Think Economically

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Maximum understanding, minimum average total cost.

The *real* real problem with financial regulatory reform: closing our model

“How come good people do bad things?”

So people are thinking and talking about this and there are two glaring problems in the discussion. First, “the structure of regulation” will never be done, complete, finished–it’s a game we make up as we go along. Second, the question “How come good people do bad things?” is the wrong question.

Jim Surowiecki argues that regulators need to focus more on “preventing malfeasance from happening.” John Kay argues that we need “a structure of regulation” that fixes perverse incentives and makes people–or financial institutions–more trustworthy.

Felix Salmon shoots holes in both of them, basically saying “yeah, good luck with that.” Which I’d like to reinterpret: for real, good luck.

The answer: people do things, and smart people do creative things, and there is no fix–there is managing society, and if everyone does what people do, it’ll never end. There is no regulation to solve it–but we have to put up a dam and pile up the levees or the torrent of human intention will go places we don’t want it.

Tunnel under the embankment - geograph.org.uk - 1154526

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Training your elephant: how to make yourself do what you already promised yourself you would do.

Some of my students have asked me for advice on how to achieve, and as someone who almost failed out of college, then went on to finish a Ph.D., I suppose I’m in a position to provide some advice on the matter. I tried to boil it down for one of them, and the three most important things that I came to were:

  1. Making active decisions about how you spend your time.
  2. Setting long-term goals.
  3. Driving your discount rate down.
These are really important to me. I still feel like the person who almost ruined his life, and I think of the disciplined exercise of these as a bulwark against the loss of everything I hold dear. It’s been a decade since I really behaved badly, but it’s an ever-present fear.

 

The third one is the least straight-forward, and the first one is the hardest to do in practice, and I was thinking about what stands in the way. Time inconsistency of preferences is closely related to the interface between spending time wisely and your discount rate, and it can throw the whole thing off, though, and so I wanted to talk a little about it.

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Art, baseball, story and self-reference: post-modernism can’t make you more naked than naked.

So I got into a discussion this weekend about movies and television shows and books, and we were throwing stories around, by which I mean naming and recommending and panning narratives by title, and there wasn’t that much more to it, except that when you’re dropping the references to which the referents are hundreds or thousands of pages or dozens of hours as the final product of thousands of person-hours of writing and directing and costumery and millions of dollars or blood and tears invested, then the mind can reel a bit when you try to wrap your head around it.

by Zaphod

On the face of it, though, it was just a bunch of people talking about the books and movies and TV shows that they like. The idea that one could be entertained or enlightened by the exchange of references seems to be a source of some angst. It need not be a source of guilt. Postmodernism isn’t really going to destroy anything worth caring deeply about after all, except maybe its adherents’ career prospects, eventually. Read the rest of this entry »

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Mending walls and reading minds: explicating poetry and finding real human connection with fictional characters

So, as the result of a Facebook conversation that is totally tangential, I just reread and explicated Frost’s “Mending Wall.” I forgot how much I missed poetry. And prose, for that matter, but really just dialogue and subtext and the myriad gaps that are open to interpretation in any scene. It set my mind spinning and I wanted to get some of it down. What I got? Explication, David Foster Wallace, social anxiety, mindblindness, Borat’s cousin, and the flip side of existential loneliness.

Kopaniec Stone Wall

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Minivans, booyah. Search costs, the internets, weak ties, and our used car purchasing experience.

We just bought a used minivan, and it was by far the best car purchasing experience of my life. There was so much to it, so many improvements in the process as a result of technology, that the overall result was really stunning. There is so much really excellent information out there. Stronger “weak ties” lead to broader access to private sellers, while the power of search, through sites like autotrader.com, provides price information across dealerships. It felt like we knew what we were doing.

We ended up with a nice minivan that looks pretty much like the following. This is not ours, but it looks like ours, which is why we need to put a sticker on its feet so we can tell the difference. Check out this sweet ride:Image

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Watching the odds change: Baseball Prospectus’s’s Playoff Odds and the 2012 New York Mets

So, last night, R.A. Dickey was knocked out of his astral plane and the world is a worse place for it (stupid Yankees). The Mets took 1 of 3 against the Yankees, mostly because their bullpen is terrible. I’d link to a facts, but when your bullpen combines to lose 17 games before July, I lose the will to finish sentences.

But I don’t like bad news; I like good news, because of confirmation bias and a slew of other behavioral problems I have. And so, I’d like to draw your attention to Baseball Prospectus’ Playoff Odds Report. Read the rest of this entry »

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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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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.).

Enjoy!

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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: http://1.usa.gov/AnqXTZ

 

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