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, March 19, 2005

The Old Margarine/Butter Controversy

The Emirates Economist posted recently about a Canadian Supreme Court ruling, upholding a Quebec regulation that Quebecois must buy white margarine instead of margarine coloured to look like butter.

[The court] confirmed the rulings of the Quebec Superior Court in 1999 and the Quebec Court of Appeal in 2003 that validated the Quebec regulation which prevents the sale of margarine in the same colour as butter.
The regulation was put in place to help protect Quebec's dairy farmers:

According to dairy producers, 600 farms and 3,000 jobs would be
threatened if margarine took butter's yellow glow.
But the stated purpose was nonsensical: consumer protection:

Quebec said it was designed to ensure consumers
weren't confused about the products...

The controversy over butter and margarine is an old battle between consumers and dairy farmers. Back in the early 1940s, noted agricultural economist, Ted Schultz, led a battle for academic freedom at Iowa State University based on a study recommending the use of margarine:

A scientific study by a fellow professor had concluded that the nutritional properties of oleomargarine were no different from, and might be better than, traditional dairy-based butter. Although the study recommended oleomargarine as a way of conserving wartime resources, it provoked a firestorm of controversy within the state’s dairy community. Major efforts were made to squelch the report, but Ted Schultz, citing academic freedom and the dangers of censoring research, held firm and refused. He made it very clear that the goal of research was the discovery of truth and that there was no major scientific basis for criticizing the report. Therefore, he had the report published and the dispute escalated. When the college administration proposed withdrawing the article, Schultz spoke out unsuccessfully against the action and resigned in protest. The net outcome was that in 1943 he joined the Department of Economics at the University of Chicago, becoming chairman in 1946, to serve for fifteen years.
I did my graduate work in economics at Iowa State and had relatives who had been embroiled in the controversy. The above summary is a good one.

In the late 1940s I lived in Michigan; we bought oleo in clear plastic bags, not sticks or blocks. Each bag had a small food-colouring capsule in it that we had to break and mix in with the oleo to make it look yellow. We would get the desired colour, but the bags were a serious mess. We all cheered when the state legislature removed the ban on coloured margarine.

Oddly enough, by the time I got to Iowa in the mid-1960s to attend graduate school, the oleo/butter controversy was a faint memory in the minds of all but a few more senior faculty members. The stores carried coloured margarine, and it seemed I would never face such regulations and controversies again.

When I moved to London, Ontario, Canada in 1971, there were two margarine shocks. The first was that our old "butter" dishes were useless because neither butter nor oleo was sold in sticks but was sold in blocks instead [only recently have the products become available in sticks]. The second was that we could not buy oleo that had the same colour as butter. It either had be very pale, close to white, or very orange. When it is very pale, oleo is little more than salted vegetable shortening; when it is very orange, it looks a bit like cheesey butter or something.

In my naivete, I had assumed I had seen the last of the oleo/butter controversies when Ontario finally permitted the sale of oleo that is coloured to be the same colour as butter. And it is no surprise that I have never, in any of the jurisdictions in which I have lived, known of any consumer who was misled by the colour. One reason, surely, is that oleo and butter are both packaged, so we have to read what they are; we do not see their colour until we get them home and remove them from their packages (or open the tubs). It would be difficult for us to be misled by the colour.
[Update: Lisa, at London Fog, wonders if "Citizens in Quebec are apparently too stupid to read labels".]

It turns out that the Quebec gubmnt of Bourassa was more beholden to the dairy farmers; hence its ban on the sale of coloured margarine.

I applaud the decision by the Supreme Court of Canada. This is a matter that should be left to the provinces, even if I disagree with the policy. However, the matter is not finished. The federal gubmnt will likely take on the province because its ban conflicts with some of the portions of Canada's trade treaties with the U.S. and other countries.

What Is the Price Elasticity of Demand of a Gubmnt Provided Good?

Brian Ferguson and I recently had a fun, silly e-mail exchange about this question.

