you didn’t necessarily like the people you were having it with.”

What any economist will realize, though, is that all of these reasons boil down to the same thing: during the summer (i.e. on vacation), the opportunity cost of socialization is reduced. During the workweek and normal weekends, free time is extremely limited (not a lot time for friends, reason #1) and may be very costly (babysitters, expensive nights out in Manhattan) and thus in order to spend time with a particular friend or friends, the value of the that time spent needs to be pretty high.

While on vacation, this is no longer true: you have all day to do whatever you want, so time spent with other people doesn't crowd out other valuable activities. That is, the price of being friends with people goes way down. As a result, you use that time to "buy" both more and "lower quality" friends. For example, either you don't really like them that much or you'll drop the snootiness a bit and be friends with someone "below" you.

What's great is that at least vactioner interviewed for the article recognizes this outright:

“You can be less discriminating.” Ms. Braddock said. “You look at your time differently in the country. If you’re having dinner for two hours with people you don’t like, you’ve had 10 other hours to do what you wanted. You can be more tolerant because you’re being pleased by so much around you."

“But on a precious Saturday night in the city,” she continued. “you’re not going to want to hire a baby sitter and spend a couple of hundred bucks to have dinner with them.”

Huh?

Saddam Hussein was not a dictator, according to the lead judge at his trail:

Questioning a Kurdish witness Thursday, Saddam said, ''I wonder why this man wanted to meet with me, if I am a dictator?''

The judge interrupted: ''You were not a dictator. People around you made you (look like) a dictator.''

''Thank you,'' Saddam responded, bowing his head in respect.

Wow, ok. Here's Webster's definition of a dictator:

Main Entry: dic·ta·tor
Pronunciation: 'dik-"tA-t&r, dik-'
Function: noun
Etymology: Latin, from dictare
1 a : a person granted absolute emergency power; especially : one appointed by the senate of ancient Rome b : one holding complete autocratic control c : one ruling absolutely and often oppressively
2 : one that dictates

Definitions 1b seems to describe Hussein without any debate at all. Some (like Hussein) might object to definition 1c (the "often oppressively" part), but I think it's pretty absurd for a judge in the trail to make a claim like that.

Just As Long as Nobody Produces Jaws 10D!

Check out this flash animation (with sound) on how one might imagine ten-dimensional space. Pretty cool.

(h/t to Alex Tabarrok.)

Data on Inventors

Patent data (and data on inventors) has often been used in economic research. However, it is difficult to track inventors over time due to name changes, different spellings, and non-unique names. Since over 3.1 million patents have been issued by the USPTO between 1963 and 1999 (the patents included in the NBER patent data file), this is an impossible hurdle to overcome manually.

Manuel Trajtenberg, Gil Shiff, and Ran Melamed have recently produced a paper that tackles the "who is who" problem in this dataset. Thus, they have created a even richer patent dataset which allows for the tracking of inventors (including the inventor's residential location as well as that of the firm and relevent patent information, such as citations, etc.) The paper presents the methodology used to overcome this problem; it looks very much like it could be used in other datasources with similar problems.

I don't see that they have yet made their data available for use, though the paper seems to indicate that it should be at some point. This is a great project and the authors should be commended for creating what should become a very valuable data set. Hopefully, it will be out there soon enough, and we'll see a bunch of interesting new work coming out of it....

Should We Have a Draft?

I was watching the Presidential Address last night on CBS (why CBS? I admit, I was watching a rerun of The New Adventures of Old Christine) and after the speech, Bob Schieffer came on and spoke with Katie Couric. He raised the point (a point I admit I've heard elsewhere) that it seems odd for the president to impress upon the country that it is a time during which great sacrifice is needed, when the only sacrifices are being made by members of the military and since we have an all-volunteer military, those sacrifices are grouped together among the (generally poor) military families.

This got me wondering if the fact that we have an all-volunteer military makes it easier to go to war. Strike that... it's clear to me that an all-volunteer military makes it less costly for the president and Congress to send troops into harm's way. They know that (a) personally, there's no chance any of their family members will be sent to war and that (b) politically, only a small fraction of voters are at risk of having themselves or their children sent off to war. My question is whether or not this margin matters or not. Would we have gone to Iraq with a draft? Would we still be there?

I'd always been opposed to a draft. Now I'm not sure. I still have my youthful, ideological opposition to it, but if it's the case that a draft raises the cost of armed conflict and thus might prevent loss of life, then maybe I need to rethink it.

(Note, of course, that this necessarily implies that I think that there are too many armed conflicts. This may or may not be true. And certainly a draft that would have prevented worthwhile wars is not something we'd want.)

