Category Archives: Economics

Feb 18 2010
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Economics, Food

On the Uniqueness of Springfield, Missouri

I have heard anecdotally for years that Springfield, Missouri, is the nation’s most competitive restaurant market. It is a test market particularly for national chains; if McDonald’s or KFC wants to forecast consumer response to a new menu item Springfield is where the item is first tested.

Does anyone know more on the subject? There doesn’t seem to be much literature that I could find through Google and I imagine most of the literature on the subject is proprietary. But I’m interested, if anyone knows where I might find information on the subject.

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Feb 18 2010
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Economics, Food, politics

Sarah Brodsky on School Lunch: Consumer Preferences = Protectionism

I’ll write a longer, more exhaustive post, but Sarah Brodsky’s latest post at the Show-Me Institute has me boggled with how inane and wrong-spirited it is. In it, she responds to an article in the Christian Science Monitor,  noting the following:

As Farm to School expands to include products like meat or cheese, it gets harder for supporters to justify the program as anything but protectionism. The appeal of local fruits and vegetables is easier to relate to. Anyone’s who’s eaten delicious fruit right off the tree can sympathize with activists’ support for local produce. (At least, we can sympathize in the early fall and late spring. Activists still have to explain how local produce is superior during the rest of the school year, when very few fruits or vegetables are harvested. Many will say to preserve the local food in the fall — but is locally preserved food really better than food that was preserved somewhere else, or shipped in fresh?)

Protectionism refers to the top-down trade policies of nations looking to protect domestic industries through tariffs or import quotas. Neither of these are the case. What is the case is that schools are working hard to transition from unsafe food low in nutrients to safe foods high in nutrients; often these are locally produced produce and meats. There is no restriction on the availability or price of market alternatives.

Further, Brodsky’s armchair theorizing is inane and worse than useless. Of course it’s true that there are seasonal variations in what is available. But it’s wrong-spirited to criticize the people who are making those decisions for making the rational calculations that say that it is worth it to them to begin transitioning their consumption in ways that take advantage of what is available locally when they can. Perhaps Brodsky should call the fourth-graders cited in the article and tell them that they should be eating industrially produced meat that may have high levels of bacterial contamination that they can’t easily monitor but is available for a lower price than local meat.

And Brodsky ignores what the article in the CSM actually says. Here are some excerpts:

The students are learning to eat healthier, and the focus on agriculture, local food and nutrition is paying off in the classroom, says principal Barrett Williams.

Kids are interested, and teachers are given more diversity in the curriculum — they can work the food angle in science, reading and health classes, he says.

“That really changes kids’ perspectives on the traditional reading, writing, math, science, social studies,” Mr. Williams says. “If they can see that they are meeting writing standards through doing a response to their cooking activity that day, you know, that means something to them.”

But activities like the farm field trips are what Williams really likes.

“A student who may struggle with a textbook — sitting down and reading text and responding to text — may excel going into a place-based activity,” Williams says. “Whether it’s visiting a farm or going on some type of field trip and having a hands-on experience, and then being able to respond to that through writing.”

Working with local farmers helps build community, he says, although that food may be more expensive than the commodity food that some schools use.

The grant helped to buy at least 200 pounds of ground beef from Back Beyond Farm in Chelsea, which cost about a dollar more per pound than hamburger from an area distributor, Perry says. But Vermont apples are cheaper than apples from other states, she says.

The school has raised money for the program by hosting a winter farmers’ market.

I am honestly stunned that the Show-Me Institute pays for this quality of scholarship. Brodsky’s argumentation is not even coherent, nor is it based on any educated or thoroughly researched framework. Brodsky simply does not like the idea that school districts are re-evaluating their school lunches and consider the investment in better meat and produce to be worth it; indeed, she characterizes this expression of consumer preferences as protectionism! Nor does she compute the implicit benefits of better academic achievement or the economies of scale that are generated when the school invests in multi-use programs like these.  And one would think Brodsky should know better: she is either a student or a graduate of a Masters program in economics at Loyola, which means at some point she’s been taught how to parse information and research at a graduate level.

I want to specifically note that I don’t deny the infrastructural problems or the issues that face school districts looking at their cafeteria as a place where improvement is drastically needed. Sensible debate can be had over food policy, from agricultural subsidies to nutrition to the constraints that schools operate under. Indeed, I had a great discussion about subsidy policy yesterday with an engineer friend, Eric Lefevre. But Brodsky’s analysis and argumentation are poor and patronizing. Indeed, most of her posts cite articles that are selectively interpreted for her purposes because they draw the opposite conclusion.