The equation for price elasticity of demand is E = (dq/dp)(P/Q)

So if the price is zero, then the elasticity of demand must be zero, too, right? No wonder so many politicians seem to think demand curves are vertical! 8-)

note to students: an infinitesimal rise in price would, however, change matters. As Brian says, it might be good to use "arc elasticity" measures instead of "point elasticity" in cases like this.

The REAL Reason Martha Went to Jail

Even though Martha Stewart has done her time, she still maintains she didn't do the crime. Her case is under appeal, and, quite frankly, I think she has a pretty good chance of winning.
At the federal appeals court in Manhattan, Stewart's lawyer Walter Dellinger argued that his client's conviction should be reversed on two grounds: firstly that one juror lied on his selection questionnaire, and secondly, that an expert government witness allegedly perjured himself.
If Martha Stewart has such a strong case on appeal, why did she go to jail back in October? What I am asking this time is not, "Why was she sent to jail?" Rather, I am asking, "Why would she decide to go to jail when, in all likelihood, she could have avoided it?" Was that the sort of rational maximizing behaviour one might expect from someone who has been painted by the media as being so ruthless and hard-nosed in her business dealings?

One explanation might be that she knew that dragging out the case would merely reduce her fortune, even if she eventually won. Is it possible that she anticipated, ex ante, that going to jail for five months would benefit her corporation as much as it has?

A second explanation, independent from the first, and more devious, is that perhaps she knew she could win on appeal. Think of the possibilities in a suit for malicious prosecution and wrongful imprisonment....

It is not unreasonable that someone in her position and with her abilities would have, at the very least, considered such possibilities last September.

Friday, March 18, 2005

Adam Smith's Secret
sent by RyanS, one of my students

Stop the Senseless Killing?

I have mixed feeling about zoos. Given the phenomenal documentaries available about wildlife, I wonder if zoos are the best way to provide education and information for people who are curious about wildlife. And yet, there is nothing like up close and personal viewing of animals I would not otherwise see .

If there are to be zoos, I understand that there are good reasons to have the environment be as natural as possible for the animals, though I could be persuaded that a sheltered environment might be better for the animals.

What about food for the animals? Should zookeepers provide fresh-killed meat for the carnivores, or should the zoo be really natural, releasing old horses or oxen into the area for the lions and tigers to kill? From Reuters [link via Slate's Today's Papers],

Safari parks in China have agreed to stop feeding their lions and tigers large live animals such as horses -- at least in public.

The gory eating habits could lead visitors to believe that animals, both hunter and prey, were only human playthings, Xinhua news agency on Wednesday quoted Xie Youxin, the deputy general manager of the Wild Animal World in Chengdu, as saying.

"The bloody scene could also have implanted violent tendencies in youngsters," he said. ...

But the safari park agreement only restricts the release of large
domestic animals, such as oxen and horses, during the presence of visitors, the agency said.

"Feeding when the park is not open is permitted. Parks are allowed to continue to sell small birds for visitors to feed the wild beasts."

Maybe the zoos should put the lions and tigers on high-protein high-supplement soybean diets.

Canada's Health System:
It IS Broken, & It Needs Fixing

One of the best brief assessments of Canada's Health system was written by Mario Dumont, leader of Quebec's Action Democratic Party. He begins with a destruction of the myths of about Canadian health care. [National Post; Date: Mar 14, 2005; Section: Issues & Ideas; Page: 19. Thanks to Jack for the article; $subscription required]

The issue of accessibility is the subject of the first myth. From waiting months for surgery to waiting hours at the emergency room, patients are risking their health daily — sometimes even their lives — because they don’t have access to the medical services required when they need them. Overcrowding and delays have destroyed the system’s claim to
true accessibility; nevertheless, we continue to make ourselves believe the opposite.

A second myth is that there is no “two-tiered” or “parallel” system. In reality, our system is like a residence with a front and back door. Depending on who you are, you use one or the other. If your employer pays for your access to a private clinic, you will be served at the speed of light. The same goes if you are lucky enough to know somebody who works in the health care system. Likewise, if you work for a hospital and your labour union has negotiated group insurance, giving you access to swifter care, there will be no delay. (Such arrangements are surprisingly common: Although health workers themselves are fiercely opposed to
all private financing of the health system, their contracts often provide them with care dispensed at private clinics by nonunionized personnel.) However, if you are not privileged enough to have these benefits, you will have to lose an entire day’s work while waiting your turn at the hospital. That is how hypocritical our supposedly egalitarian system is.

