Bastiat’s Bastions

In great haste, the U.S. House of Representatives passed the new climate change bill that attempts to halt global warming. This bill with nearly 1200 pages of text, 300 pages of which arrived only at 3 a.m. Friday morning, was passed by that evening in a very close vote . You can bet that it includes a lot of pork to buy the votes of some congressmen. Buried text in those 300 pages that were rushed through are sure to contain unpopular provisions used to purchase votes to pass this bill. Logrolling in this way amounts to taking two bills that cannot get a majority on their own and fusing them together so that both get passed.

In addition to the pork in the bill, making it much more costly than needed to meet its goal, we should take a close look how well the bill can be expected to meet any goals of halting or delaying the impact of global warming. We should never forget that global warming is not a national problem, but a global one. What is done to reduce greenhouse gases in one place can be undone elsewhere.

The prevailing international agreement on global climate change, the Kyoto Accord, allows developing nations, particularly India and China, to continue to increase their greenhouse gas emissions as the developed nations reduce their emissions. So as the U.S. decreases its use of coal, China, which has been building many coal-fired generators, will be able to purchase the same coal that would have been used in the U.S. and burn it in their new power plants. The result is cheaper power in China than in the U.S. and more manufacturing there with less here.

There is a new round of talks to work toward a new international agreement on climate change to begin in Copenhagen, where Obama hopes that the new climate change bill can help him lead these talks. The U.S. is one of the few countries not to sign the Kyoto Accord, so Kyoto is likely to be the starting point for any new agreement. There is a provision in the new bill that allows tariffs to be placed on imports from China or other developing country that does not adopt similar regulations to reduce greenhouse gas emissions, but China has had increasing leverage over our policies with their increasing holdings of American debt and American dollars, as well as the weight of many other countries having already agreed to Kyoto. Increased tariffs on Chinese imports merely threaten to repeat the trade war of 1930s that were precipitated by the Smoot-Hawley tariffs imposed by the U.S. that prolonged and deepened the Great Depression. This is something that no one wants to repeat, especially given the existing global depression.

One misleading argument made by the administration is that the new climate change bill will bring about an explosion of new jobs in alternative energy sources. Of course, many jobs in traditional energy areas will be lost. However, to maximize “number of jobs” should never be a social goal. We could easily increase the number of jobs by prohibiting efficient technologies. For instance, after the city of Bordeaux in the mid 1800s suggested that a break in the railroad from Paris to Spain would increase employment by requiring cargo to be unloaded and reloaded there, the 9^th century economist and pamphleteer, Bastiat, facetiously suggested that by replacing the train altogether with what he called “a negative railroad,” so that a long line of people would just hand packages from one to another, would increase employment enormously. Of course, it should then be obvious that either these cargo handlers could only be paid a pittance, or the cost of such transportation would lead to other methods of transporting goods from place to place, such as by donkey and wagon, and no one would be employed with a negative railroad.

Too often we fail to see that people do not want work for work’s sake, but want it for what they can get for their effort. We can all work more without producing any more than before, and then we will have wasted our efforts in unproductive ways. More so-called “green jobs” might be available after this bill, but this does not mean that these jobs will be producing as much as we had been before.  More work and less to show for that work does not sound like progress.

The truth is that energy costs, under this bill, will undoubtedly rise, making it unbearable for a poor person to live in the areas of our country with many heating or many cooling days, as in the Gulf South where I live or in Buffalo, New York. Industries that are heavily dependent on energy are likely to become decrease. Transportation, upon which most trade is based, will fall off and demand in all physical goods will fall. The steel industry, which is already in trouble in the U.S., will face further trouble as using coal becomes almost prohibitive, so steel production is likely to move out of the U.S. In addition, since cheap electric power is necessary for aluminum production from bauxite, another industry will likely leave this country.

Of course, if global warming is the threat we are told, then perhaps such action is necessary to keep other wealth from being destroyed, such as the many buildings, homes, factories and farmland in low-lying areas. What are our alternatives? How effective are the actions that are being proposed and how costly are they likely to be? Bjorn Lomborg of the Copenhagen Consensus asked another question, “what global problems are there that we could do with our limited resources to help the planet and its people?” Lomborg and his associates looked closely at various contenders for global priorities and try to prioritize solutions to the world’s problems.

