Monthly Archives: June 2008

I often share a taxi home with friends, and wonder how best to split the bill. When dropping a friend off first, I have received contributions varying from nothing to the full fare. If I get out first, what should I pay? As a woman with a large collection of frivolous shoes, walking home is a last resort.
Frances, Brussels

Dear Frances,

Of course contributions vary.

In a bar with friends, haven’t you noticed that sometimes somebody pays for your drink, and at other times you buy a round for everyone?

But in the long run, the saving should be divided fairly – a word with many interpretations. If three friends would have paid €4, €8 and €12 for taxis along the same route, and now must pay €12 in total, the total saving is €12.

That saving could be divided equally, €4 apiece, meaning fares of zero, €4 and €8. Or it could be divided in proportion to the original fares, meaning fares of €2, €4 and €6. Or the first leg could be split three ways, the second leg halved, and the third leg paid by the final passenger, implying fares of €1.34, €3.34 and €7.34.

There is no magic formula.

That is why no economist would share a cab without agreeing terms beforehand.

Questions to economist@ft.com

A lovely mini-essay from Brandon Fuller on the Aplia Econ Blog, about the cost to dry-cleaners of tariffs aimed at protecting the strategically-vital US wire coat-hanger manufacturing industry:

Milton Magnus III, owner of one of the U.S. manufacturers that filed for the anti-dumping duties, argues that the costs to consumers are negligible—amounting to a penny or two per hanger. “If I pay $12.95 to have my suit cleaned and that hanger cost him a cent and a half more, that’s $12.96 and a half. It’s not a factor.” Magnus’s point partly explains why import-competing industries often succeed in their efforts to lobby government for the imposition of trade restrictions: the tariff offers concentrated benefits to a few domestic firms, while the costs of the tariff are spread out among millions of consumers—none of whom see a sharp increase in price. Of course, over millions of hangers, a penny or two per hanger can add up.

Advocates of trade restrictions often argue that protection will save jobs. Since we can observe price and cost increases associated with trade restrictions, we can estimate how much it costs to save each job in a protected industry. According to the NPR story, there are roughly 30,000 dry cleaners in the U.S., and on average, each pays an additional $4,000 per year due to the hanger tariff. This indicates an average annual cost of 30,000 firms x $4,000 per firm = $120 million. According to the U.S. International Trade Commission’s report, U.S. employment in wire hanger manufacturing was 564 workers in 2004 and fell to 236 workers by 2006.

Fuller shows that a lowball estimate of how much it costs to save a job in the hanger industry is over $200,000 per year – these jobs pay $30,000 per year.

I have finally had the “pleasure” of flying from Heathrow’s Terminal Five. The architecture is pleasant enough but does not remotely live up to the hype. The queues at security and passport control were short, so that is a blessing.

But the terminal managed to produce a miserable experience in both directions. On the way out, I sat in front of a departure screen which then froze: it appeared to be working just fine, but simply assured me that my flight was not yet boarding when in fact I was about to miss the plane.

On the way back, the plane and ground crew were directed to different gates. After a delay, the floating walkway suffered a technical fault. After further delay, the pilot informed us that we were an international arrival in the domestic part of the terminal, and so would have to be shuttled around by coaches. In the end we got through passport control an hour late.

I may be giving the future of air travel another throw of the dice in a few weeks. I’ll keep y’all posted.

That’s the discussion in this new IZA working paper from Halla and Schneider:

While there is an extensive literature on tax evasion a further aspect of cheating on the state, namely benefit fraud, has gained relatively modest attention in the economic literature. This paper seeks to fill this gap. We explore differences between benefit fraud and tax evasion due to differing social norms. We define the concepts of benefit morale and tax morale as the motivation to abstain from cheating on the state via these two offenses. Our multilevel analysis, based on a large micro data set of respondents from 29 OECD member countries, shows that benefit morale and tax morale have different determinants at an individual-level and respond differently to fiscal policy measures.

