Economics and the mid-life crisis have much in common: Both dwell on foregone opportunities

C'est la vie; c'est la guerre; c'est la pomme de terre . . . . . . . . . . . . . email: jpalmer at uwo dot ca

. . . . . . . . . . .Richard Posner should be awarded the next Nobel Prize in Economics . . . . . . . . . . . .

Saturday, November 13, 2004

Mismanaging a War

It's really hard not to think that the U.S. Pentagon has mismanaged the war in Iraq. Have they been using a misunderstood production function, trying to over-substitute capital for labour? It is hard to tell for sure, but it seems they used too few soldiers, bad and biased intelligence about local support, and now escaping insurgents attacking other cities. I certainly hope there's more planning behind all this than meets the eye.

Update (in response to the comment below; also see Tom Hanna's blog):
Back when I was in grad school, we used to talk about pentagon models that estimated the marginal productivity of enemy kills with respect to bullets (and presumably other inputs). That was during Vietnam; I expect the production function is different for Iraq.
Also, it is probably more appropriate in many situations to build production functions with other objective functions besides enemy kills .

Why is the value of the Canadian Dollar Rising?

Steve Poloz, Chief Economist of Export Development Canada, received his PhD from The University of Western Ontario. It follows that he is a very bright guy.

Steve puts out a Weekly Commentary, which is available on-line and by e-mail subscription, in which he looks at current events and developments and gives his assessment of various economic situations.

In his November 10, 2004 issue, Steve takes on the question of why the U.S. price of the Loonie (aka the Canuck Buck [aka The Canadian Dollar]) has been rising. Like most economists, he points out that internationally the Canadian economy is heavily weighted toward providing commodities, for which prices have been rising rapidly, thus increasing the demand for Canadian dollars. He also points out the Purchasing Power Parity arguments don't really explain the recent exchange rate movements because those theories have been indicating that the U.S. price of a Loonie should have been up around or over $.80 U.S. for many years now, not down around 62 cents, as it was two years ago.

For the most part, I think he's right. There is one other consideration, though, which follows from a conversation I had with valued colleague, Robin Carter, last year. Exchange rates have to do with risk as well as relative prices. And in the past year, investments in the U.S. have become financially riskier due to the large deficits there and fears of future inflation. At the same time, threats of Quebec separation in Canada seem to have diminished considerably, reducing the risk of inflation and economic disruptions in Canada. The confluence of rising financial risk in the U.S. and falling financial risk in Canada has likely also contributed to the rise in the U.S. price of the Loonie.

Friday, November 12, 2004

Suing Ontario over the Health Tax?

During the run-up to the most recent election, the current leader of the Ontario Liberal Party [Dalton McGuinty] signed an agreement in September, 2003, not raise taxes in Ontario. There is also a law on the books prohibiting the provincial gubmnt from raising taxes without an election or referendum.

Nevertheless, shortly after the Liberals defeated the Conservatives in the last provincial election, they declared that the province's finances were in much worse shape than they had imagined and imposed a health "levy" to help with the costs of running the medical system in the province.

The Canadian Taxpayers Federation is suing the Province and the Premier for violation of the law and breach of contract. The case has been delayed a few months but finally goes to court on Monday, November 15th.

Of course, "impossibility" is sometimes a defence in a breach of contract suit; it might even be raised in defence of the gubmnt's alleged violation of the law. But it's difficult to understand how the gubmnt can claim they didn't know how badly the province was in debt when serious fiscal mismanagement by the conservatives was so well-known that it became a campaign issue for many of the liberal candidates.

So let me raise the usual questions from Economic Analysis of Law: What are the risks? and who is the least-cost avoider of the risks?

One of the risks, of course, is that the taxpayers will foot the legal bills, regardless of the outcome of the suit!

Thanks to Jim Chapman for the pointer on this issue.


When I first moved to Canada in 1971, one of the first things I learned was that Canadians are very concerned about extra-territoriality: the effective export of U.S. laws and policies to Canada. An example often cited was a reported U.S.-imposed ban on GM-Canada, keeping the Canadian firm from selling vehicles to the Cuban government by threatening to prosecute the parent firm, GM, for "trading with the enemy".

