Tyler Cowen's Blog, page 281

Assorted links

1 Cardiff Garcia on what is the case against quantitative easing?

2. One theory as to why women are paid less.

3. In praise of Frank Ramsey.

4. The housing wedge.

5. Eighteen signs you are reading bad criticisms of economics.

Stayaway from Layaway

Layaway plans are immensely popular, a fact I find deeply puzzling much like the popularity of Justin Bieber, Snooki, and homeopathy makes me question the rationality of my fellow human beings.

The typical layaway plan requires a deposit of 10-15% of the price of the good, say a new TV. If the consumer pays the balance over the following 10-12 weeks (i.e. by Christmas) they can pickup the good. If the consumer doesn’t pay the balance they get a refund of payments made less a service fee.

Walmart and Kmart advertise their layaway plans heavily. I am shocked, however, that so-called consumer advocates also have good things to say about poor people lending big corporations money:

Consumer advocates say layaway is a great way to manage a major purchase and stick to a budget, allowing consumers to spread the cost of an item over a number of payments without running up a lot of costly debt.

…”The fees, if any, are generally nominal and probably much lower than the interest you’d pay if you purchased those things with a credit card and didn’t pay off the bill for several months,” said Tod Marks, senior editor and shopping expert at Consumer Reports.

Stop the insanity! The relevant comparison is not to buying on credit but to saving. Instead of lending Walmart money, get yourself an old-fashioned piggy bank and avoid the cancellation fee and the hassle of going to the store to make the periodic payments.

Tod Marks, from Consumer Reports (!), also makes this astounding argument:

With layaway, you don’t have to worry that the store will run out of an item you want,” he said.

Are we living in the Soviet Union? Who worries about Walmart and Kmart running out of goods? Occasionally an item will be discontinued but then the replacement is usually better and/or cheaper. Similarly, layaway plans advertise that you can “lock-in” the current price. Right, and if the price goes down or you find a lower price elsewhere you are similarly locked in.

Still not convinced? In the spirit of Tabarrok’s Wager I offer Tabarrok’s Layaway Plan.

Send me $10 right away along with a message telling me what you want, when you want it and the current price. Save your money. If you save enough to buy the good at the requisite time send me a note and I will heartily congratulate you with a $10 reward. If you don’t save enough, thanks for the $10 and better luck next time. Unlike Walmart I will not guarantee the current price but Tabarrok’s Layaway Plan offers significant advantages that Walmart’s plan does not. On the day that you have saved up enough, Tabarrok’s Layaway Plan lets you buy at any store and at the lowest price that you can find! And that’s not all! Tabarrok’s Layaway Plan offers another great advantage, The Tabarrok Switch™. If you find a good that you like more than the good that you had originally planned to buy the Tabarrok Layaway Plan lets you switch to the new good!

Congratulations on choosing the Tabarrok Layaway Plan, the plan with the most options and flexibility of all layaway plans.

Hayek’s liberaltarian essay “”Free” Enterprise and Competitive Order”

I’ve been preparing a class on Hayek for MRUniversity.com, and I was struck by my reread of this essay, which was presented at the Mont Pelerin Society meeting of 1947 (it was later published in Individualism and Economic Order, pdf of the book here).

In this piece Hayek argues the following:

1. It is not enough for classical liberals to seek to limit the state, they also must outline what governments could and should do better.

2. Monetary policy should be used to limit unemployment, albeit in a rules-based framework.

3. Eminent domain is an essential function of government, especially in urban cities, and it needs to be thought through more carefully.

4. Many of the biggest dangers of monopoly stem from patent law and intellectual property protection, rather than from monopoly of the traditional “sole seller” sort.  On this issue Hayek sounds like Alex or Larry Lessig.

5. It is not enough to defend “freedom of contract” in the abstract, rather the details of the law really matter.

6. Hayek questions whether limited liability for corporations is always the right way to proceed.

7. Finally, although inheritance taxes have in the past sometimes been abused, “…inheritance taxes could, of course, be made an instrument toward greater social mobility and greater dispersion of property and, consequently, may have to be regarded as important tools of a truly liberal policy…”

You will recall that in other settings Hayek endorsed the idea of a social welfare state and also the taxation of pollution.