So what do they find? Moral norms matter:

Our results suggest that moral values evolve endogenously and are determined by prices (i.e. the cost of acting morally). Citizens who have comparably more opportunities and low cost to commit a certain offense, develop the attitude that it is a minor offense. This suggests that citizens excuse or rationalize their own deviant behavior. Put differently, they self-servingly adjust their moral values. From a policy perspective it is beneficial to know which groups of citizens view benefit fraud as a minor offense and which sub-population is reluctant to pay taxes. This allows policy makers to predict how cheating behavior will evolve over time in response to socio-demographic changes.

But incentives matter too, because they shape moral norms:

We have shown that in the context of benefit fraud and tax evasion the intrinsic motivation to comply (benefit morale and tax morale) is indeed altered by extrinsic factors, such as tax rates.

Poor Ron James is getting a pounding from the tabloids for charging £1.99 a litre for petrol (that’s about $18 $14-15 a gallon, for those of you reading this in the US):

He said: ‘I am trying to stop people panic-buying.

‘People have been buying hundreds of pounds worth of fuel instead of the usual £5 or £6.

‘It slowed down after I put the price up and the result is I’ve still got fuel left.

‘It’s been chaos and it’s still chaos. I’ve never seen anything like it in 30 years of petrol retailing.’

He added: ‘We’re not being mean. I would say I’m a very nice person. The price will go back to normal as soon as we get a delivery.’

But one disgruntled driver said: ‘It’s just greedy profiteering. It’s outrageously high – it’s atrocious. It’s clearly an attempt to take advantage of the fuel shortage.’

I’m going to take a stand for Mr James here.

Here’s the problem: a minor hiccup for fuel supplies in the UK (the result of a brief strike by some tanker drivers) has led to a more severe disruption, because demand has surged. Demand has surged because people are nervous that they may not be able to fill up when they need to; but since the strike has not actually drained much fuel out of the system, the only reason that people may not be able to fill up is because demand has surged.

Here’s the solution: petrol stations should be temporarily raising the price of fuel during the strike to discourage what tends (unfairly) to be called “panic buying”. It would not take more than a few pennies; everybody would be confident that fuel was readily available, and nobody would buy unless they really needed to.

Why doesn’t that happen? Because petrol station managers are terrified of being accused of “greedy profiteering”. They’d rather play politics than do their jobs – which is to make sure they have fuel available when customers come calling. Clearly price-gouging is woefully undersupplied in this market.

Mr James seems to be the only petrol retailer in the country with the courage to stand up and do the right thing. I doubt he is making much money (who would buy £1.99/litre petrol while they had a choice?) and he is being villified. Yet thanks to Mr James, drivers in Exeter know for sure that they can always get fuel if they need it. Mr James is providing the whole city with a valuable backstop. They can sleep soundly at night, knowing Mr James will always be ready to serve them. He’s taking the blame, Exeter drivers get the benefit.

Somebody needs to reward the virtuous. Arise, Sir Ron of Exeter!

Update: Alas, cancel that knighthood. They’ve capitulated… Although in fairness, I suppose the fuel strike is over. Thanks for Josep’s comment: I got my US and UK gallons confused.

I wrote in sanguine terms about pensions here and here. Gary Becker (whom I once interviewed for Lunch with the FT) agrees:

Most young people who do not go to college are high school graduates, and they too have lower earnings and greater family responsibilities during their thirties and forties. They also would like to borrow at younger ages to raise their consumption at these ages to more appropriate levels compared to their consumption when they are older.

Studies by my colleague Erik Hurst show that consumption of Americans beyond age 65 is generally not low relative to consumption at younger ages; apparently, they save enough when younger to enable them to consume generously when retired. In earlier time, families had to save to provide for their old age consumption since social security and company pensions were non-existent.

