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Another month, another epic post on Interfluidity

5/19/2014

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An excerpt:

Let’s consider another common case about which many economists differ with views that might be characterized as “populist”. Suppose there is a limited, inelastic supply of road-lanes flowing onto the island of Manhattan. If access to roads is ungated, unpleasant evidence of shortage emerges. Thousands of people lose time in snarling, smoking, traffic jams. A frequently proposed solution to this problem is “congestion pricing”. Access to the bridges and tunnels crossing onto the island might be tolled, and the cost of the toll could be made to rise to the point where the number of vehicles willing to pay the price of entry was no more than what the lanes can fluidly accommodate. The case for price-rationing of an inelastically supplied good is very strong under two assumptions: 1) that people have diverse needs and preferences related to the individual circumstances of their lives; and 2) willingness to pay is a good measure of the relative strength of those needs and values. Under these assumptions, the virtue of congestion pricing is clear. People who most need to make the trip into Manhattan quickly, those who most value a quick journey, will pay for it. Those who don’t really need the trip or don’t mind waiting will skip the journey, or delay it until the price of the journey is cheap. When willingness to pay is a good measure of contribution to welfare, price rationing ensures that those more willing to pay travel in preference to those less willing, maximizing welfare.

Unfortunately, willingness to pay cannot be taken as a reasonable proxy for contribution to welfare if similar individuals face the choice with very different endowments. Congestion pricing is a reasonable candidate for near-optimal policy in a world where consumers are roughly equal in wealth and income. The more unequal the population of consumers, the weaker the case for price rationing. Schemes like congestion pricing become impossibly dumb in a world where a poor person might be rationed out of a life-saving trip to the hospital by a millionaire on a joy ride. Your position on whether congestion pricing of roads, or many analogous price-rationing schemes, would be good policy in practice has to be conditioned on an evaluation of just how unequal a world you think we live in. (Alternatively, maybe under some “just desserts” theory you think inequality of endowment in the context of an individual choice is determined by more global factors that justify rationing schemes that are plainly welfare-destructive and would be indefensible in isolation. I, um, disagree. But if this is you, your case in favor of microeconomic market-clearing survives only through the intervention of a very contestable macro- model.)

Inequality’s evisceration of the case for market-clearing does not require any conventional market failures. We need not invoke externalities or information asymmetries. The goods exchanged can be rival and excluded, the sort of goods that markets are presumed to allocate best. Under inequality, administered prices might be welfare maximizing when suppliers are perfectly competitive (a price floor might be optimal) or when demand is perfectly elastic (in which case price ceilings might of help).

But this analysis, I can hear you say, cruel reader, is so very static. Even if the case for market-clearing, or price-rationing, is not as strong as the textbooks say in the short run, in the long run — in the dynamic future of our brilliant transhuman progeny — price rationing is best because it creates incentives for increased supply. Isn’t at least that much right? Well, maybe! But there is no general reason to think that the market-clearing price is the “right” price that maximizes dynamic efficiency, and any benefits from purported dynamic efficiency have to be traded off against the real and present welfare costs of price rationing in the context of severe inequality. It’s quite difficult to measure real-world supply and demand curves, since we only observe the price and volume of transactions, and observed changes can be due to shifts in supply or demand. To argue for “dynamic market efficiency” one must posit distinct short- and log-run supply curves, a dynamic process by which one evolves to the other with a speed sensitive to price, and argue that the short-term supply curve over continuous time provides at every moment prices which reflect a distribution-sensitive optimal tradeoff between short-term well-being and long-run improved supply. If not, perhaps a high price floor would better encourage supply than the short-run market equilibrium, at acceptable cost (as we seem to think with respect to intellectual property), or perhaps a price ceiling would help consumers at minimal cost to future supply. There is no introductory-economics-level case to establish the “dynamic efficiency” of laissez-faire price rationing, and no widely accepted advanced case either. We do have lots of claims of the form, “we must let XXX be priced at whatever the market bears in order to encourage future supply”. That’s a frequent argument for America’s rent-dripping system of health care finance, for example. But, even if we concede that the availability of high producer surplus does incentivize innovation in health care, that provides us with absolutely no reason to think that existing supply and demand curves (which emerge from a crazy patchwork of institutional factors) equilibrate to make the correct short- and long-term tradeoffs. Maybe we are paying too little! Our great grandchildren’s wings and gills and immortality hang in the balance! Often it is simply incorrect to posit long-term price elasticity masked by short-term tight supply. The New Urbanists are heartbroken that, in fact, the supply of housing in coveted locations seems not to be price elastic, in the short-term or long. Their preferred solution is to cling manfully to price rationing but alter the institutions beneath housing markets in hope that they might be made price elastic. An alternative solution would be to concede the actual inelasticity and just impose price controls.

