Monday, March 31, 2008

Push Presents: Irrationality?

There is apparently a disturbing new trend according to the Telegraph, namely push presents. These are presents a mother is expecting for the delivery of a child, and these presents are expected from the father. There was a time where the gift of life and flowers would do, and the latter served a purpose: beautifying a hospital room. But this new trend is not about flowers, but expensive jewelry. And I do not understand the logic of it.

A child is usually a big financial liability: feeding, clothing, educating, entertaining, providing shelter and security do not come cheap. For a rationally thinking person, this is a large financial hit. This is why governments typically support families with children in various ways. Then why add to the financial burden with jewelry requirements? It is not like those shiny rocks are any good investment. Just try selling a diamond. In particular, why would a mother, who cares very much about her child, jeopardize the future of said child with unwise financial decisions?

The only way I can think of rationalizing this is the following. Say the mother is worried the father would walk away. Then any financial guarantee is good, and shiny rocks have some value, can be immediately coaxed from the father and are considered in many jurisdictions as unreturnable in case of break-up. Weighing this against the financial gain of the couple of not purchasing a diamond, a gain that is mostly in the future, calculate the probability of a break-up, and it may all make sense. Sorry to take the romance of the diamonds...

PS: Sorry, no post last Friday, I was wasting my time on Uncyclopedia.

Thursday, March 27, 2008

Where to go for graduate school

It is about the time now where student have to decide where to go for graduate school among the programs that accepted them. Let me add my grain of salt in this decision, assuming one is interested in pursuing a PhD in Economics.

Financial considerations are obviously an important matter, but academic ones are more important. A fellowship with no teaching assistant obligations is not necessarily better. Indeed, many graduates will ultimately be hired to teach, and teaching experience, especially an extensive one, is valued by many schools when it comes to hiring. We are obviously not talking about the top research universities, but while they are very visible and the dream job of many, they constitute only a minority of the market. So be realistic, most jobs are in teaching colleges.

Going for the top program can also have drawbacks: it is more difficult to pass the exams, classes are larger, and professors are less accessible than in the second tier programs. Second tier programs can still provide a world-class education. The top graduates from the top programs are those everyone talks about, but those coming after them are not getting top jobs just because they come from a prestigious program. While this certainly opens doors, especially in business schools and some foreign universities, gone are the days were any candidate from Harvard University was better than any candidate from, say, the University of Oklahoma. Many hiring departments are looking arbitrage opportunities (excellent candidates from lower ranked programs), including looking at job candidates from outside the US, the UK and Canada. So do not focus just on top US schools.

Geographic preferences should not be important at all. Studying for a PhD is not tourism, and an attractive place can be a distraction. Possibly the only exception is Washington, with many internship opportunities on location.

Finally, check that the professors you are interested in working are actually still going to be there once you arrive. Turnover is quite high, especially in the top programs.

Wednesday, March 26, 2008

The (exhorbitant) cost of textbooks

To those teaching and requiring your students to use a textbook: do you know what that textbook costs? Many do not, and thus tell students to buy a book without proper information. This is much like in the health industry, where physicians prescribe drugs without knowing their cost. No wonder publishers exploit students like pharmaceutical exploit their captive clientele.

Ted Bergstrom, who is already a driving force in reducing the cost of journals, now has teamed up with Maxim Massenkoff and Martin Osborne and created an informative website, PoET, that gives the information that publishers are reluctant to give faculty: the price of their textbooks. One can also leave a review of a textbook, and thus make the adoption of a textbook a more informed matter.

To be honest, I would prefer teaching without a textbook. But students nowadays require one and complain when I stray away from it. I tell them to buy the one that is the closest to what I teach. And I do not care which edition it is. Now I will also put the price in my optimization.

Tuesday, March 25, 2008

Carbon credits for airlines

The treaty that guides trans-atlantic flights is up for renegotiation between the European Union and the United States. While the talks are supposed to start this Spring, no movement is expected until next year, that is when a new administration will be in place in Washington. The reasons are pretty clear.

The European want to negotiate on three main areas: 1) the excessive security requirements (passenger data, boarding checks) required for flights to the United States, 2) possible foreign ownership of US airlines, 3) carbon credit for airlines. This post is about the last point.