The Economist is not so relaxed:

As a recent paper published by Britain’s Pensions Institute points out: for “financial products extending over long periods of time, many consumers are clearly not well-informed or well-educated. The retirement-savings decision needs accurate forecasts of lifetime earnings, asset returns, interest rates, tax rates, inflation and longevity; yet very few people have the skills to produce such forecasts.”
The result may be that many employees face retirement with an income well short of their expectations. An employee who pays into a DC scheme for 40 years may get only half the retirement income he could have expected under a final-salary system. When pension experts were polled by Watson Wyatt their biggest concern was that DC schemes will yield inadequate pensions for DC members. As the Pensions Institute paper says: “When the plan member eventually discovers how low his pension really is, it is by then too late to do anything about it.”

I’ve been enjoying Slate’s “Green Lantern” feed:

A 1992 study from Franklin Associates estimated that producing a year’s supply of disposables, which are composed largely of plastic, consumes roughly 6,900 megajoules of energy, vs. around 1,400 megajoules for a year’s supply of cloth diapers. Yet the study concluded that cloth ended up being 39 percent more energy-intensive overall, given the electricity needed to wash load after load of dirty diapers.

That conclusion is now woefully outdated, however, given the major advances that have occurred in washing-machine efficiency (PDF). For a washing machine made in 1985, an 11-pound load of cottons washed in warm water used up 1.68 kilowatt hours of electricity and 34 gallons of water; for a machine made two decades later, the relevant figures are just 0.95 kilowatt hours and 12 gallons.

A 2005 study (PDF) by Britain’s Environment Agency took into account some of these technological advances. In making their calculations regarding cloth diapers, the study’s authors used average energy-consumption figures for machines made in 1997. They concluded that there was “no significant difference” between the environmental impact of cloth and disposable diapers. Keeping a child clad in home-laundered cloth diapers for 2.5 years emitted 1,232 pounds of carbon dioxide equivalent, vs. 1,380 pounds for disposable diapers.

So there. Also, are Priuses actually worse for the environment than Hummers? (No: but the source of the urban myth is interesting.) And, are mechanical dishwashers bad for the planet? No they aren’t:

More than 100 Europeans were observed cleaning a dozen full place-settings by hand. The German researchers found that the average hand-washer is quite the wastrel, using 27.2 gallons of water, which requires 2.5 kWh of electricity to heat. (The most careless hand-washers were Spanish and Portuguese, while the most economical were German.) An ultra-efficient machine, by contrast, used only between 3.96 and 5.81 gallons of water, and between 1 and 2 kWh of electricity.Advantage, technology. But if you read the German study carefully, you’ll see that the best hand-washers came close to matching the machine’s performance.

The feed is here.

Last week I mused about whether people in general were saving enough for retirement. (The answer: as far as we can tell, most people are.) This week I have decided to take on a far more important question: am I saving enough for retirement?

Apparently this activity is called “retirement planning”, which strikes me as a silly phrase given the imponderables involved.

Saving for retirement is usually posed as a problem of willpower: foolish, impatient people save too little and doom themselves to an old age devoid of Caribbean cruises. The real problem is not lack of willpower but lack of omniscience.

Hip kid that I am, I started my planning by opening up a spreadsheet. The next steps would have been to project the growth rate of my income, monthly savings, the path of inflation, the return on my growing savings pot, and (eventually) the likely annuity rate on retirement.

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

I am about to be married, and have no doubts about the relationship. But there is one nagging worry: my fiance co-owns a condo overlooking the Pacific Ocean near San Francisco – with an ex-girlfriend, who lives next door to it. She is not in a position to buy him out of his investment, and although they rent it out, the mortgage is steep. I believe the condo is an investment specific to the former relationship and would like it divested – but the housing market is a shambles.
Mary

Dear Mary,

While I sympathise with your problem, I must correct you. A relationship-specific investment is one that is worth more within a relationship than outside it, such as a set of wedding photos. The condo is not relationship-specific, just unprofitable and illiquid.

The condo can therefore be disposed of without destroying value – but not, it seems, by either side buying the other side out.