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Bermuda Shorts Day turns into the worst mass murder in Calgary history

5/19/2014

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The events of April 14th highlight the randomness of life and how much luck factors into our outcomes. 

Words are inadequate to express the loss felt by those who lost love ones.

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Guaranteed minimum income debate

5/19/2014

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Via World Finance
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What does George Clooney's marriage tells us about matching?

5/7/2014

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George is getting married.

Economics on hedonic marriage.

So what drives modern marriage? We believe that the answer lies in a shift from the family as a forum for shared production, to shared consumption...the key today is consumption complementarities — activities that are not only enjoyable, but are more enjoyable when shared with a spouse. We call this new model of sharing our lives “hedonic marriage”.

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Another article on how the legal profession is shrinking

5/7/2014

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Via Quartz
The job statistics are brutal for recent graduates of law school—graduates who often pay six figures or more for their law degree. The unemployment rate nine months after graduation for the class of 2013  was 11.2%—up from 10.6% for the class of 2012 and 9.2% for 2011 graduates.



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Noah Smith notices that Tyler Cowen has a hate on for Piketty

5/4/2014

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Noah muses.....

"So why has Tyler turned into an anti-Piketty crusader? Well, Piketty is a popular topic, and his thesis is encountering a huge amount of skepticism, so there is demand out there for a one-stop anti-Piketty shop.

But it also seems possible that Piketty has deeply worried economists and pundits who thought that concern over inequality was a thing of the past, and that laissez-faire had basically won the battle of ideas. Piketty's immense popularity might seem, to these folks, to threaten to drag us back into a dark age when radical wealth redistribution was taken seriously, not only by large segments of the public, but by a number of prominent economists as well. Piketty might seem like the vanguard of an onrushing wave of socialist thought that could succeed in turning back the tide of neoliberalism that had been advancing for at least 40 years. So Cowen - and the numerous anti-Piketty writers he links to - may simply be worried about Piketty and what he represents."

Does a bear shit in the woods? Tyler Cowen is a sock puppet of the Koch brothers, his billionaire masters.

I marvel at the weak rebuttals to Piketty that pass themselves off as deep thinking, here is one from the AEI.

The commentator gives two main critiques:

One that the elasticity of substitution of labour for capital is less than one.

I think that (putting aside tax haven effects and offshoring) we are in an age of transformational -disruptive technologies.

What does OCR do for the demand for young lawyers to be interns to do discovery? How about tax planning software?

What did Google do to librarians?

3-D printing?

Automated driving (Google again)?

Amazon drone delivery? (Amazon has a fully automated warehouse in Kentucky)

The other (laughable) objection to Piketty is that  his recommendation of a global wealth tax is a non starter.

Yes, because we could never get a large number of countries to agree to tax harmonization -like say we did with  the WTO. (Bretton Woods?). Large international treaties are impossible.

Here is  the world that Tyler Cowen fears- the world where students are given the opportunity to take History of Economic Thought. The world where Piketty is taught along side Marx, where students must read Keynes "The Economic Possibilities of our Grandchildren", the world where students learn that Summer's secular stagnation arguments are the same ones Marriner Eccles was making in the Great Depression.

Imagine a world where students have a choice between ideas other then the entrenched neoclassical dogma. Imagine a world where History of Economic Thought is not cancelled despite high demand and students are not forced into yet another neoclassical option that they don't want. Imagine a world of ideas where the best ideas win. A world where the best teachers get to teach. Imagine a world where inductive thinking is given its place besides deductive thinking.

The entrenched establishment is afraid of the very egalitarian concepts they claim to promote. Tyler Cowen's response, when he can no longer deny inequality is rising, is to throw is hands in the air and say nothing can be done.

Be afraid Tyler, be very afraid. Reality is not on your side. One need only look at the history of organized religion throughout the ages to understand what is going on in Econ departments today. You can kill Galileo but you can't kill his ideas.

Piketty ideas are not a "fad diet" equivalent -he is popular precisely because they resonate with the reality people have been experiencing since the 1980s. A reality that grows sharper everyday.

Unlike Cowen, Piketty thinks that something can be done to ameliorate the future and it involves significant wealth redistribution. Piketty's ideas are resonating. 

May the best ideas win. Here are a few:

How about closing tax havens, how about higher progressive taxes?

While we can't defend theoretically the correct amount of inequality that should be present in society -why not have a debate anyways rather than throw our hands up and say math (deduction) can't give us the answer. 

Here is my starting position based on induction, Oliver Stone made Wallstreet in 1987 as a rebuke to the excesses of the 1980s. At that time average CEO compensation was 100X the AVERAGE employee of their firm. Now it is closer to 300X? Why don't we start by moving inequality back to the halcyon (neoclassical-right wing) days of Ronald Reagan that so many pine for?






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