The EU is implementing a carbon emissions trading scheme for Europe-based airlines. The idea is basically to have airlines buy carbon offsets, thus internalizing the pollution they generate. Obviously, participation in such a scheme needs to be mandatory in order to prevent a free-rider problem. The EU wants in addition to force flights in and out of Europe by non-European airlines to participate in that scheme as well. The problem is that the U.S. is not letting American airlines participate. They would thus have an obvious price advantage (and be free-riding). The Europeans can threaten to withdraw landing rights, and there is no doubt the Americans would retaliate doing the same.

Internalizing externalities makes good sense in general, much more so that imposing emission limits, as we discussed previously. This issue should really have been tackled globally, this being a global market, by the International Civil Aviation Organization or by the industry itself, the International Air Transport Association, as a voluntary self-regulation scheme. Now it seems we have to look forward to a disrupting stand-off, unless the U.S. moves, which may happen with a new administration.

And it is ironic that the United States, which typically believe in market forces and introduced pollution right markets, are the ones opposing a market-based initiative.

Monday, March 24, 2008


Greg Mankiw has a lot of great posts on his blog, but this time I have to strongly disagree with him. In reaction to a post from Paul Krugman, he argues that the Fed was responsible of the Great Depression because of its deflationary policy. Given that the current policy is inflationary, we should have nothing to worry about. He quotes his intermediate macro textbook to support this.

I agree with the assessment that we are not facing a depression. I disagree with the assertion that the Fed is responsible for the great one. We all agree that money is neutral in the long run, right? When is the long run? Could we truly believe that the impact of the deflationary policy at the very start of the depression would have persisted all through the depression? Never would have the impact of monetary policy have been so persistent. And what about the fact that the monetary policy reverted to an inflationary one after 1933? Would that suddenly have no impact?

Research support for my claims: Cole, Ohanian and Leung show that there is no systematic relationship between money and output during the great depression. Cole and Ohanian show that it was the New Deal that prolonged the Great Depression. Cole and Ohanian, again, show that the 1929-1932 deflation was as deep as the 1920-1922 one (20%), but lead to a decrease of GDP of 36% compared to 4% in the earlier episode.

Friday, March 21, 2008

Another good free good: RePEc

To conclude this week's tour of free goods and how they can be good even though they are free, let us look at our own profession. RePEc is a free bibliographic database that is free for all participants: authors, publishers, readers. Interestingly, it does not even rely on a grant, as its budget indicates.

Somehow, RePEc manages to find the resources from various sponsors providing hardware, hosting and bandwidth, as well as numerous volunteers. Incentives seem to be aligned for everyone to want to provide help for RePEc. Obviously, publishers want to make sure their material is listed, thus they provide records for free. Various volunteers seem to participate either out of pride of doing something good for the community, or to satisfy some (public) service requirement their job may have. And end-users are just happy to find a free service that is better than the pay services out there (Econlit and SSRN come to mind).

For non-economists, there is always Google Scholar, but for Economists, RePEc is unrivaled.

Thursday, March 20, 2008

Free Newspapers

The marginal cost of printing a newspaper is minimal, yet the fix cost is huge. The marginal revenue of a newspaper is positive, both from sales and from ads. Thus, a newspaper needs a diffusion as large as possible. Now how could you maximize diffusion? One way is to give the newspaper for free. You lose the sales revenue, but you gain ad revenue, and retailing costs are minimized.

This is exactly what Metro does, and with tremendous success, being now the most disseminated newspaper in the world. The idea was born in 1995 in Stockholm: print a newspaper, distribute for free in public transportation stations, attract ads, etc. Now readership is at 23 million a day. There are even competing free newspapers in some cities.

The same principle applies to newspapers on the Internet, where the marginal cost is even smaller, as well as the fix cost. Now, I wonder why some newspapers still insist on charging a price for their product. For sure, a positive price allows some discrimination of readers. The New York Times would be very different if it were free. But it is the New York Posts of this world that should be free, even in paper form.

Wednesday, March 19, 2008

Free, and yet better than costly goods: open source software

Open source software does not follow basic economic principles: people contribute sometimes considerable time and effort to the development of a product and then agree to provide it for free to anyone who wants it. In some cases, employers even encourage their workers to participate in such endeavors. Why?

Participation dynamics in open source are extremely complex. David and Rullani study the participation of over 200,000 individuals (!) on SourceForge and argue that once critical mass is obtained, people want to help for the common good. Spiegel argues that participation allows to signal about one's qualities, and thus be hired on other projects. Bitzer, Schrettl and Schröder argue that there can be intrinsic motives for participation beyond signaling. Another aspect that drives participation is the knowledge that your contribution will remain in the public domain.