A third myth has it that our public healthcare system is free. But Canadian health care is not free. We already pay more than one quarter of total health care expenses directly from our own pockets, or through a private insurance plan.

Of course, we are talking here about non-insurable services, such as dental care, psychological services, physiotherapy, homeotherapy and so forth. But we are also talking about certain covered services for which there is a very long period of wait in the public sector — notably in the area of medical imaging.

One of the primary reasons for the serious deterioration of our health system is that in the mid-1980s, the federal gubmnt mandated that we could not have any private provision of health care. The gubmnt did not want any two-tiered health system -- better that everyone be worse off than let some folks pay to get more. Fortunately Mario Dumont would like to break the gubmnt monopoly on the provision of health care. Let us hope other politicians soon see the light as well.

What Would Be the Deterrent Value of Cruel and Unusual Punishment?

I have a strong presumption that there are many fates worse than death [digression: Woody Allen says an evening with a life insurance salesman is one such fate; I often use the example of someone's previous marriage to an now-ex-spouse.]. I can readily imagine that life in prison wouldn't be much better than dying for many of us. If so, it should come as no surprise that there are some serious questions about whether capital punishment has much, if any, deterrence effect on murder. I wrote about this topic here.

Jack recently sent me an article from The National Post [National Post; Date: Mar 17, 2005; Section: World; Page: 17]($subscription required) about the use of a punishment in Iran that would probably be considered "cruel and unusual" in North America.

Mohammad Bijeh, branded “the Vampire of the Desert” in the Iranian press, was lashed 100 times with electrical cables and stabbed in the back by a furious brother of one victim before a blue nylon rope was placed around his neck by the mother of another murdered child.
I am reasonably confident that if I had been the parent of one the children abused and murdered by Bijeh, I would have wanted him to suffer. You may call it a thirst for revenge; I prefer the nicer term, "retributive justice."

If people respond to incentives, I wonder if this type of punishment has more of a deterrent effect than the type of capital punishment practiced in the U.S.

Update: I am not the only one who feels this way. See Volokh

As GM Goes, So Goes the Nation?

That was the phrase of importance during the 50s and 60s. Now, however,

STANDARD & POOR’S yesterday threatened to reduce the credit rating of General Motors to junk status, pushing the financial reputation of America’s largest carmaker to the edge of the precipice.
The rating agency, which had already relegated GM’s debt to the bottom of the investment ladder, yesterday increased its negative stance when GM cut its 2005 profit forecast by 80 per cent and said that it would suffer a loss in the first quarter.
[h/t to BF for the link]
In my oral comprehensive exam in economics at Carleton College, back in the 1960s, I was asked to explain the underlying economic truths of, "As GM goes, so goes the nation." I wonder if it's still true....
GM is burdened with large pension and health liabilities; the company is the biggest private health provider in the US and hundreds of thousands of US pensioners rely on monthly cheques from the motor group.

I would, myself, would feel uncomfortable with the risk involved if I were a retiree from GM, having the continuation of my pension and health care dependent on the fortunes of GM. In general, I am uncomfortable when I hear about pension and health care plans that depend on the fortunes of one company for their long-term viability.

Thursday, March 17, 2005

Have a Beer Today

It's St. Patrick's Day. Whether you are Irish doesn't matter; it is still a good excuse to have a beer. And for good advice on what to order, consult an expert.
If you want to celebrate St. Patty's Day by having a beer and you want to, somehow, feel a bit Irish, don't have a green American lager (like a McBudweiser or a McMiller Genuine McDraft). Instead, you should have an Irish stout (I like milk stouts and oatmeal stouts myself) or an Irish Ale. Yes, a Guiness Stout is acceptable.