They examined estimates of the costs and benefits of various world problems and concluded that fighting global warming was not a high priority. The reason is that there is very little that fighting global warming will do. With spending the huge amounts that have been proposed, the climate change models that have been proposed, will at most delay the effects of global warming by six years. His talk at the TED (Technology, Entertainment and Design) Conference explaining the work of the Copenhagen Consensus on setting global priorities is very powerful and worth hearing.  The bottom line is that while global climate change has gotten much of our attention with so much focus on the issue, there is very little we can do to stop it and so much more we can do that will be effective by tackling other issues, such as AIDS prevention and fighting malaria. Perhaps, with so little effect we have on global warming climate change legislation amounts to tilting at windmills.

Passing laws in haste, having them railroaded through, or perhaps “negative railroaded” through, should be cause for suspicion. Still, the “cap and trade” provisions of the bill are worth consideration and are based on ideas economists have suggested at least since the 1970s. Discussion of why capping emissions and then allowing trading of “emissions rights” makes sense will have to wait for the next installment: “Climate Change Legislation: The What and Why of Cap and Trade.”

-MC

There are many words used to describe people who have some strong difficulty that might put them at a disadvantage to others. Yet, I am constantly reminded by a major finding in my discipline, economics, in one of its core concepts called “comparative advantage.” The idea is that any person who can interact with others has a place in the society where they can be productive and can engage in trade that is both beneficial to them and to other members of the society. Even someone who is especially good at everything is in need of trading with others: being able to do all things does not mean that a person can do all things, since we all face only 24 hours in a day and cannot possibly do all things.

Now, I should point out that having a place to produce goods or services that others will demand does not mean that all of us are especially good at any one thing, nor does it mean that all of us can provide others with goods or services of sufficient value that we can support ourselves without help of others. It does mean we all have a place and something we can do to help provide something to others of value. I often mention in classes that there are two paths to comparative advantage: one is to be relatively good at that one thing, and the other is to be relatively bad at everything else.

Still, there are some people who face certain substantial difficulties in life that it is amazing that they excel and even lead their fields in what they have chosen to do. Here are some personal recollections of three people I have come across at one time or another who were so astounding to me that the difficulty in their life was, for a time, invisible to me. Perhaps, I am just not that observant.

Walter Oi

Walter Oi is one of those economists whose articles were required readings in economic theory classes in graduate school. The most important of his theoretical works was an article titled “A Disneyland dilemma: Two-part pricing for a Mickey Mouse Monopoly.” The subject of that paper is something that I teach to my MBA students in managerial economics.
More socially importantly though, his paper in the American Economic Review in 1967, “The Economic Cost of the Draft,”  and his related book, The Costs and Implications of an All-Volunteer Force, were instrumental in bringing an end to the military draft in the nation, showing that the draft was a more costly way to raise a military force than was an all-volunteer force of the same size.

In graduate school at Virginia Tech (better known as VPI back then), on Wednesday evenings and Friday afternoons, we had seminars that all graduate students were expected to attend. These seminars almost always had guest lecturers. One Wednesday night I arrived right after Professor Oi had been introduced. I do not recall the subject of that evening’s lecture. Professor Oi, though of Japanese descent, spoke perfectly clear English, as he had grown up in California (and was one of those Japanese Americans sent to a concentration camp during WWII). While his English was perfectly clear, when he furiously wrote equation after equation on the blackboard I had trouble reading his handwriting on the board, even though my own handwriting is difficult to make out (one reason I am a fan of Powerpoint). I could make out a few lower-case deltas and alphas in the equations and could read some of it, but with great difficulty.

While after about 30 years I do not recall exactly what Professor Oi’s lecture was about, I do recall that it was brilliant, as his work usually was. At the end of his lecture, the moderator thanked him for coming and giving his talk, and Dr. Oi received the usual round of appreciative applause. As he was leaving, I discovered the reason for Dr. Oi’s illegible blackboard handwriting when a German Shepard came around from the other room to Dr. Oi’s side. It was his seeing-eye dog. As it turns out, Oi, who received his Ph.D. from the University of Chicago in 1961could not read ordinary text at all when he began college.

Incidentally, Oi also once served as the Vice-Chair of the President’s Commission on Employment of People with Disabilities. For more on Oi, this Wikipedia entry is rather accurate.

