Think Economically


Maximum understanding, minimum average total cost.

Will everything be free in the future? Robots, information, value, and the long view of relative prices.

I don’t think everything will be free–more likely relative prices of raw goods and manufactured goods are just likely to swing drastically. If you take the long view of human history, increasingly the value of a good is defined by the information in it, and we have gotten much better at separating, recording and transmitting that information. If you think about it, mathematics and engineering are about inventing the language to describe the information contained in a good, interchangeable parts and mass production increase the signal-to-noise ratio, information goods like books, music, movies, research, software–these *are*their information–and then the development of an information infrastructure as well as cheaper and more widely distributed mechanized production methods mean that the information slowly becomes the only missing part.

Another way to think about it is that we have steadily shortened the distance between knowing how to make something and having it made. Little by little, the having it made part is becoming trivial relative to the knowing how to make something. Because information is non-rival–my having information implies nothing about your ability to have it–private goods become less private. Read the rest of this entry »


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This week I have read: Patent Trolling, Cloudpaging, Santorum’s Polls, Obama’s Polls, Taco trucks, Gas and Crude Oil Prices, LEGO Monthly Mini Builds

Patents are broken

Economists, for the most part, have not yet developed the tools to think about information goods. Undergraduate econ still revolves mostly around agriculture. So what do we do about software patents? Or the sharing economy?

I got nothin’. Maybe I’ll devote some focused thought to it some time soon. By then, of course, the entire industry will have changed.

For and insider’s view on the patent wars, check out Andy Biao on his work on patents for Yahoo that have been weaponized and fired at Facebook.

Polls are broken

Political polls have been turned into the analogue to baseball statistics by Nate Silver. As someone who teaches and uses statistics, and watches politics and baseball, this has been delightful. And yet.

Nate Silver points out that Santorum has significantly outperformed his poll numbers. What to make of that? Are people disinclined to admit they’ll vote for Santorum?

That would be odd enough, but no one can figure out whether Obama is universally reviled or climbing back into the catbird seat. On net, InTrade seems to think there has been little change in Obama’s likelihood of reelection in the last six days, and so I read all that news for nothing.

Tacos are yummier from trucks?

For some reason Felix Salmon wants to know why tacos taste better from taco trucks. For some other reason, Matt Yglesias responds. My guess? Because you’re at SXSW and it’s a slow news morning? Also something about more competition, lower average total cost, etc. It doesn’t actually seem that mysterious.

The President can’t affect gas prices

In the CBS/NYTimes poll linked to above, 56% of people thought that the President could affect gas prices. He can’t. Peter Van Doren and Jerry Taylor over at Cato point this out, but if you don’t like reading words and stuff, the White House has just released a very involved, but stylish, infographic. Personally, I think they protest a little too much, with a dash of preaching to the choir.

Ultimately, James Hamilton argues it shouldn’t matter for the recovery, and IMHO, he would know. Matt Yglesias concurs.

Everything else

It was a good week for us. Personal spending is low; personal income is steady. David Brooks is apparently a Mets fan. I bought some silicone-based glue to repair a mug. Also, LEGO Monthly Mini Builds are awesome and brickset has instructions from mid-2010 onward.

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Economics is a science. An awesome science. Newton, Feynman, Maxwell, Hooke, et al. would agree.

I wrote this in reply to a list-serv conversation with some criticisms of economics as a  science, and since I still work for my supper, I figured in addition to making lemonade, I would clone that lemonade with the handy-dandy Replicator function on my futuristic writing contraption. The names have been changed to protect the innocent (Not very much. Einstein was changed to Galileo, and Galileo was changed to Einstein. I just switched the ‘n’s in Newton, and the same with Feynman. With Hooke it was the ‘o’s. Maxwell is not innocent, so I left his name as is.).


Read the rest of this entry »

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Kony2012 and its discontents: how much snark does it take to fix all the world’s solutions to the world’s problems?

So, Invisible Children posted a video (which video henceforward I shall refer to as “KONY 2012”) in order to develop awareness about a terrible person named Joseph Kony who has done some reprehensible things and is currently at large. One of the terrible things of which he stands accused is abducting children and pressing them into military service and/or sex slavery.

In response to aesthetic and rhetorical choices on the part of the film’s producers, all the people who think they’re smarter than you or too cool for school (or both) started tearing it down. Not from the right, mind you–this wasn’t a case of “who cares about African kids?” No, this is criticism from the left. There is a drinking game. This kind of nonsense is as nauseating as it is sophomoric. It’s snarky, and elitist, and counterproductive…and my people (by which I mean ridiculous, absurd intellectuals and/or academics) are to blame.

And while I’ve been annoyed by this dynamic in the past, this particular episode feels like the apotheosis of this idiosyncratic brand of annoyance, so I thought I’d take the opportunity to get down a few thoughts. Read the rest of this entry »

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Closing tax loopholes in the oil industry would have no effect on gas prices

What would be the effect on gas prices of $4 billion in closing tax loopholes for oil companies?

The short answer? There should be almost no effect on prices.

For background, we should briefly answer this question: when are taxes “bad”? It’s an imprecise question and so you’ll only get terrible answers unless we make it more specific. So for now, I’m going to define “bad” as “detrimental to overall economic well-being.” It turns out that taxes are only bad in this sense when people change their behavior in response for what would be better—more economically productive—behavior. Taxes are “good” when they discourage people from mutually destructive behavior, or encourage economically beneficially behavior.