More on the Differences between the Sexes

I wonder if the folks who did this research would even be allowed to apply for a job at Harvard. They say women are genetically disposed to being more empathetic and less aggressive than men. Is it okay to say that and not even ask if there are differences in the ability to do math and science?
Traits such as aggression and empathy, which are more common on average in one sex, could be influenced by the differing behaviour of the X chromosome in men and women, scientists said....

“Our study shows that the inactive X in women is not as silent as we thought,” said Laura Carrel, of Pennsylvania State University, who led this element of the research. “The effects of these genes from the inactive X chromosome could explain some of the differences between men and women that are not attributable to sex hormones.”

I am, quite frankly, offended that they would even ask such questions about the differences between men and women. I think there should inquiries into whether their tenure should be revoked.

h/t to BF

Gender Pricing.
Is It a Sign of Discrimination?

Earlier this week, the CBC and the Globe & Mail both reported on a private member's bill, introduced in the Ontario Legislature, that would prohibit hair stylists from charging more for women's haircuts than for men's haircuts. It would also prohibit dry cleaners from charging more for finishing women's shirts than men's shirts.

Women across the country are overcharged a total of $750 million for their hairstyling alone, according to Joanne Thomas Yaccato, a marketing consultant.

The bill, which would impose fines of up to $5,000 for charging
women more than men, will be debated on April 14.

This is the kind of nonsense that ensues when people do not understand competitive markets. Dry cleaners and hair stylists are in some of the most competitive businesses there are. If some firms are somehow and for some unexplained reason exploiting women, others will surely offer lower prices. The potential for competitive pricing in these industries leads me to believe that gender differences in pricing are almost surely cost-determined.

My barber, in Blyth, Ontario, charges $3 for men's haircuts. I don't know what he would do if a woman wanted a haircut for the same price. Our local dry-cleaner charges the same for men's and women's slacks.

Don't Bother Trying to Save the Downtown

London, Ontario, has 23 closed stores in its downtown area, with more closing soon. I would like the London city council to let the stores close and say to developers and landowners, "So? What are you going to do about it?"

London, like many other cities in North America, has experienced a phenomenal growth in malls and big-box plazas. Over a decade ago, in response to a consulting report by a colleague in our bizskool, I wrote, "I Love Malls"

The downtown landowners and their henchmen on city council would have you believe there is something holy and magical about preserving the downtown shopping area. They're wrong. And the sooner we let the downtowns and other older shopping districts of North America evolve into different uses, the better off we'll all be.
Unfortunately, the London City Council is still at it [links courtesy of London Fog]. Many council members are now pushing the construction of a gigantic parking garage for the downtown area. Doing so will, in effect, amount to no more than a very inefficient way of taking money from the property taxpayers of the city and giving it to the downtown landowners. As I have said before,

[A]s shoppers and shopkeepers move to the malls, the demand declines for downtown shopping space; businesses can and do move to new locations, taking the jobs with them. But it is pretty hard to move the land and buildings from downtown. As a result, the downtown land and buildings become less valuable; and it is the owners of these buildings and the land on which they sit who ultimately suffer the most as shopping malls proliferate.
And sure as shootin', it is an owner of downtown real estate who is lobbying strongly for the construction of a downtown parking garage:

It can't happen soon enough for landlords such as Shmuel Farhi, of Farhi Holdings, who owns more than 700,000 square feet of vacant office and commercial space downtown. [emphasis added]

"I welcome it. It's the right direction," Farhi said. "Let's give (landlords) the tools they need to bring people downtown."

Farhi said he owns about 300,000 square feet of commercial and office space within two blocks of the city's Queens Avenue surface lot. Rule of thumb, said Farhi, is you need three or four parking spaces for every 1,000 square feet of leased office space.

Farhi said the city must do more to help landlords, not just in parking, but increased safety and tax breaks, especially on heritage buildings.
"We need those tools to help us (rent the buildings), if not, some buildings are not going to be standing by the end of the year," Farhi said.

"And you're going to see some buildings boarded up and paying no taxes."

It appears this landlord owns a considerable amount of space that, by his estimate, requires between 300 and 700 additional parking spaces, which he thinks the taxpayers of London should provide for him so he will not have to lower his rents (or build the parking stalls himself).

