Monthly Archives: March 2008

Yoram Bauman is coming to the UK as part of his “supply side” world tour. Don’t miss it: Old Fire Station, 19 April 2008. (HT: Knackered Hack, and Yoram himself too.)

Videos from Yoram here; I am also speaking in Oxford twice in April, but that’s a lot less exciting.

I recently discovered that I am entitled to an occasional tax-free breakfast, because I cycle to work. (The UK government advises that “Under general principles such meals are a taxable benefit in kind but regulations exempt them from tax, as long as they are provided on designated ‘cycle to work’ days.’’) Good to know – and a reminder that the idea of using the tax system to promote environmental goals has taken a wrong turn somewhere.

The basic idea behind green taxes is sound. Since people usually respond to financial incentives, whenever something is taxed they tend to do less of it. Usually, that is a problem. When the government taxes income, we slack off. When the government taxes moving house, we may stay in the wrong size house on the opposite side of town from our new job. What’s more, whenever the tax dissuades someone from earning income or moving house, the tax office loses out as well.

But when the government levies a “green tax’’ – that is, a tax on some polluting activity – these vices become virtues. If the tax does not dissuade the polluters, they pay through the nose, funding public spending or tax cuts on the rest of us. And if the tax does dissuade the polluters, all the better, because pollution will fall.

The remainder of this column can be read here. Please post comments below.

Dear Economist,
I’m an American. As you know, the primary elections are heating up here, and in a few months we’ll have the real thing. Eight years ago I caught flak from my wife for not voting; I tried pointing out the minuscule impact of a single vote (mine). She responded that if everyone thought as I did, no one would vote. However, I don’t make decisions for everyone, just myself. Is it rational for me to vote, considering only the effect of my vote on the outcome of the election, and leaving out (for once) my wife’s lowered opinion of me?
P.B.

Dear P.B.,

I accept that your vote has almost no chance of deciding the outcome. Even in the infamous Bush-Gore contest in Florida in 2000, the chance that a single Florida voter could have changed the outcome seemed minuscule at the time. With hindsight it was zero, since the official margin of victory was more than one vote.

For this reason, nobody votes hoping that his vote will change the outcome. We vote instead because we like to feel involved, out of a sense of duty, or – importantly – to avoid being criticised by our friends and loved ones. These motives are enough to get about half of us out to the polls, but not enough to persuade us to engage in pointless research into the details of each candidate’s policy platform. All of which explains why many people vote, but few do so in an informed fashion.

None of this changes the fact that democracy is useless without a decent number of voters. That is why your wife is right to put you under pressure. It should go without saying that ignoring her would be highly irrational.

Questions to economist@ft.com

A nice paper at last week’s Royal Economic Society conference from Oxford’s Michael Mikhail Drugov (sorry, Mikhail):

This paper studies the consequences of introducing competition between bureaucrats. Bureaucrats are supposed to grant licences to firms that satisfy certain requirements. Firms have to invest into satisfying these requirements. Some bureaucrats are corrupt, that is, they give the licence to any firm in exchange for a bribe. Some firms prefer to buy the licence rather than to invest and satisfy the requirements imposing negative externalities on the society. The competition regime is found to create more ex ante incentives for firms to invest while the monopoly regime is better at implementing ex post allocation, that is, distributing the licences given the firms’ investment decisions. Additional results on the effects of intermediaries, staff rotation, punishments and endogenous entry to the bureaucracy are provided.

Drugov pointed out that, for instance, in India you have only one local bureaucrat you can go to for a driving licence, while in Russia you have a choice of different offices. If bureaucrats demand bribes, which situation is preferable?

The answer, by the way, is not obvious. We prefer bribes to be low if the bureaucrats are extorting from qualified drivers; but if the bureaucrats are colluding to give licences to unsafe drivers, we’d like the bribes to be high. The paper has much more, for those of a technical bent.

The BBC reports:

The amount of money sent back home last year by millions of Latin Americans working abroad grew at the slowest rate in nearly a decade, partly due to the economic turndown in the US.
For the first time since the Inter-American Development Bank (IDB) started to study remittances in 2000, the increase is less than 10%.
The slowdown was particularly marked in Brazil and Mexico, which receive the largest amounts of money.
In Brazil it fell by 4%, and in Mexico it grew by only 1%, a move that has started to concern some analysts.
Despite the decline, the total amount of money sent home by Latin Americans is still huge – $66.5bn (£33bn) in 2007.

Interesting story, although an increase of 7 per cent is not a decline. Remittance growth has been remarkably robust in the past half-decade. A crackdown on terrorism finance and money-laundering was widely expected to put a dent in it. Here is the IDB press release, with map.