The amazing thing in open source is that the delivered product is often superior to commercial ones. The prime example in Linux, which easily surpasses market dominator Windows in security, efficiency, functionality, and, of course, price. Windows users: with Linux, you do not need anti-virus software clogging your memory, no need to defragment your hard drive, no need to reboot for minute updates, no worries about the computer crashing, and no need to buy any software. Speaking of software, products like LaTeX (already discussed here), emacs, apache, and MySQL dominate corresponding commercial products. Beyond the software industry, open source collaborations on sites like Gutenberg, Wikipedia, or Youtube that show that there is a place for the public good.

Tuesday, March 18, 2008

Free Rice and Free Education

Second in the series this week about free goods: how to enrich your vocabulary and provide food relief, both for free. FreeRice provides a vocabulary test, and for each answered questions provides some grains of rice to needy people.

How can this be pulled off? After all the website operators need to maintain a server, databank and buy bandwidth and rice. It is all financed by discreet ads at the bottom. So discreet in fact that I did not notice them until I saw them mentioned in the site's FAQ. Cost are relatively low, however: 1000 grains of rice cost in the order of one cent (wholesale), and the marginal cost of server traffic is close to zero.

This site has become a favorite in many schools, and these few grains a word certainly add up. As of today, the total is closing in on 25 billion grains, and their cost still add up to a quarter million dollars.

Monday, March 17, 2008


This week, I will be featuring a few examples of goods that are free, yet of value and willingly offered by those who provide them. Basic economic principles seem to imply that something that is free cannot be better that something with a positive price. It turns out that there are exceptions to this rule.

Radio is a good you can consume for free over the airwaves. It is financed by advertisements or by taxes. I some countries, one needs to pay a fee to listen to radio, but the fee does not depend on usage. One can however argue that ads are annoying and thus there is still a non-monetary cost to listening to commercial radio. And you have a rather limited choice regarding programming. This is partly what XM-Radio and Sirius exploit by offering numerous specialized ad-free radio stations for a subscription fee.

Then, there is internet radio, of which Pandora is the flagship. Is this particular case, the radio station is individualized, as listeners can stipulate what they like or dislike, and something akin to expert systems then suggests pieces that are most likely to fit your tastes (with a little randomness thrown in, to explore). With a little bit of training, stations fit very well to personal tastes and allows someone to find new artists from which you want to buy titles: descriptions and links for purchases are provided.

Pandora is free, so how is it financed? From ads you do not need to see (minimize the window...) and from sponsors that offer their own radio stations. Thanks to its algorithm, it is revolutionizing the way you find new music to listen to, as you do not have to rely on what airwave radio stations are deeming appropriate. And many artists are willing to put their music on Pandora for free, as it gives them a chance to be discovered. They may even be willing to pay to be listed.

This type of radio is vastly superior to anything radio could offer so far. Yet it is free. And artists are excited about it.

Friday, March 14, 2008

Global imbalances and sliding dollar, is the US doomed?

Now that the US dollar has slipped to new lows (US$2.00 a £, US$1.50 a €, US$1.00 a C$, US$0.01 a ¥, US$1.00 a Sfr), now that the US has been dissaving for several years and does not seem to reverse course soon, one can be worried was lies in the future. But there is hope.

Take the research of Pierre-Olivier Gourinchas and Hélène Rey, who show that the US is helped in two ways: 1) by its particular position within the international financial system, which allows it to benefit from a significant interest premium, 2) by the structure of US debts and credits, which allow to earn net interest despite having net debt (NBER 11563). They claim also that 31% of necessary external adjustments come "automatically" from such valuation effects (NBER 11155). In fact, there is remarkable stability in the system (NBER 11996).

The future is not so gloomy after all.

Thursday, March 13, 2008

Congestion pricing in Colorado

I-70 is the highway that leads from Denver into the Rockies, and every winter evening or week-end it is severely congested by traffic going or coming from the ski resorts. State Senator Chris Romer is leading the charge to do something about it and he seems right now to favor a congestion pricing scheme.

We have argued previously that congestion pricing is a good idea. The problem that people are grappling with here are the cars going to the ski slopes, which generates congestion not only along I-70 to the East of Denver, but in Denver itself. The proposal would impose a toll only during peak times for ski traffic, and only on a portion of the highway that is outside the city, hoping there would be no congestion in the city. The hope is also to scare away some of the truck traffic, but considering that this highway is a major East-West thoroughfare for the US, it is unlikely.