There is absolutely no way the taxes collected on those buildings will cover the costs of building a parking garage. The sooner those buildings are boarded up, condemned, and demolished, the smoother the economic evolutionary process will be.

Wednesday, March 16, 2005

Are Markets Efficient?
Our Pension Board Thinks Not

I never fully understood the "efficient markets hypothesis" (as if I do now) until I read A Random Walk Down Wall Street by Malkiel. It is a very clear exposition of why there are no discovery values out there for you and me and why I do best by putting my money in a passive index fund.

About 20 years ago we had a near revolt at this university when several economists and other financial experts realized that the committee managing our pension funds was trying to play the market with our money and was doing a bad job of it. My colleagues set in place a series of changes that favoured passive management, index funds. They also attempted to diversify into some mid-cap and small-cap funds, but were forced to look into small-bet active managers because there were no index funds for these components of a diversified portfolio.

Now I learn that gradually the pension fund is employing active management at all levels. When I asked a member of the pension board about this, he said, (paraphrased)

"Active management has no advantages in the U.S., but in Canada markets are not efficient, and we can gain about 100 basis points above the index with judicious active management; in Europe, judicious active management returns about 300 basis points above the index."

This surprises the heck out of me. If it is true, and if the MERs of the funds we employ to do this active management do not erode all the gains, why have these gains not been competed away? Why are Canadian and European markets so inefficient?

And if those markets are inefficient, I anticipate that the gains we have seen in the past few years will disappear in the future as the markets become more efficient.

Bankruptcy and Interest Rates

The U.S. is considering tightening its bankruptcy laws. The gist of the proposals is to make borrowers repay more loans and make it harder for them to declare bankruptcy. The long-run effect would be to make it easier for less credit-worthy borrowers to obtain credit.

Bill Sjostrom has a nice discussion of bankruptcy and interest rates here.
Bankruptcy is a cost of lending. Lenders can choose which markets to lend in, so each market has to pay its way. Mortgage rates are lower than credit card rates because the borrower has a house for collateral. Car loan rates are higher than mortgage rates, but lower than credit card rates, because the car is collateral, but does not last as long as a house, and the borrower can more easily depreciate it by reckless driving. So credit card borrowers, to compete for funds against house and car borrowers, have to offer an interest rate that makes credit card lending as profitable as the lenders' alternatives.

...Easy discharge of debts drives up interest rates. The gainers are the dishonest borrowers who plan to retreat into bankruptcy (why worry about the interest rate if you do not plan to pay off?). The losers are the more honest borrowers who face higher rates.
To the extent that the U.S. does, in the end, tighten up its bankruptcy laws, the effect should be to reverse the distribution effects (set out above) and to lower interest rates eventually, especially on credit card balances. Also see the discussions by Jane Galt, by The Emirates Economist, and his reference to Larry White's cogent criticism of Paul Krugman.

Charging for Grocery Bags (again)

Several months ago, I argued the price elasticity of demand is so high that a 17-cents per bag charge for plastic grocery bags would dramatically reduce the quantity demanded. Here [h/t to BrianF] is some Australian evidence on the effect of charging for plastic grocery bags.

Hardware chain Bunnings has sold a million of its red and green reusable bags, chief operating officer Peter Davis said.
Since September 2003, when Bunnings imposed a novel 10c levy on plastic bags, customers had used 21 million fewer plastic bags.

Overall, in Australia, use of plastic grocery bags has declined by about 20%, and in grocery stores the use has declined by about 25%. Unfortunately the article does not provide more details about how many other retailers have implemented fees-for-bags programmes. The article does, however, reference this study, which says,

Scenario 1B (a 25 cent legislated levy) achieves the most significant reductions in environmental impact when compared to Scenario 4
(the current Code of Practice), ie.:

  • 63% reduction in primary energy use
  • 65% reduction in global warming impacts
  • 82% reduction in contribution to litter (using persistence as the

Scenario 1A (a 15 cent levy) also achieves significant benefits, ie.:

  • 54% reduction in primary energy use
  • 56% reduction in global warming impacts
  • 71% reduction in contribution to litter (using persistence as the
Unfortunately, the method for calculating these results is far from transparent in the study. My priors would be to attach a wide confidence interval to them. Why didn't they just estimate the price elasticity of demand?