The rise of bookazines?

The number of magazine launches is dropping, but the market for bookazines — high-priced one-shot special issues costing $10 or more — is on the rise.

That’s the observation of Samir Husni, a journalism professor at the University of Mississippi who has emerged as the dean of tracking new magazine launches and even given himself the trademarked nickname Mr. Magazine.

“I’ve never seen so many bookazines launched,” said Husni. “They are definitely replacing regularly published magazines.”

Through the first three quarters ended Sept. 30, there were a total of 591 new magazines, down slightly from the 614 in the first nine months of 2012.

But Husni noted that one-off special issues, often with cover prices in the $10 range, actually rose about 2.4 percent, to 457, compared with 446 in 2012.

…the biggest categories are more niche-oriented and mostly upscale: Food is No. 1, followed by crafts and sports/leisure magazines.

There is more information here.  Here is what you get if you enter bookazine into Twitter.

What is the most philosophical thing that you have ever heard a child under the age of 5 say?

That is a new Reddit thread (apologies, I have forgotten who directed my attention to it).  My favorite answer was this Stigler-Becker approach to the matter:

My little sister handed me a juice box as I was packing to move out and said “No one is really a grown up. They just act old because they have to”

The full thread is here.

Assorted links

1. Scott Sumner on fixed vs. floating exchange rates.

2. How much does an MBA for your dog cost?  No photo required.

3. ACA reinsurance provisions, the next hot topic.  More here.  The key though is not protecting insurance companies profits, but making sure they have the right incentives on the margin with prices.  It seems to me the natural result will be price controls on insurance policies, not offsetting subsidies preventing the “adverse selection death spiral.”

4. The culture that is Japan?

5. Should public universities go private?  And Michael Gibson debates Peter Boettke on the future of education.

6. Doyle McManus at the LA Times on Average is Over.

7. Ross Douthat on Medicaid for all.

Will California’s electoral reforms improve the quality of their government?

Adam Nagourney reports:

Lawmakers came into office this year representing districts whose lines were drawn by a nonpartisan commission, rather than under the more calculating eye of political leaders. This is the first Legislature chosen under an election system where the top two finishers in a nonpartisan primary run against each other, regardless of party affiliations, an effort to prod candidates to appeal to a wider ideological swath of the electorate.

If you read the article, you will see some early reports that this is working out well, and allowing for less partisan decisions.  Focusing on the primaries question alone, I have a few points:

1. If the median voter theorem holds, the nonpartisan primary shouldn’t matter much.  That said, the median voter theorem in this context probably does not hold.

2. Imagine you have an expressive voting model, where a big chunk of the electorate will vote for a Democrat no matter what and will not vote for a Republican in a nonpartisan primary.  In essence that is like allowing Republicans to vote in the (decisive) Democratic primary.  If Republicans vote expressively, they will vote for their own and we are back to this change not mattering.  If some Republicans vote strategically, to pull the Democrats closer to the center, they may succeed in doing so.  That said, if Democrats observe Republicans voting strategically, the Democrats may respond by voting more strategically themselves, to pull their candidates closer to the Left.  Alternatively, Republican candidates may respond by moving to the center, hoping to appeal to the strategic Republican voters.  If the more moderate Republicans become “too acceptable,” they may prevent the strategic Republican voters from voting for Democrats and thus influencing the final outcome.

Multiple equilibria, etc., but it is not obvious that, after a few iterations, you end up with a better or a less partisan outcome.

3. Many electoral changes have short-run effects which differ from their long-run effects.  In the longer run, there is a Beckerian equilibrium of pressure groups and those groups may manage to master the new procedures and reimpose their will on the proceedings, albeit with a lag.  Changes in electoral systems should never be judged too rapidly.

4.  #3 is especially true when an electoral system change alters “what happens within parties” vs. “what happens outside parties.”  It takes a few iterations for parties to adjust to the new rules and change their nature, to adapt to the new equilibrium.

The bottom line: One virtue of federalism is that such experiments can be tried.  I’m all for it.  But it is far too soon to think this is a big deal.