Vernon Smith

Several years after I finished my degree at Virginia Tech, I was at a meeting of the Public Choice Society (devoted to using economic methods and theories to study political, sociological and other non-market activities), which met jointly with the Economic Science Association (devoted to experimental methods) in Tucson. At that time, Vernon Smith, who is credited for beginning the study of experimental economics was at the University of Arizona in Tucson, as was Gordon Tullock, one of my Virginia Tech professors, who was one of the most influential originators of public choice economics. About 10 or so years later, Smith, along with the psychologist, Daniel Kahneman won the Nobel in economics in 1999. While there in Tucson, Vernon Smith, invited me and several other young professors out with him and his graduate students, to a Western bar, which had a country and western band.

Smith was friendly and courteous, but a barroom was obviously not home for him. Some years later, Smith began to talk about his Asberger’s Syndrome, which is a type of Autism. As a result, Smith, unlike many of us, seems to function just fine for long periods of time isolated from others. Actually, Smith’s autism may have worked well for him, allowing him to become a very prolific writer, even for someone who is such an original thinker. (For more on Smith, see
http://en.wikipedia.org/wiki/Vernon_Smith.)

Evelyn Glennies

Some years later, sometimes in the 1990s, I attended the meetings of the Atlantic Economic Society to present one of my papers. One of the more enjoyable aspects of the Atlantic meetings is that they often arrange for attendees to go to some very nice cultural event and at reduced rates. I went to hear the Philadelphia Symphony at one meeting, but I especially recall hearing the National Symphony at the Kennedy Center in Washington at another.

While I still recall the grandeur of the Kennedy Center, mostly I recall the performance. The audience was told that the performance was being recorded for later broadcast on National Public Radio or for Public Television. There were just two pieces on the program, with the second being a rare percussion concerto. The percussion concerto called for the soloist, Dame Evelyn Glennies, to play almost 30 different percussion instruments that were arranged around the stage. Dame Glennies must have been in her mid thirties at the time, and this very beautiful and talented woman came to the stage in a flowing, gauzy white dress that made her appear as a forest faery as she flitted from instrument to instrument about the stage the way a humming bird flies from blossom to blossom. What was out of place, though, in this most formal of musical performances for a soloist with the National Symphony at the Kennedy Center, was that she was barefooted. I thought perhaps this was to make as little noise as possible as she went from drum to marimba to water tympani across the stage. She finished the evening with a brilliant encore with just her and a snare drum on the stage.

The next morning, I had a 7:30 flight out of Reagan National Airport. This flight was one of the few I have been on where they showed an in-flight interview program. Imagine my surprise to see an interview with the very performer featured at the performance the evening before, Evelyn Glennies. I was even more surprised when the interviewer asked Dame Glennies how long she had been completely deaf. Yes, this Scottish musician, and the only solo symphonic percussionist in the world at the time (she still may be for all I know), was completely deaf. Anyone who has ever performed with a musical ensemble, a band, a choir, an orchestra, a trio or quartet, knows that being able to hear the others you are performing with is essential for proper balancing, blending and timing. Then I understood the reason for her bare feet at this performance. Bare feet enabled her to “listen” to the rest of the orchestra through her feet from the stage floor.

You can hear Dame Glennies talk about listening as a deaf person and, more importantly, as a deaf musician at the TED conference. Listening to her over and over (and “listening with my whole body”), I still cannot detect any signs of deafness.

Extraordinary people and the rest of us

Some people are just extraordinary and would be extraordinary almost no matter what difficulty faced them, making their adversities seemingly disappear before their brilliance. Most of us are not so gifted. Each of us does, however, have something to offer, something to make the world better for others, some comparative advantage, even if it is just that one thing we can do. We should all understand and appreciate others for what they do for us, from the musician that thrills us, to the shortstop who amazes us, to the doctor who saves the life of a child, and on to the person who takes away our garbage or cleans restrooms. Everyone has something of value to contribute, and they should be valued and appreciated for making our lives better.

The question posed at the beginning was “what was the right word for those with disabilities?” Under various circumstances, any of those words may be appropriate, but remember that most of us have some area where we fall short, for some of us it is noticeable and for others, our disabilities are as invisible as Professor Oi’s and Dame Glennies’ disabilities were to me. I am constantly reminded of the words of the great American humorist, Will Rogers, who noted “everybody’s ignorant, only on different subjects.” We all fall short somewhere, even the brilliant and the beautiful. The word I tend to prefer is “human.”