Tuesday, March 15, 2005

Paris Hilton Knows Nothing about String Theory

Let's see what this does. I should probably mention singles as well.

Mandatory Retirement in Universities

The University of Toronto has negotiated an end to mandatory retirement.

The University of Toronto has reached a tentative deal with its faculty association to end the school's policy of mandatory retirement for professors and librarians. The deal would allow academic staff to keep their full-time positions past the age of 65.

If it is ratified, faculty members who turn 65 after June 30 of this year will no longer be bound by the school's current mandatory retirement rule. The university says the policy change will help the school keep valued staff members who would otherwise move on.

"Many of our faculty [members] are engaged in active research programs," said Angela Hillyard, U of T's vice-president of human resources.

"They still want to teach, they still provide huge benefits to our students, and we were losing eople to other institutions, elsewhere in Canada and in the States, that didn't have mandatory retirement."

So now tenured faculty members must be retained, at their current salaries with basic raises, until they keel over? If so, look for massive buyout programmes.

A much more sensible policy would be to eliminate mandatory retirement but with the proviso that tenure is revoked at age 65. Then the universities could negotiate different arrangements with different faculty members, depending on their expected productivity. But faculty unions usually object to more productive professors' getting better deals, and so, as sensible as it seems, my proposal probably will never be implemented at any major Canadian university.

An interesting note about this announcement is that the University of Toronto has a defined benefits pension plan, and so keeping faculty members on the job after age 65 will not cost the university the full amount of their salaries because the university will not have to pay them pensions while they are working; here at the University of Western Ontario, we have a defined contributions pension plan -- if we keep on working past age 65, the university must pay the full salary, and it gets no offsetting benefit from our not drawing a pension.

For more on life-long tenure, see the Becker-Posner blog here, and the Emirates Economist here.

I hope we eliminate mandatory retirement here; I'd like to teach until I'm 90.

Globalization and the Free Movement of Scarce Resources

Craig Newmark, of Newmark's Door, recently linked to this article in Vanity Fair about super models (streaming video available at that site) from Eastern European countries. His posting brought to mind the immigration scandals in Canada involving exotic dancers and (now former) immigration minister, Judy Sgro.

Immigration Minister Judy Sgro, embroiled in a controversy over a residency visa awarded to a Romanian stripper, now says she plans to change the rules that exotic dancers can use to emigrate to Canada.

Under the present rules exotic dancing is classified as one of the jobs the Labour Department monitors for shortages, making it easier for people to emigrate and fill those jobs.

This article highlights important observations about the Canadian labour market.

  • In general, women in Canada have other opportunities to work and earn a living that they prefer, compared with becoming exotic dancers, and
  • Many Eastern European women would prefer exotic dancing to any of their other options.

As the then-minister said,

"When you talk to the women who are so desperate for a way out of [their] countries they say, 'Please keep this program because it does
provide us with an opportunity – as much as we may not like it or approve of it – a chance of a better life.'"

What bothered me most about Craig's posting is that he said he would be unwilling to use the example in the classroom. Why not use it? It is a perfect illustration of opportunity costs and the gains from trade. Has Raleigh, NC, banned exotic dancing?

What is a Professor's Constituency?

I have always had the impression that a professor's job is to help increase the net present discounted value of the expected future flow of each student's utility. [digression: Or possibly the net present value of the wealth of the university through donations, grants and funding?].

What that means, operationally, is open to question. Which students' utilities get what weights? What discount rate is important? And how much in loco parentis is possible?

Consequently, to implement such a job description, different people have come up with other, more intermediate goal and job descriptions, such as

  • student as customer
  • student's parent as customer
  • elected funding legislature as customer

I like the concept of student as customer, except that in a market explicitly based on asymmetric information, it makes sense for students to pay professors to make/encourage/induce the students do something they would not otherwise do. Students are an important constituency, but catering to their current wishes is probably not a very good idea since profs know the subject (and one might hope) more about how to teach it than the students do. In this sense, teaching evaluations by students should probably have no more than a 10% weight on overall assessments of professors.