From the excellent writer Dahlia Lithwick in Slate, here's an intriguing example of extra-territoriality, but sort of in reverse.

Some people were smuggling cheap, untaxed alcohol into Canada. But apparently they haven't been prosecuted in Canada. Nevertheless, they were charged (and convicted) of wire-fraud violation in the U.S. because they used interstate telephone services to set up and maintain the smuggling enterprise.

The case has recently been heard by the U.S. Supreme Court, where it is (almost) clear the justices are not interested in enforcing Canadian anti-smuggling law in the U.S., at least not explicitly. Rather the case seems to hinge on U.S. law regarding ill-gotten gains using U.S. telephones.

Return policies

One of the really neat things about most of the major retailers is that if I buy something and don't like it, I can return it for a full refund, no questions asked, no problem. As an example, I sometimes find that when I'm working on something around the house, I buy too many materials; the store lets me return the extras for a full refund. As another example, I recently bought something at a Walmart in London, Ontario, but when I got it home, found it was defective. Rather than make the 1-hour drive to London to return it, I simply went to the Walmart in Goderich. They zapped my receipt, pulled up a record of the transaction, and provided an exchange.

In most instances, in fact, even if you don't have a receipt, the major retailers will provide a refund or, at the very least, a store credit.

I've often wondered not if people abuse this system, but how many abuse the system and to what extent. I guess in some cases the answer is that the abuse is serious, judging from this article in the Washington Post. Some major retailers are beginning to track refund histories and are denying refunds to people who seem to return a large portion of their purchases.

I don't blame them, but they have to be careful about type I and type II errors. If they have a strict policy, they'll cut down on the number of instances of people who "buy" something, use it once, and then return it (a wardrobe for a special event, a tool for a special project, a generator and propane stove prior to the Y2K scare, etc.); these folks are essentially using the store to provide them with the use of something for a short term without compensating the store. This practice can be quite costly for the stores.

At the same time, if the store is too strict, it will anger some customers who, due to nothing more than randomness, have a high number of returns. Trading off the costs and benefits arising from the policy and the type I and type II errors requires careful use of binomial distributions combined with an understanding of shoppers' tendencies. This is not a simple problem, but computer tracking will almost certainly allow/encourage other major retailers to move in this direction.

Thursday, November 11, 2004

The Greatest Canadian?

The CBC is running a survivor-type survey of its viewers on "The Greatest Canadian". The results so far provide an interesting reflection of the tastes and preferences of those who watch the CBC and have the patience to vote on this question.

  1. Tommy Douglas, the top vote-getter, was a flaming socialist. This is like saying Norman Thomas was the greatest American. There are two other politicians in the top ten who favoured larger government and more government intervention in the economy. In my view, those who held off these guys were greater Canadians.
  2. Two of the top ten are from the hockey industry. Most folks in the world with even a passing interest in sports have heard of Gretzky, but how many of you outside Canada (or Boston, where he once coached) have heard of Don Cherry? Cherry is an outrageous commentator on Hockey Night in Canada, a CBC telecast, and he correctly (and likely unknowingly) applied Sam Peltzman's analysis of the effects of seatbelt legislation to the world of hockey: he predicted that requiring players to wear helmets and facemasks would lead to more high-sticking and slashing incidents. I wonder if he will continue to rank above Canada's leading anti-intellectual bleeding heart, about whom I had this to say some years ago. Anyway, my artiste friends are aghast that Don Cherry is even on the list, much less that he ranked 2nd in the voting last week.
  3. Only one of the country's founders is in the top ten, and barely so, with a very unflattering write-up. Tecumseh is 37th on the list
  4. There are no women in the top ten. Can you guess who the top vote-getter is among women? Guess before you click! She's listed as 18th.

As I said, these results say a lot about the CBC and about those who watch and support the CBC. I'm waiting for The Fraser Institute to run a counter-poll.

Brands and Big Box Stores

A friend of mine was recently bemoaning the disappearance of small stores and old-time department stores, where clerks knew the products and had information and advice that we, as customers, could trust. Understandably, he is frustrated when he walks into a Big Box store, asks a clerk a question about a product, and the clerk starts looking at the box to read whatever is there (as if my friend, perhaps because he is a sociologist, is unable to read that information himself).

