Category Archives: Articles

Articles, Op-eds, letters. Generally not made by us or for us but found on the web or something.

Tax Freedom Day UK

Yesterday was Tax Freedom Day in the UK, and for a word about what that means I direct you to Allister Heath’s editorial in City AM today: Time to celebrate tax freedom day.

As he states: “to think that every single penny earned by every single person working in the UK so far this year has all been spent on paying for the public sector does put matters into perspective.”

Let’s celebrate the first day of the year we actually work for ourselves. As we do this, let’s hope that more people realise how hiking up taxes will only serve to slow down the economy, and will not move us out of debt.

Why Drugs Should be Legalized

The War on Drugs has been going on for many decades now in the United States and has produced exactly zero tangible results. Many of you will know that we tend to be libertarian free-marketers, and therefore believe drugs should be legalized, or at least decriminalized.

For those of you who think we’re living in la-la land, we’d like to remind you that Portugal decriminalized ALL of its drugs in 2001, at the time sparking great fears of “Drug tourism” and a huge increase in diseases such as AIDS. However, in the past 10 years none of this has occurred. 95% of those caught with drugs were Portuguese, drug users went from constituting 56% of HIV to just 20%, and the number of drug dealers has dropped by 30%.

The United States, however, followed a different route. It declared war on drugs and shut down the caribbean cocaine route. This transferred most drug dealing through Mexico instead. Now Mexico has started fighting back, which means more and more activity is flowing further South, to Central American states. These states are considerably weaker than Mexico and don’t have nearly enough resources to deal with these drug barons (Mexico hardly does itself).

All this drugs activity is done, of course, to provide the United States with cocaine. So, yes, American drug users are financing the drug gangs and, yes, American gun merchants are arming them. So, as the Economist put it: “failing American policies help beget failed states in the neighbourhood.”

In the 1970′s and 80′s the United States recognized that it would be better to have friendly democracies in Central America rather than chaotic dictatorships. It is time they recognized this again. They could provide help in rebuilding infrastructure, or in security, or in keeping democracy alive. But all of these would just be temporary band-aids, for as long as drugs are illegal, users will have to be supplied by outlaws living in chaotic countries. Only the legalization of drugs in the United States would hit at the root of the issue.

Taxation and “Fairness”

Do you ever get the impression that people see taxation as an end in itself, rather than a means to an end? We are struggling with empty state coffers: well just raise taxes. But for what? Why tax people at all? What is the money being spent on, besides front-line services? And why should producers be paying for those things?

Chris Dillow writes at the Stumbling and Mumbling blog about “The Fairness of 50p” tax rate.  [To be honest I take issue even with the title of this post: “fairness” is not an absolute, and what is fair to one is not fair to all.]

In a nutshell: he is saying that the rich (which he says can mean various things, but which he does not define here) should pay more taxes to the state because it is the state that has made them rich to begin with (I should have warned Ayn Rand fans to brace themselves for that one).

In any case, he presents his argument in 3 main points, and I choose the space of a post, rather than just a comment on his site, to give my own opinion on each. His first point reads:

“1. A high tax is a dividend, paid to the state in return for its investment in the things that made you rich.”

“Even if the state did not educate you”, he says, “chances are it educated your customers”. Although he does not explain why that education is central to these customers purchasing my product, service or labour. And I apologise for sounding sarky, but if I can prove that most my customers were not educated in state schools, may I pay less taxes?

The state also provides peace, in which the economy can flourish. I wonder: without the state are we all crazed animals who feed on each others’ wealth and fear? Did not trade come first, the state second? The state is not detached from peace, of course: it helps maintain peace, more or less effectively. However: we have the same amount of state all over the country, but not the same amount of peace (or safety).

And thirdly within this point: the state helps sustain capitalism. In fact more often then not: when the state gets involved in business corruption and market distortion ensue (automotive bailout, anyone?)

His second point seems to imply that business is corrupt by definition:

“2. The state’s force is a form of countervailing power. Some (many?) of the rich owe their fortune to the fact that they are powerful.”

In other words man is powerful first and rich second, and at that point holds undue influence to extract money from the state. I dare say wealth tends to precede power. Even in politics: wealth helps get you elected. In fact generally the more one grows in wealth, the less he extracts from the state. He will move from state to private health care, send his children to private schools, not depend on public housing, and much more.

In point 3 we look at markets, and so of course we find a negative:

“3. Inequality is a form of market failing.”

This appears premised on the idea that people become rich because of luck or talent, which I presume he associates closely with luck (you are either born with it or not). So this argument can only stand if we deny that wealth can and usually does come from work. Providing a good service, creating a great product, making fruitful decisions: these things generally come from training, work and dedication; not luck.