Students' parents are an important constituency. We may not see this on a day-to-day basis, but it crops up now and then. Students go home and tell their parents what they have learned, and their parents become outraged: "What are they teaching you at that place?"

But the other time I see parents as a constituency is at graduation - they love it, and our university caters to this with a full two weeks of my working time devoted to graduation ceremonies.

Another important aspect of constituencies, from a professor's point of view, is who in the department is important? Should I work on research topics that seem important to senior members of the department? Should I drink the same beer they drink? And here's a new one, in this link which quotes a friend of The Emirates Economist.

"Students are my raw material. My customers are the teachers who get them later."

For new (untenured) assistant professors that is not bad advice. But for the most part, I prefer the Emirates Economist's perspective.
[F]or my friend's idea to have full impact, he needs to be informed about the courses his courses feed. And the instructor's in the upper level courses need to hold his students accountable for knowing the material in the pre-requisite.

The only reason this advice from his friend has any merit is that if those teaching lower level courses do not keep in mind (or don't find out or don't care about) what is being covered in upper level courses, then the students and/or their parents and/or the funding legislators will be upset. In other words, the advice may be good, but it certainly should not set the framework for our teaching objectives.

Paul Heyne made his name as a teacher, in fact, from not following this advice. And although I'm no Paul Heyne, one thing I know is that there are many aspects of the Economic Way of Thinking that I must teach my students because if I don't do it, they won't learn them in their upper-level courses. In other words, if I take the upper level courses as a parameter, then I could teach nothing but technique and math and really give my students a leg up for those courses. I don't think that would be doing them a great service, though, and it completely ignores those students who will not be taking any more courses in the subject.

Update: Phil Miller has some interesting additional thoughts on this topic at Market Power.

Monday, March 14, 2005

Economics of Crime
A Standard Application

Gary Becker's famous article on the economics of crime and punishment postulates that potential criminals assess both the probability of being caught and punished and the expected size of the punishment.

Early work on the economics of crime by Becker, Shavell, Polinski, and others wondered whether, if criminals are risk-neutral rational maximizers, it could be more efficient for society to get the same deterrence by reducing the resources used to detect and capture criminals but by increasing the expected size of the punishment. If the probability of capture and conviction decreased, but the punishment increased, then the expected costs for the potential criminal would remain the same, but society might be able to get by with fewer scarce resources devoted to law enforcement. For various reasons and for various crimes, it didn't work [see here for one; and here for a more formal reason].

The upshot has been that more resources are again flowing back into front-line detection, arrest, and conviction to increase the probabilities that people will be caught and punished. In a very simple application of this principle, the City of Ottawa hired more traffic enforcment officers and has begun issuing more traffic violation tickets (primarily for speeding, but also for other traffic violations).

Late in 2003, police received approval to hire 18 new traffic/escort officers, bringing to 30 the number of officers dedicated to traffic enforcement. The program began Jan. 4, 2004.

The 18 new enforcement positions has accounted for one-quarter of all traffic tickets issued, an average of almost 200 per officer. The unit, in total, was responsible for 29 per cent of the 51-per-cent increase in traffic fines, meaning other front-line officers picked up 21 per cent of the total increase.

The effects of the increased resources devoted to increasing the probabilities of detection and conviction have been very high.
Almost 51 per cent more tickets were handed out last year, from 86,917 in 2003 to 130,416 in 2004. The 2004 figure is double the total for 2002.
About 70 per cent of all offences are for speeding.

Fatal crashes for 2003 to 2004 dropped 18 per cent, from 33 to 27. ... In 2004, there were 18,000 serious collisions, down by 1,500.

The reduction in auto fatalities and serious collisions may be due to many other variables, but it appears to have been substantial.

Keep in mind that the punishment for moving violations involves not just the $100 - $400 fine, but also the increased auto insurance premiums that follow a moving violation conviction. Nevertheless, the size of the punishment has not changed in Ottawa. Only the size of the expected punishment has changed in a probablistic sense. And it appears to have been effective.