Happy 40th Birthday

Revealing my inner geekdom, today is Star Trek's 40th birthday. On September 8, 1966 NBC aired the first ever episode of Star Trek, "The Man Trap." (Further revealing my inner geekdom, I am well aware that although The Man Trap was the first Star Trek episode to air, it is episode #6 in production order.)

So Happy Birthday, Star Trek.

Ugh....

You know, I really like Netflix and all (I was a very early subscriber, but have since moved from the Netflix model to the Tony V "buy them used and keep them forever" model of DVD renting), but I can't get behind their move to sue Blockbuster for infringing their (dubious) patents. From law.com:

Netflix argues that it has patents covering its many online features, including allowing subscribers to keep DVDs for as long as they want without incurring a late fee, obtaining new DVDs upon return of those already watched and prioritizing their own personal movie list.

In response, Blockbuster has filed an anti-trust counterclaim, alleging that Netflix obtained their patents fraudulently and is exploiting them to create market power.

For the interested, here are the Netflix patents:

• 7,024,381 - "Approach for renting items to customers"
• 6,966,484 - "Mailing and response envelope"

Now, I can believe that the mailing envelope patent might be valid. It's unlikely that anyone else bothered to design a packaging solution for shipping DVDs (without cases) in the mail in a reusable envelope that can be used for returns; it's a unique requirement of a new business and Netflix was first. But the othe patent is a little more suspect as it seems to be patenting a business plan. And that just doesn't seem like something that should be patentable to me.

The law.com article indictates that Netflix feels that its patent covers the unlimited rental period feature that they started:

Netflix argues that it has patents covering its many online features, including allowing subscribers to keep DVDs for as long as they want without incurring a late fee, obtaining new DVDs upon return of those already watched and prioritizing their own personal movie list.

This, then, is essentially patenting a pricing strategy: pay a fixed fee, keep the discs as long as you want. That shouldn't be patentable. I haven't read through the '381 patent, but on its face, it seems like something that should be outside the realm of patent law. It's not that it's obvious or anything, just that if we allow people to patent business plans, then we'll have nothing but monopolies running around, and that's a bad idea.

(h/t to /.)

A Great Story

In the NY Times:

Six weeks before Kyle Paxman’s scheduled wedding, a stranger walked into her office with e-mail messages and other evidence that Ms. Paxman’s fiancé was cheating on her — with the stranger’s girlfriend....
But rather than cancel the reception, planned for this Saturday in Vermont, Ms. Paxman, 29, has turned it into a charity benefit, at which strong women will be celebrated...
Ms. Paxman and her parents have invited 125 women, only some of whom were among the original invitees, to enjoy the cocktails and four-course dinner and, in return, she hopes they will write checks to two charities she has chosen, the Vermont Children’s Aid Society and CARE USA, the American affiliate of the international relief group.

Good for her.

Gas Stations and Convenience Stores

A commenter, JerseyKnave, left the following note in my most recent post on the relationship between self-service laws, gas stations, and convenience stores:

Well as a resident of NJ, I would speculate that the number is low because when building new gas stations adding a conveinence store would be unwise because there are alreay enough conveinence stores around.

If you're building an Exxon next to a Wawa I don't think your Tiger Mart is going to do enough business to make it worthwhile.

I also believe Full Service does have a large contributing factor.

Complementary stats that show % of conveinence stores not in gas stations would be most interesting.

OK, let's see, again using the 2002 Economic Census:
If it's hard to read, click on it, and view the larger version. Anyway, the states we care about are, mainly, Oregon and New Jersey. If you recall, in the last post, we saw that despite having a full-service only law for gas stations, Oregon was #3 nation-wide in terms of the lowest % of gas stations with convenience stores attached. Here was the "top" five:

State	% of Gas Stations w/ Conv. Store
New Jersey	25.2%
Massachusetts	47.3%
Oregon	53.0%
Connecticut	57.9%
New York	59.7%

New Jersey was, as expected, in a world of its own. But Oregon didn't stand out. I postulated that it had something to do with the geography of the states (Oregon is the only one of those 5 not in the Northeast). That may be, looking at the big table above, we can also see that New Jersey is an extreme outlier in terms of the % of convenience stores that are not in gas stations, with only 30.7% of its convenience stores in gas stations. DC is close at 32.7%, but the next closest is Massachusetts at 46.5%. The others on that list above: Oregon is next at 50.2%, Connecticut is 12th at 67.9%, and New York is 8th at 62.6%.

So, as the commenter suggested, it seems that New Jersey has the vast majority of its convenience stores outside of gas stations, but doesn't seem to be much more of an outlier here than it did it terms of the % of gas stations with convenience stores. This probably isn't surprising, because the two measurements are pretty similar. If all your gas stations have convenience stores, then most of your convenience stores are likely to be in gas stations. And it doesn't really speak to causality at all. But it is interesting.