So, if the loopholes that oil companies benefit from were closed, what would happen? I’ve heard people say it would lead to $4 billion in higher prices. This seems transparently and obviously wrong, even without any analysis. The only way you would get full pass-through of taxes to consumers is if the supply of oil were perfectly elastic—totally responsive to price. If that were the case, then if oil prices ever dropped at all, oil companies would have to stop producing oil entirely.

Another way to think about this: if somebody wants to buy your house, and you have some asking price, and they lower their offer, the only way you can avoid going below your asking price is if you are totally and absolutely willing to walk away for even a penny less than your hardline offer. The only way oil companies don’t swallow some of the taxes is if they’re perfectly price responsive—willing to abandon oil rigs and investments and liquidate immediately. That’s transparently not the case.

So what would happen? Well, we could look at this as a competitive market. In that case, there would be a split between producers and consumers. Whoever is more inelastic bears more of the cost. In the short run, consumer demand for gasoline is very inelastic, but so is oil supply. Over a longer time period, both supply and demand are more elastic. In the short run, then, maybe consumers and producers would evenly split the tax, but quantity would stay high. Over the longer time period, consumers and producers would both shift away from the oil market, and quantity would drop.

This is a good thing, by the way, because tax loopholes are really tax expenditures, meaning that they are artificial subsidies, and so the oil industry is inefficiently large. Reducing the size of the oil market would move money out of an inefficient market, restoring balance to the economy. It would move people into other markets, and lead to price more accurately representing the social value of our investments.

This analysis, by the way, assumes that the tax we are discussing is an excise tax—a tax on production. The tax loopholes in question are actually exemptions from a corporate profit tax. Eliminating the loophole then treats oil companies like other companies regarding this tax on profits.

Corporate profit taxes are nice because they do not change the underlying production decision. The optimal quantity remains the same, and it is only in the long run that firms will exit. The firms that do eventually exit are firms that should exit, because they are the ones that would not be making a profit if not for government subsidies.

In other words, government subsidies serve to pay inefficient firms to stay in business when they should really find another line of work.

Moreover, all of the above assumes that the oil industry is a competitive industry. Which it isn’t. It’s an oligopoly. That complicates the analysis of the optimal policy somewhat, but increasing the burden of a profit tax should still have no effect on prices–it just reallocates the surplus…which for an extractive industry seems to make good sense (but that’s me with my normative hat on).

When do subsidies make sense? We can talk more about that later. They certainly don’t make sense in the oil industry.

For a different, and quite good take on this, check out the great work done by the people at the Congressional Research Service:


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Economists and crises: my take on Krugman’s take on economists’ take on The Big One.

Krugman gave a speech on receiving an honorary degree in Lisbon; he reprints the full text here:

Krugman’s general story: the field of macroeconomics was better, descriptively and predictively, back in the 1970s, but at the cost of being coherent and complete. In the intervening years, a number of economists sacrificed completeness and consistency for external validity, and that blinded us (well, them; I’m not a macroeconomist) to the causes and cures of the recent financial crisis. He pitches it as a saltwater v. freshwater battle, which maybe it is.

Then again, maybe it’s a matter of getting high off your own supply. Read the rest of this entry »

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How do people decide what they like? Atlanta commute with and without train tracks and decision under risk and uncertainty.

So I’m trying to put something together here with some coauthors and I thought it might be useful to put down some really back-of-the-envelope thoughts to see if I can get some of this articulated, as well as any comments or criticisms anybody might like to offer.

The question I/we are grappling with is this: how do people decide what they like?

The anecdote that got me interested in this particular question is this: when I lived in Atlanta, I would regularly (2x a week) have to drive from my friends’ house in Clarkston, where my daughter would stay for the day, to the train station at Edgewood/Candler Park. There are two routes between the two locations (clearly there are more, but let’s say there are two routes). One of the routes is shorter but has a set of train tracks across it. The other is longer, but manages to circumvent the train tracks by going under a railway bridge. Read the rest of this entry »

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Read up: Tax expenditures cost $1 trillion a year, or almost the entire deficit.

Tax expenditures are huge. What are they? Government spending disguised in tax language. They make government look smaller than it is.

Income tax expenditures added up to about 75% of the tax actually collected (Burman et al 2007), but have gone up to about 94%. I’m just doing this math in my head, but that means income tax rates are almost twice as high as they would have to be without these loopholes. Not only that, but these deductions cause a regressive shift in the tax structure.

The politics governing them are pretty straightforward: provide a tax loophole to a favored constituency and from below, your profile looks like that of a small-government conservative, axe in hand, taking apart the beast blow by blow. Meanwhile, from above, lobbyists and special interests get the bird’s-eye-view of someone well aware of who, precisely, is circling overhead, waiting to pluck that axe from the hand right before pecking out the liver.

So what to do? There’s been some political chatter, but bilateral disarmament here…well, I’m skeptical.

Read up and then write somebody, maybe:

Wikipedia has a surprisingly terse overview–someone should maybe get on this–here:, with a little more here:

The tax policy center has a briefing book here:

Burman, Geissler, and Toder have a 2007 paper in the AER proceedings that does the accounting and analysis:

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