Tyler Cowen's Blog, page 432

Price gouging and the elasticity of supply

Jeff writes:

…in fact it is quite typical for the consumer surplus maximizing solution to be a rationing system with a price below market clearing. I devoted a series of posts to this point last year. The basic idea is that the efficiency gains you get from separating the high-values from the low-values can be more than offset by the high prices necessary to achieve that and the corresponding loss of consumer surplus.

Why would we only care about consumers’ surplus and not also the surplus that goes to producers? We normally we care about producer’s surplus because that’s what gives producers an incentive to produce in the first place.  But remember that a natural disaster has occurred. It wasn’t expected. Production already happened. Whatever we decide to do when that unexpected event occurs will have no effect on production decisions. We get a freebie chance to maximize consumer’s surplus without negative incentive effects on producers.

This is a very clever post and it provides much to think about.  But I don’t accept the main premise that supply is inelastic.  Last night most stores were closed!  At higher prices more of them might have opened, and in fact in most places it was logistically possible to have a store open in Fairfax.  There might also be effects from mechanisms such as “should I leave these flashlights out for sale, or take the extra home to the family?”  Furthermore the periodic demand for batteries, flashlights, bottled water, etc. around here has become (sadly) a regular event, where longer-run “option ready” supply arguably is linked to precedents from previous experience.

Are Americans losing their perspective?

Being a member of the opposite party often beats religious difference, unattractiveness, and low educational and professional attainment on Ms. Adler’s clients’ list of turnoffs…

“People now say ‘I don’t even want to meet anybody who’s from the other party,’ even if it’s someone who’s perfect in every other way,” Ms. Adler says. In past election years, about a quarter of her clients wouldn’t date a member of the opposite party. Now it is three-quarters, Ms. Adler says.

Here is more.

Visualization data for world development

From Damian Clarke:

I am a PhD student in economics at the University of Oxford, and a fan of your blog.  Much of my work focuses on the microeconomics of development (principally fertility and education), however I am also working on the use of open data in economic development – quite an exciting area.  I write you with regards to this open data work.  Recently I have written a module for Stata which allows anyone to automatically import any of the over 5000 indicators maintained by the World Bank, and produces both a geographic and time series representation of the data (I provide a png attachment of this graph here if you are interested in seeing it)…

Whilst this program may be useful for researchers, I think its prinicipal benefit is in pedagogy – perhaps even users of MRUniversity would be interested in visualising for example fertility, GDP, current account balances, etc in a simple command.  The syntax really is very easy: “worldstat Africa, stat(GDP)”.

I provide at the end of this email a brief description, and more details are available on my site: https://sites.google.com/site/damiancclarke/computation#TOC-worldstat

…worldstat is a module which allows for the current state of world development to be visualised in a computationally simple way. worldstat presents both the geographic and temporal variation in a wide range of statistics which represent the state of national development. While worldstat includes a number of “in-built” statistics such as GDP, maternal mortality and years of schooling, it is extremely flexible, and can (thanks to the World Bank’s module wbopendata) easily incorporate over 5,000 other indicators housed in World Bank Open Databases.

…it is automatically available from Stata’s command line by typing: “ssc install worldstat”

“Blind Retrospection Electoral Responses To Drought, Flu, and Shark Attacks”

That is the title of a 2004 paper by Christopher Achen and Larry Bartels (pdf), perhaps it will prove relevant this week or next:

Students of democratic politics have long believed that voters punish incumbents for hard times. Governments bear the responsibility for the economy in the modern era, so that replacing incompetent managers with capable alternatives appears to be a well-informed, rational act. However, this vision of a sophisticated retrospective electorate does not bear close examination. We find that voters regularly punish governments for acts of God, including droughts, floods, and shark attacks. As long as responsibility for the event itself (or more commonly, for its amelioration) can somehow be attributed to the government in a story persuasive within the folk culture, the electorate will take out its frustrations on the incumbents and vote for out-parties. Thus, voters in pain are not necessarily irrational, but they are ignorant about both science and politics, and that makes them gullible when ambitious demagogues seek to profit from their misery. Neither conventional understandings of democratic responsiveness nor rational choice interpretations of retrospective voting survive under this interpretation of voting behavior.

Here is my related Slate piece with Angus.  For the pointer I thank Angus.

In case you haven’t been paying attention

And now the world’s largest general scientific society is weighing in on the debate.