My gut is still that the reason Oregon doesn't look like NJ, but rather looks like northeastern states that allow self-service gas stations is that Oregon's geography would tend to give it a *very high* fraction of gas stations with convenience stores, but its full-service law brings it down to look like Northeastern states whose geography leads to fewer gas station-convenience store hybrids. Oregon's neighbors (Washington, Idaho, Nevada, and California) all have high percentages of gas stations with convenience stores (82.1%, 80.4%, 85.1%, and 69.9%). So Oregon is more than 26% points lower than the average of its neighbors, which is similar to the difference between New Jersey and the other northeastern states on in the table above.

Stupid Patents

Microsoft has this one:

---

United States Patent Application

20060195313

Method and system for selecting and conjugating a verb

Abstract A verb conjugating system allows a user to input a form of a verb and display the verb forms. The verb conjugating system allows the user to input the infinitive form or non-infinitive forms of a verb. When a user inputs a non-infinitive form of a verb, the verb conjugating system identifies a corresponding base form of the verb. The verb conjugating system then uses the base form to retrieve and display the verb forms for the verb. The verb conjugating system may highlight the non-infinitive form of the verb within the displayed verb forms to assist the user in locating the verb form of interest

---

I (to think) that this (to be) a ridiculous patent. I (to be) afraid that (to write) (to be) impossible without (to pay) royalties to Microsoft. I (to hope) that the USPTO views this patent as an obvious one and that they (to deny) the patent.

(Hat tip to David Levine.)

A Neat Map

Found over at Andrew Gelman's blog:

My Answer to the 1% Question

A couple of days ago, I raised the 1% question, holding off on my answer. Here it is:

I would clearly take the $1 million/year over raising everyone's income by 1%. I'm not sure how high the number would have to be in order for me to decline the $1 million, but it's at least 10%. Why is this?

1. 1% is very, very little. I don't think I'd really notice a 1% increase in my income. (If I got it in a lump sum, I would, but if it was spread out over the year, I would not notice.) So I don't see a 1% increase as doing much for anyone. I understand that we would be adding those small utility increases over a lot of people, but this is not convincing to me. Because I know that I get a huge utility increase from $1 million/year. (This maybe means that I do not have additive utility in my social welfare function.)
2. With $1 million/year, I can take a nice increase in my personal utility, and still have a very strong social impact locally. I can't raise the income of the poor by $10 billion or whatever, but I could build house for the poor in my community, or buy mosquito nets in Africa, or create scholarship programs, etc. There's two benefits here, one selfish and one not. The selfish benefit is that I get to observe, witness, participate in, and be recognized for these local gifts; the Chinese gift is anonymous and abstract to me. The non-selfish benefit relates to #1: I don't believe the 1% really helps much (if at all) and these gifts have large impacts, even if on a small number of people. (Again, it seems that I do not have a additive social welfare function.)

What bothers me about my choice?

1. What do I believe about individual utility functions then? I don't think that a 1% increase in income is really going to make a difference for anyone. I can convince myself that there are some people who are on the margin for big needs (paying for housing/schooling/food/medical care/etc), but I can't convince myself that there are many like this. Shouldn't I believe that utility functions are increasing? If so, then even a tiny increase, accumulated over a billion Chinese, is a lot of increased happiness...
2. As suggested above, the way to reconcile this is that I have some sort of non-additive social welfare function such that a huge increase for a small number of people is more valuable than a small increase for a huge number of people; I don't think this is crazy. I can handle it. But what is the functional form of this welfare function? Would I be consistent in applying it? For example, doesn't this imply that I would vote for a re-distribution that takes 1% percent away from everyone in China and gives it to me? Or to someone else?
   
3. I'm destroying a lot of wealth. As noted in the last post, a 1% increase in everyone's income in China is something on the order of $70-$90 billion. That's 70,000 to 90,000 times larger than my income increase! That is, the price ratio is hugely in favor of giving the 1% increase to the Chinese. Framing the question that way makes me question my choice. Even a 0.1% increase is a price ratio of approximately 7,000-9,000.

But I can't get around the fact that I think the world (ok, my world) is better off with me having $1 million/year more rather than the Chinese having 1% more. The next question for me to determine is if I would make the same choice if the $1 million went to someone like me, who is not me. I think I would, but am obviously less sure. I want to say yes, because this suggests my choice is based primarily on my beliefs about utility functions and social welfare functions rather than greed.