Here is some earlier work I did on remittances and other private financial flows in a former life. And here is the down-side of against remittances:

Consistent with our predictions, remittance-receiving households work fewer hours and spend less on the education of their children. While saving more, these households are not leveraging their savings to borrow from the banking system to expand their business activities.

Oh dear. More here, from the always excellent New Economist.

Richard Easterlin – he of the Easterlin Paradox – has a new working paper [pdf] out:

In the transition from socialism to capitalism in Eastern Europe life satisfaction has followed the V-shaped pattern of GDP but failed to recover commensurately. In general, increased satisfaction with material living levels has occurred at the expense of decreased satisfaction with work, health, and family life. Disparities in life satisfaction have increased markedly with those hardest hit being the less educated and persons over age 30; women and men have suffered about equally. The asymmetric response of life satisfaction to decreases in GDP in transition countries and increases in GDP in non-transition countries is arguably due to loss aversion.

Here is an earlier essay I produced about the economics of happiness.

Over Easter, the FT’s leader writing team commented:

The Royal Economic Society held its annual conference this week to debate and analyse the pressing economic issues of the day. Naturally, the best-attended lectures focused on the credit crisis. Yet investment bankers in distress might have been intrigued by research presented in one of the more obscure parallel sessions.
There, in one of the rather cute pieces of statistical analysis that have become all the rage in recent years, the economist Andrew Clark presented the discovery that religious belief cushions the impact of adverse events. It is not that divine intervention is at work to protect the faithful. Rather, Catholics and Protestants alike are less depressed when bad things happen to them – for example, when they lose their jobs. Religious belief provides comfort in troubled times.
Fine. An economist once again states the obvious in technical terms, backed up by a battery of statistical tests. Even if this result was surprising – it is not – it would not change the behaviour of the devout…

A little harsh, perhaps. Here is the paper [pdf]. I was at the Royal Economic Society conference and found much to enjoy. Reports wll follow.

Car Bus Bike

As a cyclist, I find London’s buses – not just the bendy ones, but all of them – to be infuriating. They take up so much space! But a good economist always asks, “compared to what?”. Here’s the answer, via Virtual Economics. The original is from a campaign by the city of Munster, I am told. It matches up pretty well with my intuition.

Friends of mine, husband and wife, once argued over the price of a branded packet of lemon slices bought at some convenient corner shop or petrol station. She complained that the slices weren’t worth the price she had paid. He pointed out that she had bought them – albeit grudgingly – knowing exactly how they tasted, and that therefore they had to be worth what she had paid. No prizes for guessing which of them is an economist.

We economists know a lot about pricing, but we tend to be baffled by the way the rest of humanity thinks about it. The package holiday offer, “Kids go free to Disneyland”, is, to an economist, a profitable attempt to charge more to couples with two incomes and no children, who are likely to have more cash to burn. To everyone else, it is an idea waved through unquestioningly.

The remainder of this column can be read here. Please post comments below.

Dear Economist,
My fiancee is moving in with me. We’ve lived together before, and we hate housework. Before, we didn’t do work in retaliation for housework not done by the other. This led to a suboptimal equilibrium of dirty floors and resentful cohabitants. This time I want to create an incentive scheme to keep our house clean and us happy. I am reluctant to assign monetary value to chores, as this can backfire. Weekly rewards, such as choosing a Friday night restaurant, seem gimmicky. But I can’t think of a better idea. I have racked my brain and time is running out! Help me, Undercover Economist, you are my only hope.
Home Alone

Dear Home Alone,

If this were a holiday fling, the outcome would be clear: each of you would prefer the other to wash the champagne flutes and make the bed in the mornings, but lacking any mechanism to enforce co-operation you might both slack off and feel resentful. It is often the case that brief encounters can be mutually exploitative.

Yet economic theory, experiment and practical experience all suggest that in the most unpromising situations, the bitterest adversaries find a way to get along when they are stuck with each other. Reciprocity seems to be the key. Soldiers in the trenches of Flanders practised “live and let live” when the generals were not looking. The cold war did not end in mutual annihilation.

I venture to say that if this time you and your fiancee can’t even match the grudging co-operation of Khrushchev and Kennedy, you will at least be warned before the wedding day that housework is the least of your worries.

Questions to economist@ft.com

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Publishing schedule: Excerpts from "The Undercover Economist" and "Dear Economist", Tim's weekly columns for the FT Magazine, are published on this blog on Saturday mornings.
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