Seeing that so many people drive at predictable times along a very narrow corridor seems to be a perfect situation for a train service. Have the ski resorts pick up their clients with a bus at the train stations. And you then need not worry about tired, dangerous drivers on the way home from the slopes. And trains are not bothered by poor travel conditions, which are frequent in the mountains.

Incidentally, Chris Romer is the brother of well-known economist Paul Romer.

Wednesday, March 12, 2008

Prices are not rigid

Central banks, and in particular the US Federal Reserve, are pumping liquidity in the market like there is no tomorrow. These money injections are only going to have a real impact if prices are rigid, that is, the additional money is not going to be inflated away immediately. The trouble is, prices are not rigid.

The best study tackling price rigidity in the data is the one by Bils and Klenow, 4th most cited recent article in Economics. They use the monthly data the BLS compiles for the consumer price index. They show that on average, prices last only 4.3 months. If you take away promotions, they last 5.5 months. The article actually gives the results for 350 different types of goods, with the most volatile prices being gasoline, tomatoes, airfare, natural gas, lettuce, eggs, car rentals, girls' dresses, oranges and chuck roast, the last changing on average every 1.3 months. The most rigid? Coin-operated laundry, vehicle inspection, driver's license, mass transit, car registrations, legal fees, vehicle tolls, safe rentals and newspapers, which change prices every 30 months or so.

This study is based on data from 1995-97, when inflation was in the 2-3% range. Since then, price flexibility can only have increased, as scanners are now commonplace in retail, price changes are distributed electronically, and inflation expectations are higher. What do I take from this? If there is a real impact of monetary injections, it will be limited to a couple on months. Then inflation hits. Is it worth the effort? I say no.

PS: Now relax with the latest from Improveverywhere.

Tuesday, March 11, 2008

Taxes, everything is relative

The OECD released today its latest study on wage income taxation across its member countries. This allows to put some perspective on the level of taxes. For example, those complaining that taxes are too high in the US, are they right?

As for other studies, the OECD operates by building a particular type of household (say, single, male, average income), and then asks member countries to report what this household would pay in taxes as well social security taxes (including the share paid by employers). While the report focuses on changes of tax rates over the last years (no surprise, taxes went down for high incomes in the US, but not for the others).

The analysis of average rates reserves some surprises. For example, tax rates in Canada are only 1.3 %points higher than the US for a single worker and 1.8%points for a single earning couple with two children. This includes social security contributions. This adds up to a 55.5% average tax rate for the average single worker in Belgium, or a negative -1.1% for a married single earner with two children in Ireland. The disparity is immense.

One disadvantage of this data is that it does not give a complete picture, as it focuses on particular scenarios. One way to look at a more complete picture is with the work of Mendoza, Razin and Tesar (update on Mendoza's home page). It shows for example effective labor income tax rates that are much higher in Canada than in the US. They use national accounts and government income statistics, thus bypassing the distribution of taxes that the OECD may be able to look at. However, they have a better picture of overall taxes.

Monday, March 10, 2008

Quebec's failed daycare policy

In 1997, Quebec introduced the C$5-a-day daycare, heavily subsidizing existing daycares. The fee was increased to C$7 in 2004. While it seems admirable to provide affordable daycare for young parents, this policy is a disaster, and even more so than simple economics would have predicted.

First the obvious economics: with such a drastic reduction in price, the quantity demanded increases tremendously. And it did. People who had found other arrangements, for example within the family, do not to bother the grand-mother anymore if it costs only a few bucks a day to put a child in daycare. Parents who did not even need daycare now find it convenient to get free time at little cost. Now, was the supply subsidized enough to meet the demand? Of course not. One could think that the under-supply would be only temporary, in particular as new daycares need to be certified, manpower needs to be trained. But a decade after the introduction of the policy, the government is still struggling to provide anything near what demand would require, and at a huge cost. Given that there is rationing, a black market has evolved, or something that resembles it, as daycares bend rules to get closer to the market price. But the government is fighting it in the courts.

Now the less than obvious economics: the policy in Quebec is that everyone has equal access to public services (health care, schools, daycare, etc). Given that there must be rationing, who actually gets to use the subsidized daycare centres? Those with higher incomes, that is those who could have paid for the daycare anyway. Keep in mind that childcare tax credits were scrapped with the introduction of this programme. And this study finds that while female labour supply increased significantly, child welfare deteriorated in terms of health, behaviour and skills.