In any case I find this point moot, as equality is not, nor should be, the goal. Everybody has different desires, different pleasures and different priorities. The goal, to paraphrase Ocean, is that you get out as much as you put in, and you choose how much you put in.

I strongly believe in equality of opportunity as the only desirable equality, and this is achieved by less intervention, not more.

In summary: according to Dillow the state gives us all that is good (governments make you rich!) and the markets all that is bad (inequality is, we presume, bad). The more you have, the more you should contribute towards MPs second houses.

Culturomics?

Few things annoy economists more than anecdotal evidence. Just think of “mockumentaries” and various news headlines that don’t document “how many” or “how much”, but rather “what happened to a certain person”. It is easy to capture people emotionally with one, drawn out story, but this also goes against an economist’s training in statistics and probabilities. See how Dan Ariely complains about the $48,000 which was spent to rescue one terrier left aboard a ship, only because the dog was featured on local news channels.

Ultimately, and despite Stalin’s morbid quote that “A single death is a tragedy, a million deaths is a statistic.”, economists are actually correct in wanting to work with concrete data rather than tear-jerking anecdotes, at least for their purposes. This is the main reason why economists have tended to look down upon the humanities, which always seemed to be characterized by fluff.

This, however, might be changing, thanks to Google and Jean-Baptiste Michel of Harvard University. Michel has been digging into the data available thanks to Google books and has been able to start putting quantitative values to cultural studies, such as linguistics. You might not think much of interest could emerge from this, but thanks to this digital collection, we can analyze how often words appear, as well as group of words, and we can study the evolution of words and phrases throughout time. In fact, for the first time we can really estimate how many words truly exist in the english language (apparently slightly over 1 million). We can also find the occurrence of typos, how long it takes new inventions and phenomena to become used in everyday language, how quickly celebrities and pop-culture references fade in and out of existence, among many other things.

We think this is fascinating, and we also welcome the addition of concrete data to fields which seem to abound with anecdotes and personal stories. We do, however, think the term “culturomics” sounds off-putting. Maybe “culturnomics” might work better?

And this also gives us the excuse to show this awesome Google lab “Books Ngram Viewer”: http://ngrams.googlelabs.com/graph?content=computer%2Ccar&year_start=1800&year_end=2000&corpus=0&smoothing=3

I can see many economists, statisticians and mathematicians taking a renewed interest in the humanities in the near future.

Should Politicians be Anonymous?

Don Boudreaux at CafeHayek.com proposes an interesting idea in his recent article: Require all politicians to be anonymous.

The gist of the argument is: politicians should be working (and they continuously tell us they are working) in the public interest: they are public servants. Therefore all they do should be for the public, not for themselves. Boudreaux proposes that each politician be identified solely by his or her PIN (Political Identification number). Their faces will then never be seen by the public. They will address the public anonymously, and even have voice disguisers.

Of course, this would exclude certain types of people from holding public office, namely those seeking fame, influence and recognition, which might not be a bad thing.

We see, however, a few problems with this theory (besides the cynical fact that most politicians would disapprove). Would Jefferson, Franklin and Washington have acted in the way they did had they known they would never be remembered? If I am just to be known as a PIN, then why not seek policies that benefit me and my family? Why not make deals with other politicians behind closed doors? Why not gamble away my reputation, since I will never be remembered?

We therefore propose a modification to this, which is that at the politician’s day of death (or possibly retirement), his or her real name be identified. This would mean that all megalomaniac tendencies will be curbed, and politicians won’t be famous or influential during their careers, but they will have to worry about legacy. This means they will work for the public good all their lives, and will know their names will be tied with their decisions forever. This will also force them to take a much more long-term approach to their decisions, which will be good for the long-term health of the country as whole.

What do you think?

How to Deal with Airline Disruptions

Most readers will be familiar with the airline disruptions that have been occurring in the past 12 months or so. Those who were affected (myself included) no doubt won’t forget for some time to come. We’re all familiar with the drill: what the airlines called “external forces” or “acts of God” force the train to remain grounded, while the lucky passengers have to wait for hours in the terminal, and the unlucky ones wait for hours on the tarmac.

So what is the solution? Well it looks as though the US government wants to propose regulating the amount of time that can be spent on the tarmac, while the UK want to punish airlines that aren’t adequately prepared for such emergencies. We don’t believe these will be very effective and just add another layer of unneeded regulation (also it might be possible that these government actually like using weather-related delays for their purposes).