One reason Big Box stores have become so successful has to do with the success and reliability of brand names and branded products (yeah, yeah, I know changes in technology, the legal environment, and relative factor prices play a role, too):

If we want to buy a standard household appliance, we can search the internet or consumer magazines for information about quality and reliability, and then go shopping; Alex Tabarrok at the Marginal Revolution has
just posted on the importance of the internet in this regard.

But even if we didn't have the internet to search for information about product quality, big box stores would still become important by emphasizing low prices for well-known branded products. The strength of the branding replaces our need to rely on store clerks for information.

So when I want to buy something, I just go to a big box store and buy it at a low margin -- there's much less need to rely on knowledgeable clerks because the brand names themselves convey tonnes (hey, we're metric in Canada) of information.

From a different perspective, what I'm suggesting is that the knowledge we have about different branded products is a necessary condition for the existence of many Big Box stores. If we as customers didn't know about the qualities of different brands, or if we couldn't learn about them through experience or word-of-mouth or advertising or the internet or something, then Big Box stores would not be able to just schlep out the merchandise and sell it. If they tried that, customers would not shop there but would go to the full-service stores that provided more point-of-sale information about the products they carried. And without branding, there wouldn't be a free-rider problem that is so often identified with resale price maintenance arguments.

And speaking of big box stores, I've really enjoyed reading
this blog about Walmart. I'm glad to see it's back up and running again. And here is Russell Roberts' excellent piece on the impact of Big Box retailers on the quality of life (link via his piece in Cafe Hayek).

I wonder what will become of the importance of product branding as Walmart develops and markets more of its own, in-house brands and products.

The Worst President in U.S. History?

I honestly believe that Gerald Ford was the best president in U.S. History. So maybe it is only by comparison that the man who defeated Ford -- Jimmy Carter -- would be seen as the worst president ever. During 1976 - 1980 era, it felt as if everything was going wrong, as indeed much was. But at the same time nothing was going right, even though Carter seemed like such a nice man, and so deserving of our sympathies. Indeed, the more we reflect on that era, and the more we learn about it, the more we really think Carter was a bad president! These problems are described in detail in this book by Steven Hayward.

To read a very enjoyable and well-written review of the book, try this one in the Weekly Standard.

Wednesday, November 10, 2004

Victor Villadangos

Victor Villadangos is an absolutely superb classical guitarist from Argentina. He is also a truly nice man. I had the pleasure of listening to him play and teach for three days last August at a small music/CD shop in Stratford, Ontario, called The Wandering Minstrel.

Mark Rowsome, who runs The Wandering Minstrel, is a former world champion figure skater who has turned his energies to music and the promotion of small chamber music groups and soloists. If you're ever in Stratford, be sure to drop in to see him (Unfortunately, he doesn't have a website; his email is wanderingminstrel at bellnet dot ca).

Mark carries several CDs by Victor Villandangos. I think Victor must have brought them with him when he came to Stratford, and Amazon also carries his tango cd and his cd of Argentinian guitar music. They are fabulous; if you can find them, buy them.

One of the pieces he performed while he was here was "Danza" by Pipo. It's a fascinating, whirling flurry of a piece that requires great technique. If you are interested in hearing it, it has been recorded by the UK group "Sky" and is on their album, The Best of Sky, featuring well-known classical guitarist, John Williams.

Media Bias and the pseudo-intellectuals

The bias of the U.S. media has been apparent for years.

Editors and journalists, on average, tend to be quite left-wing: they favour more and bigger government, more intervention into the market, and a very high social safety net. Many of them are sincere in their beliefs that policies consistent with these views will make the world a better place. Others are just plain arrogant snobs who think they know better than everyone else and therefore ought to be anointed as controllers of our lives. Some years ago, I had a member of the latter group tell me, quite confidentially, mind you, that deep down she was really a left-wing journalist. Well, no foolin', eh? All my friends and colleagues knew she was; we despised her lack of objectivity, and we hoped that if she learned some economics, she'd at least understand the concept of opportunity costs.

That Slate magazine's writers almost unanimously (with a few exceptions like Steve Landsburg) supported John Kerry in the last U.S. election is evidence of how pervasive this bias is in the media. I first started reading Slate many years ago, when it seemed more anti-establishment. I don't know what has happened to it in the meantime.