And to illustrate the economic literacy of policy makers, the Quebec minister in charge of families said Saturday that the daycare fee would not increase, as there are still families that are looking for a spot. Even the simple concept of demand and supply is foreign to her.

PS: Speaking of cold places, a story on a man that is immune to cold temperatures.

Friday, March 7, 2008

Open Source Beer

The open source movement defies economic logic if you just superficially glance at it: people give away freely their ideas, their efforts and potential profits for the public good. Many software packages or operating systems, often superior to their commercial counterparts were devised this way. Beer is now also open source.

That does not mean beer is free. Rather, you can now brew beer using a recipe that is published under a Creative Commons (Attribution-ShareAlike 2.5) license by Free Beer. This means you are allowed to sell and make a profit from this recipe, and are even allowed to create derivative recipes.

This project started in Denmark. Why do they do it? The site is silent on this, but I have no doubt they just find it useful, so why not?

PS: And speaking of having a good time, here is an original way to blow birthday cake candles.

Thursday, March 6, 2008

Grameen America

Grameen Bank of Bangladesh, champion of micro-credit without collateral to the poor, has opened two branches in the United States, one in New York, the other in Dallas. Again, it targets the very poor: small credit, no collateral, 15% interest. Grameen is not allowed to collect deposits on American soil. So imagine that: Bangladesh is actually financing loans in the US...

Wednesday, March 5, 2008

A tax credit for fetuses

Various fiscal measures help parents with raising their children, typically through tax deductions, child care credits, education credits or child allowances. The goal is to increase fertility or simply help parents. The Liberal Party of Quebec, currently forming a minority government in the province, is thinking aloud about extending tax credits to fetuses of 20 weeks or more.

This is not as silly as it seems. After all, various social programmes are already in place to benefit pregnant women. For example, the WIC programme in the United States provides cheques to lower income women (either pregnant or with young children) to encourage them to buy healthy food. Other countries provide for maternity leave that can extend substantially into the pregnancy.

The innovation in Quebec would be simply extend the benefits for children to the latter stages of a first pregnancy. This would allow households to acquire the necessary goods for the baby before birth, something that may matter for cash constrained households. The credit would depend on household income and be paid out monthly. The pregnancy needs to be certified by a physician, thus encouraging women to be followed medically.

Tuesday, March 4, 2008

Title IX for academia?

The front article of The American deals with the underrepresentation of women in some fields of academia, specifically sciences, and how current efforts are under way to redress that. The focus seems to be on introducing some quota system, much like Title IX in college sports, efforts that have already reached a House subcommittee. There are many upsetting aspects of these efforts.

  1. As the article demonstrates--note that it is written by a woman--the idea that there is discrimination against women in academia is based on studies that have never been published, that cannot be reproduced because the data is "lost," or that are just not scientific.
  2. There are more women than men currently studying, including at the graduate level. It is just some fields that have a low proportion of women. A quota system would need to be applied to all fields, and women are then going to be hurt more than men. Indeed, the problem to me seems to be: why are so few men going to college?
  3. What is the goal of academia? Advance research and educate students. I do not see how putting constraints in this mission would improve things.
  4. The discussion about the lack of women in science could also apply in Economics, where women are clearly a minority. Everyone is aware of that, and departments are under a lot of pressure to hire women. In fact, it is well known that one needs offer substantially more to a woman than to a man to hire her. A quota system would just make this even worse in terms of mis-allocation of resources
  5. A quota system would actually work against female graduates. A diploma signals that you met the required criteria. If it is known that criteria are lower for women, the diploma of all women is devalued.
  6. Women can take over field without a quota system, see recently biology, veterinary sciences and, to a lesser degree, medicine.

Let women choose what they want to do. There is no evidence of discrimination against them, to the contrary (and let me preempt here: there are always exceptions).

PS: Let's relax making babies.

Monday, March 3, 2008


The proposed Federal budget for 2009 does not include any funding for the American Time Use Survey (ATUS). While it probably does not rival the Panel for the Study of Income Dynamics (PSID) in terms of return on the money, ATUS has already proven very useful despite its young age (created in 2003) and its low cost ($6,000,000 a year). An effort is currently under way to prevent the interruption of this survey. Consider signing it.

ATUS is conducted by asking 14,000 people minute by minute what they are doing during the day. This has proven tremendously useful in understanding what happens outside the market, in particular how chores are shared within households and how much children are supervised or taken care of.