-MC

How could we at Bastiat’s Bastions turn down an opportunity to promote an award in journalism called the “Bastiat Prize?” The International Policy Network is the sponsor of this competition.

According to their website, “IPN’s Bastiat Prize for Journalism was inspired by the 19th-century French philosopher and journalist Frédéric Bastiat.

“The prize was developed to encourage and reward writers whose published works promote the institutions of a free society: limited government, rule of law brokered by an independent judiciary, protection of private property, free markets, free speech, and sound science.”

The Bastiat Prize for Journalism provides 3 monetary awards, a first prize of $10,000, a second prize of $4,000 and a third prize of $1,000. In addition, they have begun a new prize this year to recognize the influence of bloggers and the new media, the Bastiat Prize for Online Journalism, which has one winner with a monetary award of $3,000.

The purpose of the prize is certainly consistent with what we try to do here at Bastiat’s Bastions and something we wholeheartedly support, even though we are not sponsoring the prize (if we had that much money to give away here at Bastiat’s Bastions, I am sure it would more likely to go toward the Chad Turner Sports Economics Field Research Fund, the Morris Coats Rent Seekers’ Lobby, and/or the Norbert Michel “Tax Rebates for Norbert Michel” Foundation).

For more information about the awards, take a look at IPN’s press release.

-MC

According to this article in the Washington Post by Lori Montgomery (”Once Considered Unthinkable, U.S. Sales Tax Gets Fresh Look,” Washington Post, 5-27-2009), the Democrats in Washington are looking at the European-style Value-added tax (VAT), a stealth version of the sales tax, to finance the Obama health care plan. In 1993, just a little earlier in Clinton’s first year in office, the VAT was proposed as a way to finance the Clinton health care plan. Back in 1993 I wrote an op-ed article for my local Chamber of Commerce magazine, and that article is still appropriate. Below is the article.

“A Tax at Every Turn,” R. Morris Coats, Thibodaux Chamber of Commerce Magazine, 24(4):10-11 (August, 1993).

With the worst possible political timing, Clinton’s team floated a trial lead ballon on April 15, the idea of using a Value-Added Tax (VAT) to finance Clinton’s health care reform plan. (By the way, it still escapes me how we must come up with an extra $100 billion dollars to adopt health care reform so that we can reduce the federal budget deficit.) Just mentioning the word “Tax” on that dreaded day signifies the administration’s lack of understanding of the plight of America’s taxpayers. Suggesting that we use a Value-Added Tax to finance anything in this country signifies either the administration’s lack of understanding of public finance or its intent to play slight-of-hand tricks with the federal budget.

For now the Clinton administration has abandoned the Value-Added Tax. It is fortunate that they were not politically astute. This is a tax idea that is likely to resurface in this administration in a few years. The administration’s suggestion that we adopt this tax because all our friends are doing it is a reason that never washed in my adolescence. I hope that voters are adult enough not to ever let the Stealth Tax to become law.

In his camaign for president, Obama said over and over, that if elected, taxpayers in the bottom 95% of taxpayers would not see their taxes go up by one cent. The word to stress there, apparently, was “see” because the VAT tax would certainly raise taxes, and raise them the most on the poor, but it is indeed a stealt tax, and taxpayers will never see this coming. If we adopt a sales tax, let us adopt a real sales tax.

-MC

Ok, not that smart, but every once in a while, I wake up and I’m glad I know some economics. As I’ve stated before, when you figure it out, it makes the world make just a bit more sense. You can explain things that others have a tougher time explaining.

For example, read this article, a cornucopia of economics. The topic is products that are “bucking the trend” of the recession.

A partial list of products are mentioned in the article that are doing well during the recession: running shoes, gardening seeds, condoms, cheap wine, mac & cheese, gold coins, tanning products. The article goes on to offer various explanations.

Let’s see what types of explanations are offered up in the article — first from some who don’t quite get the economics — or at least aren’t looking at this behavior through the lens of economics:

“The focus on the family hearth is something that has happened in nearly every recession. It’s, `How can I have more fun at home?’” said Paco Underhill, whose company, Envirosell, monitors the behavior of shoppers and sellers across the U.S. and in other countries.

He then continues…

“People are much more focused on their homes and their immediate happiness and they’re buying things that they can use themselves – seeds, fishing equipment. Lipstick and chocolate are small rewards that make you feel better.”

The author of the article chimes in with:

“Recession shoppers also are drawn to items that make them feel safe, both personally and financially.”

Ok, well and good, but here is a better way — a 30 second explanation of a simple model that explains it better — Gary Becker’s time allocation model.

It the model, there are three uses of time. Working, household production, and consumption.

Work is to earn money to buy goods – we call it market time because it is time spent in the labor market. If we want more goods, we need to work more. Cooking, cleaning, doing laundry is called household production time. And finally, the time we spend enjoying stuff is consumption time.

A key insight is that most enjoyment generating activities involve the combination of all three types of time and there are different ways to get the same end “commodity”.

For example, I enjoy eating lasagna. Consider making some lasagna from scratch. You’ll buy some ingredients (which involved some market time to pay for them), cook it up (household prodution time), and then eat the meal (consumption time.) Alternatively, you can buy Stouffer’s lasagna in box. Likely more market time (higher price), but less household production time (just defrost), and a comparable amount of consumption time.

Likewise, you can get a nicely pressed dress shirt by sending to the cleaners (relatively more market time) or wash and iron it yourself (relatively more household production time.)

We haven’t explained what is going on with the recession, but here we go.

During recessions, people often observe a decrease in their wage — sometimes people lose their jobs a very big reduction in their wage. In Becker’s model, there are two things that happen when people’s wages decrease.

First, the value of market time declines. Basically, folks will not earn as much per hour. This makes people substitute away from market time (work less) and engage in more household production.

Second, people change the types of “goods” they enjoy. We say that people switch from “goods-intensive commodities” to “time-intensive commodities”. A time-intensive commodity involves relatively few goods and relatively more consumption time. An example would be reading a novel. It takes up a lot of time in reading, but you don’t have to work much to get the goods (the novel). On the other hand, A goods-intensive commodity involves relative more goods, and relatively little consumption time. An example there would be a roller coaster. It doesn’t take very long (let’s imagine short lines), but you do have to pay a good amount for the ticket (and hence requires a fair amount of market time.)

The article talking about eating-in more and gardening are perfect examples of the first type of change. What used to be achieved through market time (purchasing goods) is now “produced” at home (household production time.)

Examples of the second?

Running? Sounds time-intensive to me. One pair of shoes (a bit of market time) and hours of enjoyment. Not surprising. Consider the alternative explanation:

Those on the go are not shying away from footing the bill for sturdy running shoes. Sales increased 2 percent in 2008, said Tom Doyle at the National Sporting Goods Association in Mount Prospect, Ill. “Runners aren’t going to hurt themselves to save a few bucks,” he said. Likewise, sales of bicycle helmets are up as parents continue to spend money to protect youngsters, he said.

I like mine better. The same goes for kids on bicycles.

Sex? I can’t speak for everyone, but I think for most people, this is a time-intensive activity. There is some market time involved (see the article for what is happening to condom sales), but there shouldn’t be that much market time involved (unless you are David Vitter?).

Please fellows (and ladies), no comments on dinner tabs and jewelry store receipts as examples of my underestimating how goods-intensive sex is for even regular folks.

Two last quotes from the article — I think they get it…

There’s a general tendency to trade down, according to Leo J. Shapiro & Associates, a consulting firm in Chicago. That means eating dinner at the kitchen table instead of restaurants, … and shopping at do-it-yourself auto parts stores.

“If you’re used to eating out, maybe you’re now buying a high-end steak at the supermarket,” said Bill Patterson, a senior analyst in Chicago with Mintel International, which supplies consumer, product and media intelligence.

Gee whiz, those ideas sound familiar I’d rather work for Leo J. Shapiro or Mintel than Envirosell…

Maybe next post I’ll pull out some macro for gold coins and some micro to explain why inferior goods aren’t really about being inferior (chocolate sales?). On that note, off to eat my left-over mac & cheese — but I assure you that has nothing to do with the recession — I just like my spirals.

–CT

Immigration is a contentious topic. Rather than add to the contention, I wish to clarify a poor economic argument that is frequently used in immigration policy debate. Many people support immigration because, “Americans aren’t willing to do the jobs that immigrants are willing to do.” This statement is potentially erroneous in that it confuses the notion of quantity of labor supplied with that of labor supply. Whereas quantity of labor supplied is the amount of labor a person or group provides at a given wage, labor supply is a schedule specifying a person or group’s quantity of labor provided at each possible wage level.

The statement quoted above stems from an observation—that some U.S. jobs are held almost exclusively by immigrant workers. From this observation, a fallacious conclusion—that domestic workers would not work in such jobs at any wage level—is drawn. To say that a group’s quantity of labor supplied is zero for a given job and wage is to say nothing about the group’s behavior at other wage levels. The graph below represents a possible depiction of a labor market with and without immigrant labor.

The graph features two supply curves, one showing quantity of labor supplied by citizens at each possible wage and another showing quantity of labor supplied by the combination of citizens and immigrants at each possible wage. In the absence of immigration, citizens would earn a wage of w_zero an hour and work q_zero hours in the featured labor market. However, if immigrants enter the country and work in the same market, the supply of labor shifts right (quantity of labor supplied increases at any given wage). In equilibrium, workers in this market now earn w_one per hour and work q_one hours. However, by looking along the labor supply curve of citizens, we find that citizens supply zero hours of labor to this market at a wage of w_one . Given their work and non-work alternatives, citizens opt out of the type of labor depicted in the presence of immigration (and its wage-depressing effect). However, citizens will rejoin this workforce if the wage rises above w_one .  Economist Chad Turner points out that this inducement of domestic labor at the higher wage will not obtain if the domestic labor supply curve is sufficiently leftward-shifted.   

Though immigrant laborers do benefit other members of our economy (e.g., consumers and producers), jobs would not go undone without them. Rather, in the absence of immigrant laborers, relevant market wages would move upward and induce the participation of citizens.

-SS

There are two types of people in this world—those who would root for the Los Angeles Lakers and those who would root for the Los Angeles Clippers. It doesn’t matter where you live, if you’ve heard of either of these organizations, or if you’ve even heard of basketball. These two organizations are as class symbolic as East Egg and West Egg in The Great Gatsby. The Lakers have trophies and Hollywood fanfare. The Clippers have cheap tickets and cheaper tickets. In that it was largely created by the people of Los Angeles, this dichotomous sports scene is a reflection of our cultural values.

In reality, the Lakers are a collection of really good basketball players, and the Clippers are a collection of really good basketball players. Each team plays in the same building of the same city. In other words, the two teams are substantially quite similar. However, substance means little to status-seeking humans. Somewhere along the line, the Lakers became a symbol for status. They won prolifically with Elgin Baylor and Jerry West in the 1960s and later with Kareem Abdul Jabbar, Magic Johnson, and James Worthy. All this winning begat high-powered fans, and high-powered fans begat more high-powered fans. If you wanted to be considered somebody in L.A., it became a pretty good idea to be seen at a Lakers game, and the closer to the sweat the better. In economics, we call sitting courtside at Lakers games a likely “status signal” in that such an action is typically less about seeing and more about being seen. Courtside Lakers fans signal that they know how to choose and break into a high-powered group of individuals. For a signal to be effective, it must separate the individual from others in a desired way. Therefore, a signal cannot be accessible to all individuals. Courtside Lakers tickets are anything but accessible. At around $90, average ticket prices were 57 percent higher for the Lakers than for the Clippers in 2007-2008, and this number gravely underestimates the proportional difference for quality seats. Such a substantial price difference existed despite the fact that the Clippers garnered more combined victories than the Lakers in the three seasons prior to 2007-2008. It wasn’t the basketball game but the status game that drove up demand for (ticket prices of) home Lakers games.

Despite all of this focus on the Lakers, the Clippers do exist. I saw them play on television once. Moreover, the Clippers have people who attend their games. One might call such individuals basketball fans, but one wouldn’t be entirely correct. It seems that Clippers fans are a mix of basketball fans and fans of counter-culture. Counter-culturalists get a perverse thrill out of paddling upstream in the river of society. They like to do things so completely opposite of societal norms as to give the rest of society the proverbial middle finger. Counter-culturalists engage in what economists might call, “countersignaling.” Whereas attending a Lakers game typically signals that a person has status, attending a Clippers game might countersignal that a person wants to see some quality basketball and could care less about such associations or labels. This does not imply that a famous person could not be a Clippers fan. However, it does indicate that a famous person who decides to root for the Clippers places less value upon being a visible part of an established status club. Billy Crystal is a classic example of the countersignaling celebrity. Crystal roots for the New York Mets in baseball and the Clippers in basketball (In terms of status, the Mets are to the Yankees as the Clippers are to the Lakers). Crystal is proof that to have status is not necessarily to engage in superficial status games.

The distinction between the Lakers fan and the Clippers fan is as much about ideology as it is about position. One might take fan countersignaling as a form of rebellion from the oppression of status contest. It is a rejection of the notion that we should, or even can, love something selfishly.

-SS

(and everyone else who has rooted for the other set of really tall guys in L.A.)

As we should all know by now, there is an outbreak of swine flu spreading around the world. While this strain of flu has proved rather deadly in Mexico, it has not yet been so fatal in its U.S. cases. While most of the response in the U.S. and the rest of the world has been cautious, some voices have been on the panic end of the scale. Vice President Joe Biden, always ready to open his mouth wide enough to fit his foot, told the press that he advises his family to avoid air travel, and any other mass transportation mode, such as trains and buses (see the USA Today’s “Today in the Sky” air travel blog by Ben Mutzabaugh).

The problem is that many people will take Biden’s advice. But shouldn’t that reduce the spread of swine flu? Maybe. But there is something else that people need to keep in mind that may not occur to them. By thinking that air travel is now more costly, in terms of one’s health and the risk of getting the flu, this increase in the non-monetary cost flying will reduce the amount of miles traveled by plane and will surely increase the miles traveled by automobile if there is a significant positive cross-elasticity of demand between air and auto travel. Shane Sanders, Assistant Professor of Economics at Nicholls, had a paper published recently in the Journal of Economic Education that should help us think about value of Biden’s advice.

In his paper with Dennis Weisman and Dong Li, Sanders discusses the substantial cross-price elasticity of airline and automobile travel, which suggests that higher prices for airline travel induces people to substitute auto for air transportation. Of course, health fears, as they raise the perceived cost of air travel, should also induce substitution into auto travel.

The problem is that auto transportation is not as safe as air travel, and it is not even close. According to the Department of Transportation’s statistics (shown and cited in the Sanders, Weisman and Li paper), for every 100 million air passenger miles traveled, there are .3 fatalities, while for every 100 million auto passenger miles traveled, there are .97 fatalities, so passenger mile for passenger mile traveled , auto transportation is over 32 times as deadly.

So, without realizing the relative safety of air and auto transportation, when people hear that Vice President Biden is suggesting to his own family that they avoid air travel, some people will switch from air travel where the chance of a fatality is very small, even after factoring in the very minute chance of getting swine flu, and passing it on to family members. In this case, the number of fatalities, including swine flu, is likely to increase.

-MC

I am doing a little research project estimating the elasticity of demand for cigarettes. This is to help lawmakers see the effects of increasing the state tax rate on cigarettes.  In doing this, I have estimated the effects of state cigarette tax rates on state cigarette prices.  After controlling for several other factors, I have estimated that, holding these other factors constant (controlling for their variation), that for every 1-cent increase in state cigarette tax rates, the price in the state goes up by more than 1 cent, by about 1.12 cents.  The correlation is extremely strong, and I am confident the rate of increase in prices is no smaller than 1.09 for every 1 cent increase in state tax rates. 

I am sure that this is correct in terms of both my statistical estimation AND economic theory, though it does not exactly mesh with the somewhat simpler theory we saw in chapter 8.  So my first question is why is this counter to the theory in the first part of chapter 8?  For the first correct answer to this question posted here on the blog, I will give double the points I usually give. 

Now for the second question: “What is the reason for this suprising result?”  Hint: the answer has to do with what has been termed the “3rd law of demand.” For the first correct answer to this question, I will give FOUR times the usual blog comment points. Be the first on your block to win!

-MC

As I discuss in my Health Economics class, hospitals are, in most places, the largest employers of nurses.  With the nursing profession still dominated by women, often as second earners in their household, nurses tend to be less mobile than many other professionals.  In addition, in many communities there are few hospitals within commuting distance, giving those hospitals in commutable distance what economists term as a “monopsonistic” position in wage determination.

A monopoly is a market type characterized by having only one seller or by a very dominant seller. A market that is monopsonistic, or simply a “monopsony,” on the other hand, is a type with just one buyer.  The “mon” (from Ancient Greek “monos”) part of the word means “single,” while the “opsony”  (from Ancient Greek “opsnia”) part means “purchase,” so “monopsony” means a single-purchaser market.

When a market has a single buyer, that buyer has an extraordinary amount of bargaining power and can strongly influence the market price.  To get more nurses, better pay and/or better benefits must be promised or the hospital will be unable to attract more people to be nurses at their hospital.  That is, the supply curve of nurses is upward sloping, so if a hospital wants more nurses, they would have to increase nurses’ pay, new and incumbent nurses alike, or incumbent nurses may just quit to be rehired later at the higher pay.  Or they may just make things difficult for the hospital administration that pays new nurses more than loyal workers.

Let’s look at a simple numerical example.  Suppose that a hospital could attract and maintain a workforce of 500 nurses by paying them each $50,000 a year, for a labor cost of $25 million a year.  Now suppose in order to increase this workforce up to 600, pay would have to go up to $60,000 a year to attract the next 100 nurses, often from greater distances.  In this case, labor costs increase from $25 million to $36 million, or 44% more in labor costs for a 20% larger force.  This is because both the additional 100 nurses had to be paid more, but so did the 500 incumbent nurses.

How can the higher pay be limited to just those new nurses without paying more to the existing nurses?  This is where nursing contractors come in.  The contractors work for someone else and usually commute great distances.    The pay is higher for the contract nurses and the hospital’s nurses do not revolt.  In this case, the labor costs are the $25 million for the hospital’s 500 nurses and another $6 million for the contract nurses, pushing costs up to only $31 million instead of $36 million, or by 24%, not much more than the increase in nurses.

This past Saturday I, along with some colleagues and a student of mine from Nicholls, attended the Louisiana Political Science Association meeting at the Grambling State campus.  The meeting was helpful and very cordial, even though many of us strongly disagreed with one another.

There was a panel of undergraduate papers with two papers from Centenary students (my student and I presented a joint paper with Dr. Sanders in another session).  There was another panel of graduate student papers.  Both of these undergraduate papers were very interesting.  Allison Saylor an undergraduate student at Centenary had a nicely done paper titled ““The Bush Administration, Private Military Contractors, and the War on Terrorism,” in which she examined the substantial growth in the use of military contractors in the war in Iraq.  She posed a very useful question, “why would the war in Iraq require so many more contractors than we saw in previous wars?” (Quote marks are used here for my interpretation of her paper rather than a quote from her.)

During the discussion period after her presentation, I think the presenters, discussant, session chair and the audience arrived at a reason for this large expansion of contractors.  The last protracted war that the U.S. was involved in was Vietnam, and soldiers could be drafted then.  Any “desired” expansion (by the Administration) was met by increases in the number drafted. To expand under a voluntary force, we need to either attract more soldiers by increasing their benefits or by outsourcing non-combat roles to civilians.

The latter solution, outsourcing to private contractors, is likely to be less costly for two reasons.  Many of the non-combat requirements of a military force are things that many private sector companies are already doing and things where they have particular expertise, such as warehousing and goods distribution, food services, accounting services and construction.  Soldiers are no better at doing these activities and are probably worse than trained civilians at these sorts of  activities.  While this was also true during earlier wars, these activities in those days could be manned with soldiers who were drafted and forced to work below their opportunity cost or their voluntary wage rate.

The other reason for outsourcing certain tasks often performed by soldiers is exactly analogous to the nursing monopsony story told above.  The market for warriors is a monopsony market with the Department of Defense just about the only buyer in the market.

How can the higher pay be limited to just those new soldiers without paying more to the existing soldiers?  The contractors fill certain non-combat roles, while the military personnel perform the combat roles.    The pay is higher for the contractors, and the combat troops do not revolt.

While it might have been the case that certain contractors got sweetheart deals, no-bid contracts or cost-plus contracts, it is likely that troop increases with a voluntary force may have to increase pay to all rather substantially to get only a few more warriors.

I should point out that the return to the draft is not a solution to this high incremental cost of troop expansion, because the real opportunity cost of a draft is that some people are forced to do military jobs, often giving up positions where they are far more valuable to the country than as soldiers.  This social cost of the draft is hidden from presidents, congressmen, taxpayers and voters and they often do not consider such costs in their decisions.

Finally,it is almost ironic that those who kill and those who heal face the same sort of labor market issues, and those who hire them face similar incentives to price or wage discriminate.

-MC