If your fiance sold his share to a stranger, he’d sell at a loss. But in truth, the loss has already happened; his reluctance to sell suggests he’s pig-headed as well as an incompetent investor.

So I recommend that you buy out your fiance’s share, at a fire-sale price. Subsequent negotiations about the condo would then be between you and the ex. Should your marriage work out, you can share the profits with your fiance. And if not, at least you will have prearranged some compensation.

Questions to economist@ft.com

Earlier this year, I wrote about the sudden rediscovery of the idea that prizes might be a good alternative to grants or patents as a way of promoting innovation:

In an ideal world, prizes could replace patents. Instead of offering a patent for an innovation, the government could offer a prize. The inventor would pocket the prize but would not be allowed to exploit any monopoly power, so the innovation would be freely available to use in products for poor consumers – cheap drugs for Africa, for instance – and, importantly, in further innovations. But to explain that idea is to see its limitations. How could the government know enough about the costs and benefits – and even the very possibility – of an innovation to put a price tag on it and write the terms of reference for a prize competition? For this reason it is hard to see prizes replacing patents in most cases. But it is not impossible.

The modern heir to 18th-century prizes for canning, water turbines and finding longitude at sea is the advanced market commitment for vaccines for the poor: the goal is clear, the costs and benefits can be guessed at, and the quasi-prize nudges the patent system to one side with a prize contract that respects the patent but, in exchange for a large subsidy, radically constricts the holder’s right to exploit it.

At the time I wrote the piece, I wish I had seen this gorgeous list of historical prizes:

Napoleon Sugar Beet Prize (1810)
In 1810, facing blockade of its ports, Napoleon offered a large prizefor the best method of extracting sugar from beets. The prize was part of a large set of national incentives and mandates to stimulate the production of sugar from beets.

Art of Piercing or Boring Artesian Wells (1818)
Similar in purpose to the 1797 book on Elkington’s methods of drainage, in 1818, the Society for the Encouragement of National Industry in France offered a reward of 3,000 francs for “the best manual, or practical and elementary instructions upon the art of piercing or boring Artesian wells with the miner’s or fountaineer’s augur, from 25 metres (82 feet), to 100 metres (328 feet) depth, and deeper if possible.” The award was given by the Society in 1821 to Mr. Gamier, for an important and useful discussion of the use of Artesian wells employed for the discharge of foul and infected water.

Wisconsin Prize for Mechanical Substitute for Horses and Other Animals (1875)
In 1875, the Wisconsin legislature passed an act authorizing the payment of a $10,000 bounty to “any citizen of Wisconsin, who shall invent, and after five years continued trial and use, shall produce a machine propelled by steam or other motive agent, which shall be a cheap and practical substitute for the use of horses, and other animals on the highway and farm.” The law was amended twice in the next two years, with the final 1877 version eliminating the requirement for “five years continued trial and use,” while adding specific requirements for winning the prize. Contestants with machines that could operate in both forward and reverse were required to complete a 200-mile route at “not less than five miles per hour working time,” and to perform certain functions, such as plowing and pulling loaded wagons. Trials were conducted in 1878 and ended in controversy when one of the judges refused to grant the full prize money to a contestant many observers thought had satisfied the contest rules. Subsequently, two crews split part of the prize money.

Then there’s:

Highland and Agricultural Society of Edinburgh Reaper Prize (1826)

Apple and Pear Prize (1826)

Substitute for Guano (1852)

Napoleon III Margarine Prize (1869)

French Prize Competition in Irrigation Practice (1874)

Italian Prize Competition in Irrigation Practice (1879)

Soviet Committee for Invention Authorship Certificates (1931)

Australian Film Bounty (1933)

Soviet Rewards for Aircraft Design (1946,7)

Burkina Faso Innovation Prizes (1994)

Don’t tell me you’re not curious. Here is the source; Alex Tabarrok pointed me to it some time ago.

The Undercover Economist: a guide

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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