Anyway, (link courtesy of Newmark's Door) novelist Tom Wolfe has some pretty funny, scathing things to say about these bleeding-heart pseudo-intellectuals:

The truth is that my pals, my fellow journos and literary types, would feel more comfortable going to Baghdad than to Cincinnati. Most couldn’t tell you what state Cincinnati is in and going there would be like being assigned to a tumbleweed county in Mexico.

They can talk to sheikhs in Lebanon and esoteric radical groups in Uzbekistan, but talk to someone in Cincinnati . . . are you crazy? They have no concept of what America is made of and even now they won’t see that.

The above quote is from his article in the UK's world edition of the Times Online. If you're anti-snob, read the whole thing. You'll get a kick out of it.

When will the NHL lockout end?

First, let me make clear that I don't miss hockey at all. This despite the fact that I grew up in Michigan, listening to the Red Wings during those halcyon days of yesteryear (Gordie Howe, Ted Lindsay, Terry Sawchuk, Red Kelly). I even went out for the freshman hockey team at Carleton College, and later played goalie in Carleton's famous Imperial Hockey League (no lifting the puck, and try not to skate on your ankles too much). But in the past 15 years or so, I've pretty much lost interest. I wonder if that's what happens as guys age....

Anyway, last week I suggested to my students that I thought the lockout would end before January 1st (probably to their credit, not one of them agreed with me). I argued that the NHL players would probably cave in pretty soon.

Several of them pointed out that many of the players don't need the money because they're playing in Europe or in the AHL. I didn't realize how important this alternative was until I read this in The Sports Economist blog (one of the best sources there is on the Economics of Sports -- it's almost required reading for my students). A very thorough analysis of this situation is provided by Phil Miller at his website, "Market Power".

It appears that the owners have few, if any, substitute options for players of NHL quality; but many of the players can do quite well, thank you, without the NHL owners. Will this be the death knell of the NHL? Of some of the teams (e.g. Phoenix) in the NHL?

Of course, if only 30-40 NHL players can make high salaries in Europe, while the rest are left to fend for themselves, we might see a big crack develop in union solidarity sooner than many people expect.

Update: here and here are some further thoughts on the lockout and hockey.

Tuesday, November 09, 2004

The Two Secret Sins of Economics

Dierdre McCloskey has taken on nearly all of what passes for economics these days with her neat-o publication, "The Secret Sins of Economics." Go grab it now (it's in pdf format at that link), and read it. It is absolutely terrific. Here's a quote from it:

"Most of what appears in the best journals of economics is unscientific rubbish. I find this unspeakably sad. All my friends, my dear, dear friends in economics have been wasting their time. You can see why I'm agitated about the Two Sins [oversimplified, these are: qualitative theory with no questions about 'how much?' and quantitative tests of significance that don't include loss functions -- but read the whole piece!]. They are vigorous, difficult, demanding activities, like hard chess problems. But they are worthless as science."

And yet most of us keep committing these sins. Why? because we respond to incentives, and these incentives change ever so slowly. If McCloskey is right, though, why do such unscientific paradigms persist for so long and so pervasively? Isn't the market for economists and economic ideas fairly competitive?

link from Tyler Cowen at the Marginal Revolution.

No, hurricanes are NOT good for the economy

I've never been much of a fan of job creation statistics. What good is job creation if it's the result of a loss of wealth? Ignore the religious overtones in the full posting, but check out this from instapundit:

Last month, American employers added 337,000 new jobs, the largest increase in seven months.
The biggest single engine for job creation was the hurricanes.Part of the pick-up in jobs was down to the worst hurricane seasons for many years. About 71,000 new construction jobs had been added - the most since March 2000.
Kathleen Utgoff, commissioner of the Bureau of Labor Statistics, said this "reflected rebuilding and clean-up activity in the south-east following the four hurricanes that struck the US in August and September".

Sure, the aftermath of the hurricane meant that more people got to work in construction, cleanup, etc., but what if the hurricane hadn't happened? Then Florida would have all its pre-hurricane wealth (and capital) plus it would have the output of all the people who lost work time or whose work time was devoted to post-hurricane fixups and renovations.