The American Association for the Advancement of Science says labeling would “mislead and falsely alarm consumers.” The AAAS – best known for publishing Science magazine – says genetically modified foods are fundamentally no different from conventionally bred foods. In fact, the organization says they are tested more extensively than most new crop varieties.

And:

Opponents of genetically modified foods have a variety of concerns. Some have a gut feeling that these crops are unwholesome. Others worry that the technology is driven simply by corporate profits for seed companies as well as herbicide producers. Indeed, industry has poured nearly $41 million into advertising to defeat the ballot measure, with “No on 37” TV and radio ads warning that the labels could lead to higher prices at the store, according to The Wall Street Journal. ..

Sometimes worries about genetically modified foods are expressed as concern over food safety, but the AAAS says that concern isn’t supported by the science.

“Civilization rests on people’s ability to modify plants to make them more suitable as food, feed and fiber plants and all of these modifications are genetic,” the AAAS statement says.

Here is more, with hat tip to Michael.  Isn’t it time for some of the respected left-wing economists to weigh in on this one?

Arrived in my pile

Mary Morgan, The World in the Model: How Economists Work and Think.  And here is chapter one on-line (pdf).

Why Milk?

Throughout evolutionary history, most adult homo sapiens could not drink milk. Even today, most adults cannot drink milk. Adults who cannot drink milk don’t seem to lose very much, particularly as they can still eat yogurt and cheese. And yet the gene that allowed some adults to drink milk spread incredibly rapidly suggesting massive advantages to milk drinkers. Why? No one knows for sure but it seems to coincide with civilization. Slate has more:

[A]round 10,000 B.C….a genetic mutation appeared, somewhere near modern-day Turkey, that jammed the lactase-production gene permanently in the “on” position. The original mutant was probably a male who passed the gene on to his children. People carrying the mutation could drink milk their entire lives. Genomic analyses have shown that within a few thousand years, at a rate that evolutionary biologists had thought impossibly rapid, this mutation spread throughout Eurasia, to Great Britain, Scandinavia, the Mediterranean, India and all points in between, stopping only at the Himalayas. Independently, other mutations for lactose tolerance arose in Africa and the Middle East, though not in the Americas, Australia, or the Far East.

In an evolutionary eye-blink, 80 percent of Europeans became milk-drinkers; in some populations, the proportion is close to 100 percent. (Though globally, lactose intolerance is the norm; around two-thirds of humans cannot drink milk in adulthood.) The speed of this transformation is one of the weirder mysteries in the story of human evolution, more so because it’s not clear why anybody needed the mutation to begin with.

…A “high selection differential” is something of a Darwinian euphemism. It means that those who couldn’t drink milk were apt to die before they could reproduce. At best they were having fewer, sicklier children. That kind of life-or-death selection differential seems necessary to explain the speed with which the mutation swept across Eurasia and spread even faster in Africa. The unfit must have been taking their lactose-intolerant genomes to the grave.

…The rise of civilization coincided with a strange twist in our evolutionary history. We became, in the coinage of one paleoanthropologist, “mampires” who feed on the fluids of other animals. Western civilization, which is twinned with agriculture, seems to have required milk to begin functioning. No one can say why.

Hat tip: John Chilton.

Would abolishing cash help cure AD problems?

Miles asks about this on Twitter.  Earlier in the year, Matt wrote:

Stop for a moment and ask yourself why the interest rate can’t be reduced much below 1 percent. The trouble is cash. At any given time, relatively little paper currency circulates in the United States. Instead, most of the American money supply consists of bank accounts and other electronic stores of value. People prefer to keep money in bank accounts because it’s convenient and because you get interest on it. If the rates were driven below zero—in effect a tax on holding cash in the bank—people would just withdraw money and store it in shoeboxes instead. But what if you couldn’t withdraw cash? What if all transactions were electronic, so the only way to avoid keeping money in a negative-rate account was to go out and buy something with the money? Well, then, we would have solved our depression problem. Too much unemployment? Lower interest rates below zero, Americans will start spending and investing again, the economic will grow, and unemployment will go back down to its “natural rate.”

Ryan Avent comments.  A few points from me:

1. Even pure cash can be taxed, if we are willing to go the goofy route.  A stochastic declaration of “counterfeit,” based on serial numbers and scans, is one way to go.