The economics of declining Somali piracy

The number of successful pirate hijackings has dropped since November 2011 when over 40 successful attacks were recorded for that month alone.  In comparison, in 2012 there were only 15 successful attacks off the East African coast, according to UN figures.  The drop has been attributed to increased private armed security on the part of commercial vessels and anti-piracy task forces from foreign governments, which have been supported by enforced prosecution of hijackers.  Maritime law before 2011 did not allow armed security on commercial vessels, but the International Maritime Organization has since added it to itsguidance on best management practices for piracy for high risk areas.  Although the situation has seen improvement, some pirate groups have turned to inland hostage taking and hijacking attempts still continue.

There is much more here.  By the way, I enjoyed Captain Phillips, which I took to be quite critical of the U.S. military and which is best understood as seeing the two stories as running parallel commentary on each other.

The markets in everything angle is this:

Not all of the crew cooperated with the movie, and those who did were paid as little as $5,000 for their life rights by Sony and made to sign nondisclosure agreements — meaning they can never speak publicly about what really happened on that ship.

It’s the film’s version of events — and Hanks’ version of Phillips — that will be immortalized.

There is more here.

Assorted links

1. A polemic in favor of Texas and against the stability of tech jobs.

2. James Bessen at The Washington Post reviews *Average is Over*.  I agree with him that numerous decades later, things will be fine.  Kevin Drum responds along different lines.

3. Reihan on ACA and Medicaid reform.

4. A good criticism of Chetty on economics as a science.

5. One overview of the new jobs report.  And how much has sequestration hurt the DC-area job market?

6. David Romer on why do firms prefer more able workers?

Charlie Stross’s vision of the Coase theorem, as applied to publishing

Google or Apple have a suf­fi­ciently large cash pile that they could take out a major­ity stake in all of the Big Five – it would only take on the order of $10 bil­lion. Also bear in mind that the paper pub­li­ca­tion side of these orga­ni­za­tions could remain largely unaf­fected by this takeover, inso­far as they could still be oper­ated as prof­itable com­mer­cial busi­ness units. The focus of the takeover by Google would be on the elec­tronic side of the indus­try. The pur­chaser would effec­tively have acquired the exclu­sive elec­tronic rights to roughly 300,000 commercial-quality books per year in the US mar­ket space. They could pro­vide free pub­lic access to these works in return for a roy­alty pay­ment to authors based on a for­mula extrap­o­lat­ing from the known paper sales, or a flat fee per down­load; or they could even put the authors on pay­roll. The cost would be on the order of a few bil­lion dol­lars per year – but the ben­e­fit would be a gigan­tic pool of high-quality content.

From an author’s point of view, the ben­e­fits should be obvi­ous. Hav­ing your books given away free by FaceAp­ple­Goog­Book max­i­mizes your poten­tial read­er­ship, while retain­ing print roy­al­ties and some sort of licens­ing stipend from FaceAp­ple­Goog­Book should main­tain your income stream. Win on both counts!

Such a buy­out would amount to a whole­sale shift to a promotion-supported model for book pub­lish­ing. Google would pre­sum­ably use free book down­loads to drive tar­geted adver­tis­ing and col­lect infor­ma­tion about their users’ read­ing habits and inter­ests. Apple might use the enor­mous free con­tent pool as a lure for a shiny new pro­pri­etary iReader hard­ware device. Face­book could tar­get the authors, wheedling them to pay for pro­mo­tional place­ment in front of new read­ers. The real ques­tions are: is there enough money in a new shiny iReader device or the AdWords mar­ket (indeed, the adver­tis­ing indus­try as a whole) to sup­port the pub­lish­ing sec­tor as a pro­mo­tional loss-leader; and, would this get FaceAp­ple­Goog­Book some­thing they don’t already have?

There is more here.  I see Google as the natural purchaser here.  By having exclusive rights to book content for its search service, it would cement its dominant position in search for a long time to come.

You should note, however, that Stross is only speculating and he sees a real barrier to his proposed solution, namely:

The dis­mal answer [as to why this doesn't happen] prob­a­bly lies in the mare’s tale of con­tracts and licens­ing agree­ments and legal boil­er­plate that under­pins the pub­lish­ing indus­try.

The pointer is from Ted Gioia.