Make Friends, Play Fantasy Football

According to the NY Times, playing fantasy football helps you make friends:

The Fantasy Sports Trade Association, an industry marketing and lobbying organization, worked with an associate professor at the University of Mississippi to study fantasy sports behavior.
Some highlights of the study:
— 40 percent of players say participation increases camaraderie among employees.
— 36 percent of players say fantasy sports are a positive influence at work.
— 30 percent say they have made friends at work through fantasy sports.

The Times notes some other issues in the research, suggesting the opposite:

Most fantasy sports players are white men. In the association’s latest study, 92 percent of respondents were men. The average age was 36, and 91 percent of players were white.

So if you're a white male, then you can make friends with other white males by playing fantasy football; everyone else, you're out. I actually find this result surprising.... I'm not surprised that it's mostly males, but I'm not sure why the fantasy football field is so white.

(I can't find any posting of the actual study, here's another article on it.)

No Surprise Here

The current crop of next-generation DVD players (Blu-Ray and HD-DVD) are underwhelming, both in terms of sales and performance. This should comes as no surprise because, frankly, nobody wants to be stuck with the losing format, which is really going to slow adoption.

If both sides could have just agreed on a format, and agreed to split the licensing revenues from the format, EVERYBODY (consumers, producers, content providers) would have been better off. Better to have 50% of a big pie than 0% of a small pie (or even 100% of a small pie). There's a lesson here; here's hoping that manufacturer's learn from this in the future....

Blogging on Vacation

To blog or not to blog.

The choice is easier when you end up at a string of places with no internet access, as I did.

The 1% Question

In my vacations last week, there were, obviously, lots of economists and a fair amount of conversation that would only appeal to economists. (Though less so than you might imagine- I've found that my group of economist friends are much more capable of having non-economist conversations. This was pointed out by some others during the trip. But I won't be presumptious enough to claim that our "non-economist" conversations would be interesting to anyone else just because they don't involve arguments about how fast diminishing marginal returns set in...) However, we did have one conversation that I thought might be interesting to the massess.

We started off trying to kill time by answering questions like "If you had to be an office supply, which would you be?" (my answer: a TI-83 graphic calculator) and "Fill in the blanks: Oregon is the ____ of ____?" (I won't reproduce my answer...). But we eventually got to a question that evolved into this:

If you faced the choice of increasing your income by $1 million per year in perpetuity or increasing the income of everyone in Country Z (we settled on China after a while) by X%, how big would X have to be to make you choose to raise the incomes of others?

Some notes:

1. This assumes that if X=0 you would choose the $1 million.
2. The increase in income is proportional. So if X=1%, then someone earning $500/year would see an extra $5, while someone earning $1,000,000/year would see an extra $10,000. That is, the Gini curve would be unchanged.
   
3. You can do whatever you want with your $1 million/year- spend it, invest in, give it to charity, send it to China, whatever.
4. If you choose to raise incomes in China by X%, no one would ever know that you did that.

After a while (as the result of various people's initial answers), we ended up debating what you would choose if X was equal to 1%. (Hence, the "1% Question.")

Some issues that came up in our debates:

1. Would you really notice a 1% increase in income? Or, as it was put at the dinner table (which may not be the right way to look at it), if you had 1% more food at each meal, would you notice?
2. How valuable is it to see the effects of your charity? For us, at least, we wouldn't witness those income increases in China. If I chose the $1 million, I could do a lot of good locally, and see the impacts. (Is this a "Think globally, act locally" question?)
3. And, of course, how selfish are you? That is, in the utility function you are maximizing here, what's the relative weight of others vs. you (and your family).

Without (yet) revealing where I came down on this, let me tell you that answers ranged from X= very, very small (i.e. less than .1%) to X= at least 10%, but not sure. Part of the issue is that we lacked some facts about China which made the difficult question even more difficuly. So here's some China facts:

1. The size of China's economy is $8.8 trillion in GDP in 2005, with GDP/capita equal to $6,800.
2. The distribution of income in China: a Gini of .415 in 2001, and the bottom 10% of the population earned 2.4% of income and the top 10% earned 30.4% in 1998.

In our debate, I think we thought China's GDP was $7 trillion, so 1% more income meant $70,000,000,000 or a ratio of 70,000 to 1, relative to the $1 million you'd get. Thus, even at 0.1%, you have a 7,000 to 1 ratio. But, of course, you don't get it and you don't even get to really see it.

Tough question.... If there's any readers left after that long absence, I'd love to know what you think. I'll give you my answer in a bit. (ETA: Here it is.)

ETA: Oops, Bryce let the world know our question first!

But What Does Dan Patrick Think?

Keith Olbermann is mad at Donald Rumsfeld: