Bastiat’s Bastions

George Will has a new column on Real Clear Politics that is somewhat illustrative of sound economics and also sort of disturbing.  The disturbing part?  Will seems to advocate putting up a new-style Berlin wall along the Mexican-U.S. border.  I sincerely hope I’m not the only person who thinks this is insane.

Will argues that “border control” belongs at the forefront of U.S. immigration policy for the following four reasons:

First, control of borders is an essential attribute of sovereignty.

Second, current conditions along the border mock the rule of law.

Third, large rallies by immigrants, many of them here illegally, protesting more stringent control of immigration reveal that many immigrants have, alas, assimilated: They have acquired the entitlement mentality spawned by America’s welfare state, asserting an entitlement to exemption from the laws of the society they invited themselves into.

Fourth, giving Americans a sense that borders are controlled is a prerequisite for calm consideration of what policy that control should serve.

I’m astounded partly because Will’s columns are usually so logical.  At what point in the history of the U.S. have we ever had this sort of control over our borders?  How does erecting a police-state barbed wire fence/wall restore the rule of U.S. law?  I’ll give Will ground on the entitlement/exemption problem, but couldn’t we just stop the exemptions?  And should our ultimate goal be that Americans have a “sense that borders are controlled,” even if it’s a completely false sense of security?  How many walls will we have to erect?

Will does finally get around to the economics of immigration.  He points out:

Urban immigrant communities, with their support networks, are magnets for immigrants. Good. Investor’s Business Daily reports a new study demonstrating that “over the past 30 years rising immigration led to higher wages for U.S.-born workers. Cities that served as migrant magnets did better than others. Why? Hiring one worker creates wealth with which to hire more workers.”

Sounds a bit like Say’s law – supply creating its own demand….no?

NM

I figure if Dr. Turner can post an article about a game show about money in a bunch of suitcases, I can have my turn about unanimous agreement. Fox has a new show called “Unan1mous” which is a clever variation on a game of coordination that is mentioned when economists discuss “tacit collusion.” The story economists tell is how firms or rival/cooperators can agree to fix high prices without actually communicating with one another, using something called “Schelling points” or sometimes “focal points.” A Schelling point or a “focal point” is some obvious point of agreement that people can come up with even without openly discussing it, named after Thomas Schelling, a noted economist and game theorist.

Here is the “Schelling point” story. Suppose I showed up to class one day with an armed guard and a suitcase that I told everyone contained $1,000,000 (do you think I would walk around with a million bucks without the armed guard?). The people in the class of 20 students could have the million bucks if they unanimously agreed upon the way to split the money and all wrote down the same splitting arrangements. And they have to do this without speaking or communicating with one another. If you notice, this is almost like Fox’s “Unan1mous.” The big difference is that in Fox’s version, all the money goes to one person and it is $1.5 million instead of $1 million.

Well, you should notice that my Schelling point game is easier for people to win than Fox’s version. The “Schelling point” is the obvious splitting arrangement, with each person getting 1/20^th of the pot (or suitcase), a nice $50,000 each. In the Fox version, there is no splitting the money, it all has to go to one person. To make things worse, if just one person leaves their underground bunker voluntarily, the prize falls to $750,000. Last night they had a quick vote, with one guy named “Steve” getting three votes, a couple of women getting two votes each and several with one vote each. They then played some game called “who has the worst secret” to boot one person out (but this was not the voluntary escape that would halve the prize). One other factor, no one can vote for themselves, but if everyone else votes for someone, a person’s own vote doesn’t count against that person.

At the end of the program, they added another twist to make things a bit more interesting. A clock started ticking and with each tick, the sum for the winner started going down. The longer they take to decide, the smaller the prize.

This is very much like the story in an article by one of my former colleagues from Marshall University, Wendell Sweetser and his co-author, Roger Congleton of George Mason. Their 1993 article, “Political Deadlocks and Distributional Information: The Value of the Veil,” in Public Choice was about how a bill in Congress kept getting amended and could not get passed. The problem was that the bill was about how to divide some funds across the states in something called “revenue sharing,” where the federal government gave some tax money back to the states. Congress could not agree on a formula to divide the funds. Every day that Congress could not decide delayed the funds to the states, effectively decreasing the value of the funds.

The factor that kept them from deciding on a funding formula was that the Congressional Budget Office (CBO) could run every formula and tell every Congressman the effect of the formula on their state and on other states. Many Congressmen were holding out for a formula that gave their state more at the expense of other states. Congress actually had too much information, because the knowledge of how the money would affect their state and other states caused deadlock. But with every tick of the clock, the expected prize fell. Congress finally passed the revenue-sharing bill, but only when the CBO came across a formula they could not run because they didn’t yet have all the data to run the formula (the data was going to come out soon, though). When Congressmen didn’t know exactly what the effect on their state or any other state was going to be, they passed the bill.

Do you think that the people on “Unan1mous” can figure out how to hide the outcomes from themselves? Probably not, since the vote has to be for a particular person. The amount that that person wins will also be well known.

Do you think that people will let the prize dwindle down to nothing? Also, probably not. What factors will be involved when they do start picking a winner who is not themselves?

Morris Coats

As someone who is an educator and is very interested in education in general, I find this article fascinating, but all together unsurprising. 

I hope someone at the Department of Education has the brains to record all the statistics for the displaced students.  Following them around will be a natural experiment from which I think researchers can learn a bunch about school quality. 

What of the three reasons given in the article for the poor evacuee performance? 

Sticking students in the wrong grade – that seems problematic, but I am a bit confused.  How is it that a student or parent doesn’t know what grade they are in? 

Trama of students – I don’t want to dismiss this outright, but it sounds a bit flaky to me.  My sense is that third graders are pretty resilient.  If we believe this is the case and students have recovered by next test, then we’ll see a sharp increase in the pass rates of evacuees.  Stay tuned.  Unfortunately for disentangling the causes, the students will have another year of Texas schools under the belts.

Quality of New Orleans Schools – now we’re on to something.  I think ultimately what will be handed down is an indictment of the New Orleans school system.  My guess?  The younger the displaced student, the smaller the gap in the pass rate, controlling for all the other important stuff.  As the students spend more time in New Orleans schools, they get further behind.  There is some evidence for this in the statistics given in the article. 

What I think would be super interesting would be able to find families with different aged children.  Many studies of educational outcomes find that socioeconomic status of parents are a powerful predictor.  The nice thing about using two children in the same family is that they have the same parents.  The difference is, the older of the two would have spent more time in New Orleans schools, while the younger more time in Texas schools. 

–CT

Here’s a link to a new USA Today article that claims tax “refunds” are on the rise. I have the word refunds in quotes because we have to use the term loosely in this context. The refunds, in this case, are those sent to taxpayers who had too much money withheld from their paychecks over the course of a year.

This phenomenon has always struck me as odd. I’ve heard the argument (and it is repeated in the article) that people simply like the idea of “forced saving.” In other words, people deliberately have too much money withheld from their paychecks because they know they will receive a refund after they turn in their tax forms.

Here’s the last paragraph of the article:

But many people love the forced savings and its reward — the fat refund — no matter how much it costs. “Taxes are so complicated people are just happy to come out ahead on April 15 rather than behind,” says Ellen Katz, editor of the Tax Savings Report newsletter.

The problem, though, is that people are not coming out ahead by doing this. They are losing money. Had they set up an automatic withdrawal from their paycheck into their own savings account, they would have been earning interest throughout the year.

I think I’m going to start a program that encourages people to send me a fraction of their paychecks every week. Then, on April 15th, I’ll give them back every cent they let me have. I’m more trustworthy than the IRS.

NM

I received a textbook in the mail today. It was from N. Gregory Mankiw. Dr. Mankiw wanted me to have a copy of his principles of microeconomics textbook, compliments of Dr. Mankiw.

I am not sure it will be a surprise, but college professors don’t pay for textbooks. There are (at least) two ways we can get the freebies (called “desk copies”).

1. We can request a desk copy. Essentially, I would be expressing some interest in adopting a text for a class, and the salesperson assigned to NSU will send me a copy. It would be very unusual for a professor who requested a copy to sell this book, but I had a few friends in grad school who drank many a beer on the book reps.

2. They simply arrive, unsolicited, at our offices. This is the case with Dr. Mankiw’s book. It turns out there is a new edition out, I once previously adopted this book, and it probably makes good marketing sense to send me a copy. Sometimes I get books unsolicited that I have never heard of that I am unlikely to adopt. Importantly, it is my sense is it is *not* that unusual for a professor who had *not* requested a copy of the book to sell the book.

Since the publishing company is not in the business of giving away free stuff for giggles, they must think that giving away desk copies leads to increased adoptions and thus greater demand. I bet they’re right.

However, interfering with their efforts are a legion of entrepenuers called “book buyers”. These folks knock on our doors, often. They offer us cash to part with our desk copies. Surely the value to me of possessing my 14th principles of microeconomics book is quite low, and these book buyers know this. They’d like to buy the books from professors and sell them to students or bookstores, who presumably are willing to pay more. In doing so, they earn a return for their services.

I respect these book buyers, they are making the world a better place – they move a book from a low valued use (sitting on my shelf collecting dust) to a high valued use (hopefully not *just* sitting on a shelf in some dorm room collecting dust).

Surely you could think of a reason why the publishers don’t like these book buyers. Used books and new books are substitutes. The existence of these used books surely reduces the demand for the new books.

Publishers have been dealing with this for some time. It used to be the case that a copy sent to a professor would be labeled Instructor’s Edition. The thought, no doubt was, that bookstores and bookbuyers or students would refuse to buy these books because they were originally complimentary. I’m not sure if you refuse to buy instructor’s copies, but they are out there. It wasn’t a slam dunk.

Finally, back to Dr. Mankiw. On the front cover of the book I received today, it says “Personalized Instructor’s Edition” and more importantly(?) it says “Specifically prepared for Professor Chad Turner, Nicholls State University, Compliments of N. Gregory Mankiw.”

Why would his publisher incur additional costs to print my name and university on the cover?

Do you think it will work?

Anybody want to buy my book?

–CT

While the level of violence escapes me, the protests over the publication of the irreverent cartoons depicting the Prophet Muhammed with a bomb-shaped turban that appeared in a Danish newspaper are understandable. Muslims consider depicting the face of Muhammed, the most important of all their prophets, as blasphemous and are deeply offended by such portrayals, just as many Christians were deeply offended several years ago by the so-called artist who imagined he was being clever by putting a Crucifix in a jar of urine and calling it “P— Christ.” Free expression and a free press are important values, but intentionally insulting a people’s religion is just being unnecessarily rude. While there are ways of dealing with rudeness, firing guns and setting American and European businesses on fire are far beyond the pale.

According to this Associated Press report by Asif Shazad (http://www.lasvegassun.com/sunbin/stories/w-me/2006/feb/14/021401813.html), in Lahore, Pakistan, there were about 15,000 people in a “protest organized by a little-known religious group and an Islamic school.” Shazad goes on to write, “the demonstration was also supported by associations representing local traders.”

Could it be that at least some of the fuel for these fiery protests against the West, especially those against Western businesses, has to do with making it difficult for Western businesses to provide so much competition for local businesses? Businesses everywhere and always have argued for greater competition for the goods that they buy while attempting to erect bigger and bigger barriers to competition, particularly foreign competition, for the goods they sell. Some economists refer to the employment of otherwise productive resources into erecting barriers to keep out competition as “rent seeking.” Rent seeking behavior is some sort of political (peaceful or violent) activity designed to transfer wealth from other people to one’s own group (for a full explanation of “rent seeking,” check out this Wikipedia entry http://en.wikipedia.org/wiki/Rent_seeking). Another way to think about rent seeking is as activities that produce no good or service but instead redistributes income and wealth away from some and to those who get the special treatment. Burning existing foreign businesses makes it less likely that these and other foreign businesses will do business in Pakistan. In this case, the use of the protestors’ time erects an entry barrier or a barrier to competition by raising the costs of business for others, thus protecting the local merchants. Imagine how far local grocers and local pharmacists would go to keep Wal-Mart out of a community.

The usual path to rent seeking and the erection of entry barriers is through the established political process, as can be seen in Bastiat’s satirical “A Petition” (http://www.econlib.org/library/Bastiat/basSoph3.html — this is a must read!). Trade barriers can be built not only through the peaceful, ordinary political process, but also through illegal and violent political processes, such as demonstrations that involve the vandalism of property and the threat to life. The results are the same: increased profits go to some at the expense of losses for others. The biggest losers, though, are usually the consumers who now have to pay higher prices for goods they buy. While the local merchants are not the only ones bankrolling these mass demonstrations, their support of selective vandalism against foreign competitors should come as no surprise.

I do not mean to suggest that all of the protestors were “rent seeking,” but rather that some local merchants were using the cover of the protests to help cut into their competition.

As an aside, I would like to suggest that if these violent demonstrators find blasphemy so distasteful, perhaps they should protest the ultimate blasphemy, the use of Allah’s name to condone murdering innocent individuals in bombings both across the globe and in the Middle East itself.

Morris Coats

In my Econ 211 classes recently, we discussed something that economists call “moral hazard.” If you look up “moral hazard” on the free internet encyclopedia, “Wikipedia” at http://en.wikipedia.org/wiki/Moral_hazard, you will find:

“In law and economics, moral hazard is the name given to the increased risk of problematical (immoral) behavior, and thus a negative outcome (“hazard”), because the person who caused the problem doesn’t suffer the full (or any) consequences, or may actually benefit. Such a concern typically arises in the context of a contract (for example, an insurance policy).”

For instance, a person with fire insurance is more likely to commit arson on his own property than someone who does not have fire insurance. Also, a person with insurance against theft is less likely to guard against theft than someone who does not have insurance against theft. Similarly, those with medical insurance go to the doctor and for more trivial ailments than those who do not.

Well, what would we predict about unemployment insurance? Yep, you guessed it! According to a Governmental Accounting Office report, people who receive unemployment benefits stay away from work longer than those who do not receive such benefits. Essentially, they take longer to find an acceptable job than those who do not get unemployment benefits: those who face a lower cost of being unemployed, “buy” more time being unemployed. The highlights of the study can be found at http://www.gao.gov/highlights/d06341high.pdf while the full version of the testimony is found at http://www.gao.gov/new.items/d06484t.pdf (for the very ambitious, a full version of the report, go to: http://www.gao.gov/new.items/d06341.pdf).

In Europe, such as in France, the unemployment benefits are much more generous than here in the U.S. in both the length of time receiving benefits and the proportion of the benefits relative to former pay. For instance, benefits in France last anywhere from 7 months (for those who have worked or trained for 6 of the previous 22 months) to 42 months (for those 57 to 60 and have worked 27 months within the last 3 years). Unemployment benefits in France range from 75% of one’s previous monthly income for those who had low wages to about 57% for those who were high earners. Of course, the minimum wage in France is over $9 an hour (Euros converted to US Dollars) and that contributes to unemployment as well. What do you think the unemployment rate is like in France relative to that in the U.S.? Take a look at the French unemployment rate at URL: http://www.indexmundi.com/g/g.aspx?c=fr&v=74 and

the historical series of U.S. unemployment rates at the Bureau of Labor Statistics (who, by the way, recently started recruiting here at Nicholls).

When you get to Economics 212, you might want to keep the relationship between unemployment benefit generosity and the unemployment rate in mind.

Morris Coats

In Sunday’s Times Picayune we learn that most people in the New Orleans area did have flood insurance after all. Somebody actually took the time to look at the data and, low and behold, about 67 percent of the homes in New Orleans were covered by flood insurance.

The data also show that LA residents have received more than $12 billion in flood insurance payouts as of February 22nd. This amount is only for flood claims – many people also have received homeowner insurance payouts, but those figures are not in the article.

The politics of all this is what I find so intriguing. As the article points out, just after the storm:

Members of Congress rose up in righteous indignation to scold residents of New Orleans, one of the most vulnerable cities in America, for failing to buy federal flood insurance and then coming hat in hand and asking to be bailed out with federal money.

Well, who was asking for the money?

In those early stages, much of the righteous indignation was in regard to a bill by Louisiana’s own Richard Baker. This was the now famous “Baker Bill,” the one that would provide a home bailout to residents and mortgage companies.

In our February 9th post, Baker’s Moral Hazard, I noted that Baker’s bill had passed the House Financial Services Committee 50-9. I then asked (sort of rhetorically):

Could this be a sign of rent seeking?

So, I’ll put my question differently: Is it more likely that “the residents of LA” were “coming hat in hand and asking to be bailed out with federal money,” or that mortgage company representatives were asking to be bailed out?

The Heritage Foundation, a public policy think tank in Washington D.C., has released a new book called Getting America Right.  The book focuses on the conservative government principles that many feel the Republican party (or, at least, the Bush White House and some members of Congress) has abandoned.

The foreword, written by former Speaker of the House Newt Gingrich, gives a good flavor of what’s in the book.  For example:

…Getting America Right examines every government action or policy through a unique prism of six questions:

• “Is it the government’s business?” Washington, the authors say, should do only those things that cannot be handled better by a state, a community, or an individual.