2. Technologically speaking, it is possible to run virtually all transactions without cash, or it will be quite soon.  That said, for this to work as stated, you would need to run all transactions without cash or the option of cash.  How many millions of Americans do not even have bank accounts much less smart phones?  This is more likely to work in Singapore or Denmark, at least for the foreseeable future.

3. You could have currency or some currency equivalent continue to exist in the black market economy, with penalties for ordinary citizens caught holding currency.  (Which would probably not be popular on Fox News, and furthermore in Tennessee imagine all that talk of Book of Revelation, “Mark of the Beast,” etc.)  Even so, you still end up with a currency-bonds margin and most likely with lower nominal interest rates in that equilibrium; if the law taxes currency holdings there is less need for equilibrium to require a high nominal interest rate.  I am not sure why this should be so desirable for monetary policy.

Furthermore, under some views, this proposal would in essence put monetary policy in the hands of the drug trade.  Cracking down on drug lords, or easing up on them, would become major monetary policy instruments, at least if you take the Fama-Sumner view that currency has special potency over the price level.

4. I do not myself believe that currency per se has such extreme power over aggregate demand, at least not in such a credit-intensive economy as ours.  That means this proposal doesn’t get at the heart of the AD problem, which is closely linked to credit creation.  But if you disagree with me on this one, you end up back at #3.

5. What do we really know about money demand anyway?  Cooley and Leroy (1981) is still worth reading.  Under one plausible view, you get sustainable increases in velocity, aggregate demand and investment when people feel safer and wealthier, not when you tax them more.  It’s fine to say “we don’t know,” but I get nervous when macro stabilization policy is relying so directly and so relentlessly on money demand effects.

6. I don’t see how this proposal could work unless it is applied globally, which seems implausible.  If your dollars are being taxed some extra amount, just put them in a foreign bank to earn zero or do some kind of funny quasi-repurchase agreement, with a foreign bank, to avoid having formal ownership of the dollars on the days of the tax.

On net, it is an interesting idea, but I wouldn’t actually do it.

Addendum: Scott Sumner comments (I don’t myself think the monetary base is so special, and if pre-2008 wasn’t a problem, that is why).

Further assorted links

1. Horse nationalism stalls gains from trade once again.

2. The great air stagnation.

3. Do blondes get special treatment?

*Searching for Sugar Man*

There is plenty of social science in this unexpected indie hit, which depicts the musical career of Sixto Rodriguez.  Rodriguez had two very good albums in the early 1970s but faded into obscurity after failing to gain commercial traction.  Unbeknown to the artist, he had become an enduring national celebrity in South Africa.  His fans there had no idea he had been working in Detroit as a construction demolitionist (this is before the modern internet, although eventually the internet helped his daughter discover his fame in South Africa, through a fan’s web site).  Here is Cass Sunstein on the movie and its portrayal of social and cultural dynamics.

The music is quite appealing — imagine a mix of Donovan, Motown, and low-tech psychedelia, the latter a’la Love.  If you are looking to hear or download one song, I recommend the iconic “I Wonder.”

To my ear it sounds naive but charming, but to the South Africans it was revelatory and cool.  Furthermore here was a non-Black coming out of Motown (Mexican ancestry but born in the United States), yet with much of the anti-establishment feel of a black artist of the time.  The movie never touches on this racial angle as possibly relevant to his popularity; did the South Africans require a non-black version of a black idol?  And what does he now symbolize, given that white rule has ended?  When they show Rodriguez’s post-apartheid concerts in South Africa, there is not a black face to be seen, as if he has become a nostalgia act in a slightly unsettling manner with the anti-establishment gloss now drained away.

The full story has not yet been told, not even on the American side.  From watching the movie, the viewer receives the feeling that Rodriguez fell into a hole circa 1973.  The reality is that he was touring Australia as late as 1981 (more here) and even put out a live album from that country in the same year.  Music aficionados will know all about the close cultural connections between Australia and South Africa at that time; did Rodriguez really have no idea of his South African following?  And what kind of connections was he keeping with the commercial world of music?

I would gladly read a book about how failing artists string out their careers by playing in niche markets or writing for them.  For instance Harry Nilsson released some of his late albums in the UK, Australia, and Japan only.  Erwin Nyiregyhzai kept giving periodic piano recitals in Japan, well after his prodigy years were over and he supposedly was “lost” and thus before his “rediscovery.”  What is a rediscovery anyway?

Here is Rodriguez’s eBook guide to happiness.  For pointers I thank Cass Sunstein and also Angus.