Let’s remember that once upon a time every new airline, every fare, and flight across state lines had to be approved by the federal government. This changed in 1978, with deregulation (under Jimmy Carter, which may surprise some). This deregulation dramatically lowered the prices of airline flights and the number of flights, and it allowed low cost airlines to enter the market as well. The savings of these deregulations to consumers have amounted to billions of dollars per year. For this reason, we think further regulation should not be taken without much consideration.

So what is a viable solution? Well, some are already being seen. The inefficiencies of sites like Kayak, Expedia and Travelocity, etc. are quite apparent. If a flight costs even a dollar more many times the flights won’t even show up on the first page (or couple of pages) of the flight results, even if that one dollar can result in a much shorter flight with fewer stops and a more reliable airline. Websites like Hipmunk are able to deal with issues such as this, while sites such as Seatguru let us deal with flight details (like making sure we’re in a good seat while we’re waiting on that tarmac).

This still leaves delays. The airlines have no incentive to deal with these, since they can usually blame ‘external factors’ and not get penalized. Also, by cramming their airlines with passengers they will rarely have an extra plane available if any of their flights get canceled. A solution to this could be a search option taking into account the average wait time of each airline company and each route (this can further be whittled down to likelihood of delay based on time of year, time of day, etc. etc.)

In fact, airlines could even be offered various spots (at a price) for priority in case of an emergency. These “preferred flights” will be able to leave earlier in case delays do occur. Passengers may be willing to pay more for the guarantee that they can arrive on time. And this extra income could help make flights cheaper for the other passengers. Michael Levine, of New York University, thinks this would be the optimal solution.

Unfortunately, most politicians see greater chances of reelection by building new airports in their districts, even if completely unneeded. Also no politician would want to risk asking the TSA to ease on their tedious and mostly useless security measures, for fear of looking “soft on terror”.

It might help if they saw that most voters aren’t as simplistic as they’d like to think, but this might be putting too much faith in politicians, who would rather decide for themselves how long airplanes can wait on tarmacs and call it a day.

Complete Drivel

I admit to following alternet.org on Twitter. I do so only because reading their articles often inspires me to write my own articles tearing their incoherent train-of-thought, vaguely anti-establishment rants apart. Occasionally, however, their articles are worth reproducing (at least in part). Their latest, entitled There’s no such thing as a Free Market, is one such example.

Don’t worry. I will spare you the 7 pages of absolute drivel, but limit myself to two paragraphs. One, in the opening section, states:

It is no secret that the American society is dominated by the super rich, held for hostage by the banks, dominated in the Nation’s Capital by the tens of thousands of lobbyists and their big bucks, as the Republican party and their corporate Tea Partyists provide cover for giant theft of many billions of wealth for the very rich, with of course the cooperation of the Democrats who supported the extension of the Bush tax cuts for the very wealthy (Check out Rachel Maddow’s op-ed, which explains why Dwight Eisenhower, who taxed the rich to balance the budget, which be a radical in today’s political reality).

Yes that was just one sentence. So at this point I decided to skip ahead to their paragraph about the free market:

The free market doesn’t exist. Every market has some rules and boundaries that restrict freedom of choice. A market looks free only because we so unconditionally accept its underlying restrictions that we fail to see them. How “free” a market is cannot be objectively defined. It is a political definition. The usual claim by free-market economists that they are trying to defend the market from politically motivated interference by the government is false. Government is always involved and those free-marketeers are as politically motivated as anyone. Overcoming the myth that there is such a thing as an objectively defined “free market” is the first step towards understanding capitalism.

In other words, the market isn’t free because it is restricted, and a free market cannot be defined(?). So their argument is a purely tautological rant with no examples describing what they mean (saying it isn’t free because it is restricted is like saying ‘He is not good because he is bad’). Here I skipped ahead to a sentence that read: “the introduction of child labour laws were considered an interference in the free markets”.

For the record, there is a huge difference between forced labor and choice to labor, and I’m sorry to admit I couldn’t read any further. If you are able to, do feel free to let me know of any gems.

At this point, I’m convinced they have no editor or fact-checker, and they accept articles by anyone who joins their rallies. So I admit to not wanting to waste anymore time on the 7 pages of rants, preferring instead to use Stephen Fry’s words when referring to it:

Update: I realize this warrants an article on what I think about Free markets and why I think they work. Although I’ve talked about the subject many times before I will be doing so again in a forthcoming post.

Shining some light on Subsidies

A recent article in the Economist highlights a great example of how government subsidies have a tendency create more profits for companies, which do not get passed down to consumers but rather raise the price of goods.