Was it cost-justified? That depends on the value you attach to human lives, human time lost due to accidents, etc. My hunch is yes.

How Much Tsunami Aid Will Become Pure Rent?

By the end of February, the rest of the world had raised at least $27 gazillion for tsunami relief. I have begun to wonder how much of this aid will be converted into pure economic rent (as opposed to attracting more resources to the affected areas).

An article from the Sydney Morning Herald raises the same question, but without the economics jargon. (h/t to BF)

Diplomatic and donor organisation sources have told the Herald that there is huge competition between those trying to fill the more prestigious projects in Aceh, such as building schools and roads.

Aid groups are competing to recruit staff from the small pool of Acehnese with the skills needed for the rebuilding. This inflates their salaries enormously. Many of these skilled workers are being poached from jobs with the Indonesian Government, draining its expertise.

The supply curve of skilled workers is probably pretty steep, in the short run, for the affected areas. Building materials and health supplies can be shipped in for roughly the world price plus shipping costs, but trying to attract more skilled workers is very costly. Hence, these workers will earn massive economic rents.

Effect of the NHL Lockout on Canadian Unemployment

What effect do you think the NHL lockout had on overall employment in Canada?

My estimate is not much, if any. People who didn't spend their money on hockey, spent it somewhere else. People probably lost jobs in some readily identifiable sectors of the economy because of the lockout; at the same time, people gained jobs in many other sectors, spread throughout the rest of the economy. The overall effect was probably near zero.

CTV, a Canadian television network, has issued a report implying otherwise.[thanks to BrianF for the link].
Canada's jobless rate remained at 7.0 per cent in February, and that could be a result, at least in part, of the NHL's ongoing labour dispute and the strong Canadian loonie.

It is difficult to figure out what CTV is trying to say. Do they think the unemployment rate would have been even lower if there had been no NHL lockout? If so, they are probably incorrect.

Here is what Statistics Canada really said:
Employment fell by 20,000 in accommodation and food services, and StatsCan said the NHL dispute, which kept a lot of people out of pubs and taverns, may be partly to blame.

The full report merely describes the sectors which gained or lost jobs.

Sunday, March 13, 2005

A Real Ditz

Teresa Heinz Kerry says the Republicans won in November because they hacked into the voting computers.

Teresa Heinz Kerry is openly sceptical about George Bush's victory some four months after the election, questioning the legitimacy of the optical scanners used in some states to record votes.

"Two brothers own 80 per cent of the machines used in the United States," she said during a fund raising event in Seattle.

They are "hard-right" Republicans, she claimed, arguing that it was "very easy to hack into the mother machines".

BrianF, who sent this to me, says that the real reason the Republicans won is that the voters didn't want anyone like her anywhere near the White House.

If you are determined to look for a conspiracy, you can find one. But where's her evidence?

Cod Liver Oil for Your Vehicle?

Is it possible to combine fish oil with diesel fuel to reduce the pollution caused by cars and trucks?
In October, after a trial that started the previous winter, Halifax
switched its entire transit fleet to biodiesel [the fuel that includes fish

Like the fuel being used for [a] Moncton [New Brunswick] trial, Halifax buses run on a biodiesel that's a blend of 20 per cent bio-fuel made with fish oil and 80 per cent regular diesel.

Studies show the biodiesel being used in Moncton, known as B20, emits 16 per cent fewer greenhouse gases than regular gasoline. Ivany relayed recent test results that show biodiesel emits 19 per cent fewer unburned hydrocarbons, 18 to 28 per cent less carbon monoxide, depending on the age of the engine, and 14 per cent fewer particulates, which are various material from sources including sand, sea salt and black smoke.

Another consideration, of course, is cost.
There's virtually no difference in the cost to fill the gas tanks of the six city vehicles with biodiesel. The alternative fuel currently retails for about 1.5 cents less a litre than regular diesel, ...

Maybe. But if the sustainability of the fish stocks is in serious doubt, I have to wonder how successful this programme will be.
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