• “Does this measure promote self-reliance?” Too many government programs punish individual initiative and condemn their clients to “ permanent dependency.”

• “Is it responsible?” Getting America Right suggests several ways to reintroduce responsibility, especially fiscal responsibility, in Washington.

• “Does it make us more prosperous?” The authors argue that because of excessive government regulation, too high taxes, and trade barriers, America is losing the economic freedom that is the wellspring of our national prosperity.

• “Does it make us safer?” Getting America Right insists, and I agree, that there must be a seriousness in Washington about the perils we face at home and abroad and a commitment to the kind of strength, courage, and resolution exhibited by Ronald Reagan in leading us to victory in the cold war.

• “Does it unify us?” Government, say the authors, should serve to bind us together, not to exaggerate our differences and divide us. After all, our national motto is E pluribus unum, not E pluribus pluribus.

The foreword can be downloaded here, and there is a Getting America Right website here.  For anyone interested in the debate within the Republican party, I recommend checking this out.  Heritage came to prominence with Ronald Reagan, one of the last notable Republicans to steadfastly refuse to accept the principle that the federal government should try to do more for individuals.

If there are any “Reagan Republicans” left, they’re likely part of the Republican Study Committee.  For a look at what they are proposing, see this piece by Heritage’s Brian Riedl.

Is there to much hub-bub about the error made by the SAT in scoring exams?

I am not sure I agree with the attitude of this article. It’s a little to flaky, a touch unbalanced, and entirely unsurprising to me.

The basic deal is that there were some high school kids who took the SAT and an error was made scoring their exams. 1% of test takers were affected, the vast majority of who received scores that were within 100 points of their true score.

Here are my least favorite excerpts:

For the last five years, Hamilton College in upstate New York has been one of a growing number of colleges not to require the SAT exam. The test causes too much anxiety, Hamilton concluded, and there’s a risk of missing bright students who don’t test well.

Hmmmn. Is the fact that there is a risk of missing bright students who don’t test well the reason that the admission process involves more than asking students what their SAT score is? That last time I applied to college, I was asked more than one question. Don’t get me wrong – Hamilton College is welcome to choose their own admission standards, but I hardly think that because Hamilton College doesn’t like SAT scores, the SAT should be scrapped. Nor will it be scrapped.

The error affected fewer than 1 percent of test-takers, and shouldn’t affect admissions decisions — though Inzer noted it’s too late for students to apply to schools they might have considered with a higher score.

Now hold on just a minute! First I listen to the folks at Hamilton College – I am supposed to be worried about students who don’t get into college because they don’t test well. Then I have to listen to the folks at Hamilton College – I have to feel bad about students who did not get into a better college because they tested slightly better than they thought they did?

I am I hearing this right? SAT scores don’t matter. Unless their good. Then they matter.

That mistake prompted a previous incarnation of Pearson Educational Management, which also scores the SAT, to pay a $7 million settlement. On college admissions bulletin boards this week, there was talk of lawsuits in response to the SAT gaffe, along with angry comments from students and parents.

We do live in a litigious society. I should have been a lawyer. I am going to go out on a limb and suggest that if these lawsuits are succsessful, the price of taking the SAT will increase. I can’t wait to read the article when people start complaining about the high price of the SAT next year.

Fair Test, Schaeffer’s group, wants more transparency and expansion of the rights of students to challenge their scores on standardized tests. The SAT error was uncovered because at least one student asked for a hand score. But that request costs $50 (refunded if an error is found), and there’s a risk of getting a lower score. The College Board says it gets about 500 such requests per year, most of which reveal no error. (emphasis added).

I know I am hearing this correctly. I am in favor of accurate SAT scores. Unless my SAT score goes down. Then I am in favor of inaccurate SAT scores.

Here, for giggles, I have noted the geographic area of everyone quoted in the article. I think you’ll find it is very representative. We’ve got upstate New York, New Hampshire, Maine, and D.C. Check out the map in the article too. I wonder how closely that map correlates with the 2004 Presidential election.

One more thing I find super interesting. Say you were going to sue – your kid got into say Hamilton College instead of Syracuse. Suppose you win. How do you prove damages? I haven’t met the economist that can precisely tell me the difference between the value of a Syracuse education and a Hamilton College education yet, but I am looking forward to it.

–CT