Those who look only at job creation numbers ignore the most fundamental of all economic concepts, opportunity costs: what was the next best alternative use of the scarce resource.

So if you think the economy needed a hurricane to create those jobs, you're being too near-sighted. Having people work on cleanup means they're not available for other work; it also means the hurricane destroyed a lot of productive capacity, meaning the economy as a whole will be producing less. And if it's producing less, that means people are, on average, worse off.

Most Valuable Player?

On November 15th and 16th, major league baseball will announce the MVPs in the National and American Leagues, respectively. Because this is an award voted on by sportswriters, not economists, the outcome will likely not include any concept of marginal physical product or marginal revenue product.

It seems to me that MVP ought to answer the question, "Who contributed the most revenue to the team?" This criterion, by itself, is probably controversial, since, on the one hand it seems terribly crass in that it relates value to something measured in dollars; and on the other hand, it ignores cost in its definition of value.

In my mind, there is no doubt that Barry Bonds displayed the most "units of playing ability" of anyone in the majors during 2004. But that doesn't necessarily mean he contributed the most to his team's revenue.

Baseball, more than any other sport probably, comes close to having fixed co-efficients production functions, but there are still likely some complementarities; consequently, it is possible that Bonds contributed less to his team's wins than, say, Adrian Beltre of the Dodgers did for his team. I doubt it, but it is possible. This aspect of the MVP has to do with incremental physical product (akin to marginal physical product) -- the contribution of a player's ability to the number of team wins.

And let's face it - - Bonds was a great draw. When the Giants came to town (well, not my hometown of Clinton, Ontario [pop. 3200]) or were on tv, people wanted to watch. And so he probably contributed a great deal to his and other teams' revenues.

But put him on a slightly better team, and his contributions would have been worth a great deal more to the SF Giants. His team would probably have made the play-offs and would have had a better chance of advancing to the league play-offs or World Series. So maybe someone else (Beltre? Edmonds?), who is not as good a player as Bonds but who had the good fortune to have better teammates, actually had a larger incremental impact on revenues for their teams.

I doubt that most people interpret MVP this way, but it makes sense to me because it is directly analogous to the concept of marginal revenue product.

Monday, November 08, 2004

Stay in School 'til 18?

The Province of Ontario is concerned about the current 30% high school drop-out rate. There is good evidence that students who don't finish high school are less productive, earn less, and are more likely to commit crimes and/or become dependent on support from the province.

So the
Province wants to force the kids to stay in school:

"If they don't follow the rules, kids could face a judge's order to go back to school or another program, Education Minister Gerard Kennedy said.
If that order is disobeyed, a judge could order jail time as the most dire consequence."

The strategy appears to be: We'll make programmes more attractive to the students and train them through non-conventional programmes. And if they don't want to come to these programmes, we'll make them show up anyway (pity the teachers!).

I have an additional suggestion: lower the height of the social safety net. Make it less attractive for young people to leave home and live on welfare. Reduce the attractiveness of options other than finishing school. In Ontario, dropping out of high school is a viable option for many young people only because we have a comparatively high social safety net.

I'm not suggesting that we should make life unbearable for young adults who are in desperate straits; rather, I'm arguing that the social safety net in Ontario is still quite high -- and it is sufficiently high that too many young adults have government supported options that seem more attractive to them than finishing high school.

Sunday, November 07, 2004

The NFL, monopoly power, and consumer choice

Man, does the present NFL television contract ever piss me off!

It used to be that in this area we had our choice of watching one of somewhere between 3 and 5 games during each Sunday afternoon time slot. Today, the Eagles and Steelers are playing at 1pm, and we have only two different channels showing NFL games, both showing the Jets vs. the Bills - ugh! This is nothing like the good old days, when London, Ont., was the tv football capital of the world (a major attraction for hiring some people).

The NFL needs to learn from some of the great economics work done on quality and monopoly [e.g. Liebowitz and Margolis]. The teams in the league can surely increase their profits (and the interest in the game) by giving viewers more choice, not less. I know it is profitable for the league to
keep big markets satisfied, but ignoring the rest of us doesn't add to their profits -- it just encourages us to watch more curling or old movies or whatever. ...
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