The focus of the article is MiaSole, which produces solar panels not made out of silicon, and therefore not receiving any government subsidies. It is just as efficient and just as cheap as any silicon-based solar panel, but since the silicon-based companies have been able to rely on subsidies, they haven’t concentrated on efficiency or driving costs down, so now they are at a disadvantage. At the risk of relying too much on quotes, these ones are telling:

“For much of the 2000s, with a shortage of pure silicon and lavish support from European governments, the price of solar panels failed to fall as expected.”

And in Europe, “Spain, then Germany, boosted demand by giving generous “feed-in tariffs” (subsidies) to anyone who produced solar power for the grid.” But “electricity consumers’ anger at their big bills is now forcing Germany to cut its subsidies.”

Although it has taken a while, hopefully governments will now realize that the subsidies have been bad for consumers, bad for solar power, bad for the economy and bad for the environment, so they will let the market take its course from now on. Some may be surprised to see that the cheaper, more efficient option is actually the better one for the environment too. To end with another quote:

“This all adds up to a bright future for cheap solar energy.”

Pop Economy – Exactly what it sounds like

After having reviewed Macrowikinomics, I’ve been having this odd sense of Deja-vu. It truly seems like this new mass-collaboration phenomenon has taken everyone by storm. Suddenly I hear people talking about a “new paradigm” and how “the rules have changed” and “things are different this time”. For those of you who lived through the dot com crash of 2000, or actually any burst bubble, these sound all too familiar. Another case in point is Loretta Napoleoni’s article in Wired Magazine (you can find the text here, although it is all in Italian, sorry).

Presumably in order to promote her new book, Maonomics, Napoleoni does nothing but talk up the “new economy”, calling it an end to markets and a start of collaboration. Some interesting quotes (crudely translated by yours truly):

“People even transform their house into a bed & Breakfast for honeymooners, and some others rent out parts of their garden to aspiring gardeners”

“Before paying for goods I can check to see whether I can borrow it or exchange something for it”

And the premise for the whole article:
“it is not the market that sets the terms, making us subject to them, but we are the ones who decide.”

Of course, this means that the terms (prices) are set by demand on the one side, and supply on the other. This is precisely what a market economy is. It is true that thanks to the Internet we are much more informed and have many more choices than any generation before us. But any distortion was likely government intervention or some other form of market inefficiency that existed earlier. To claim that these innovations are the end of the market economy is just ludicrous. A transparent economy is still very much a market economy. In fact, it is more so than ever before.

This progress has brought about immeasurable changes, many without even trying. For example, Napoleoni mentions that:
“If all Netflix members were to drive to stores like Blockbuster (rather than order movies online), Americans would be consuming 1.5 million more liters of petrol, and emitting about 2.2 million tons of Carbon dioxide.”

Oddly Napoleoni does not mention how this sharing has allowed her article to be available for free on the internet, so we don’t have to actually pay for the issue of Wired to read it. If the same were to happen with her book, I’d imagine she wouldn’t be such a big fan anymore.

So we should be very careful in getting caught up in the hype of this “Web 2.0″ (or quite possibly 3.0). More importantly though, we should look out for a glut of other people getting caught up in it, which could signal another bubble. In the meantime, goods and services, as always, we be exchanged via the market economy.

Using Economics for Real Life

Forbes recently had an excellent article on Alvin Roth entitled “Un-Freakonomics“. Alvin Roth has created almost a cult following by doing the opposite of what Dubner and Levitt achieved with Freakonomics. Rather than use ‘the dismal science’ to find out whether Sumo wrestlers are cheating or not, he uses economics to do things like save lives.

This is a rarity in itself since most theorists do not also work in the field, but Roth isn’t scared of rolling up his sleeves and applying his theories. One example was with the New York city high school match. Roth himself was a high school dropout from Queens, and knew that the New York system of matching students with schools was a complete mess. In fact, what happened was you would rank your top 5 high schools and mail them in, and these lists would then be mailed to each high school. So each school knew if they were your number 1 choice or not. He took a variation of an algorithm which matches men and women who might want to marry, and applied it to students and high schools. This same system was then used for Boston primary schools.

Another accomplishment was designing a system for kidney donors. Many times a loved one will want to donate a kidney but not have a matching blood type. His system allows them to exchange with another relative of another patient who is in the same predicament. Even Dan Ariely, of Predictably Irrational, states “I’m his biggest fan.”

We would also like to take this opportunity to remind everyone that our new book “Bringing Sexy Back to Economics“, uses economics to analyze serious matters such as gun laws, providing water to drought stricken areas and finding ways of feeding the world. The more Economics can do to change the world, the more sexy it will be.