I don’t mean to discourage readers from the rest of the Show-Me Institute’s writers. Dr. Haslag, a former professor of mine, has some very useful and worthwhile advocacy in support of switching from a state income tax to a state sales tax here. The coverage of the Northside trial by Audrey Spaulding  is absolutely worth reading if you are interested in eminent domain and land use politics in this state. David Stokes covers the politics of contractor work in St. Louis (a fascinating and worthwhile read). But Brodsky’s advocacy is embarrassingly useless and I hope it doesn’t discourage people from thinking seriously about the benefits of feeding our children well.

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Feb 17 2010
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Economics, Language

A Financial Crisis of Metaphor

Peter Phillips, an economist with the University of Southern Queensland, Australia, writes:

Financial economics is a peculiar case. It is not necessarily new facts and experiences that emerge, having previously been unknown, to initiate a revision of the metaphorical models constituting the prevailing orthodoxy but a rising to the surface of elements of the financial economic reality that had been pushed aside—though they were always known to exist. The prevailing orthodoxy within the category of knowledge known as financial economics has pushed aside a very large number of the features of the financial economic reality and emphasised those features which are amenable to the construction of mathematical metaphors. The creation of further metaphor within metaphor on this basis further distanced the models of the prevailing orthodoxy from the financial economic reality it once sought to explain. The financial crisis has highlighted the distance that has been placed between the mathematical-metaphorical models of financial economics and the financial economic reality. The interaction of individuals, firms, banking institutions and governments, each attempting to salvage their careers, positions, liquidity, solvency and credibility, may be observed on a daily basis and has no analogue within the structure of the prevailing orthodoxy of modern financial economics. Yet it is the financial crisis that highlights this and brings these elements to the foreground when once they were relegated to the background. This is a financial crisis of metaphor.

The article is ungated on SSRN, here. I found the article to have a very interesting and fairly sophisticated discussion of specific mathematical models and how specific metaphors functioned, though it feels that the main argument is made a little too repetitively.

I did not (until recently) find much of this strain of thought reflected in economic writings, or at least in most of the curricular texts I’ve read. But these ideas are not new; they are described particularly well in the writings of Umberto Eco (Travels in Hyperreality) and the work of French theorist Jean Baudrillard. I am skeptical of a number of the deeper psychological conclusions critical theorists come to and especially in the ways in which Marxist theory seems to infect all strains of critical or cultural theory, but there is much of value to be found in understanding the ways in which metaphors serve to both enhance and degrade our understanding of reality.

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Feb 12 2010
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Economics, Food, politics

Against Sarah Brodsky On School Lunch: Our Moral Obligations and a Libertarian Alternative

Our national school lunch program has a very dear place in my heart. I advocated increasing funding to the program as an affirmative case on a high school debate topic many, many moons ago. I was a novice debater and a poor advocate at the time and I am sure the only reason I won the few rounds that I did was that the arguments for these policies carry their own weight.

The argument is that hunger is perhaps the most meaningful barrier to learning in the classroom. This is because neither the mind nor the body can function at its best when it does not have enough nutrients. This prevents an immediate barrier to classroom instruction that the classroom cannot distance them from. You can provide the social, emotional, and physical distance from the problems in a child’s life in the space of a classroom, but you cannot separate a child from his or her hunger.

It seems worthwhile to me that schools should provide an adequate and nutritious breakfast or lunch option for children, particularly for children in poverty, but poverty alone is not the sole barrier to adequate nutrition. Even large numbers of children in well-off families routinely skip an adequate breakfast and having that option available at school is truly meaningful (Brown et al 2008) in whether or not your students are attentive and able to learn. There are real costs to medications and managing disruptive behavior and the entire system that enforces laws against absenteeism; I think the Brown 2008 study estimates one set of costs at $10 billion annually. Think of it this way: hunger increases misbehavior and hence the amount of non-productive, ‘guard’ labor in the form of security officers, social workers, etc that are necessary to deal with the consequences of misbehavior. Hence what appeared to be a simple problem of hungry children also represents an economy-wide misallocation of resources with many large and hidden costs.

There is a moral argument for providing sufficient diet options for schoolchildren as well. Children do not have a choice about whether or not they are educated; it is the law that they be educated (though parents have wide latitude in determining the direction of that education). In a sense mandating participation in education is a just form of involuntary servitude because children cannot opt out (and most children do want to be in school). It is our moral obligation to provide adequately for them given our constraint on their liberty. I would argue that if we cannot guarantee children the basic commitment to provide for their well being then mandating their participation in education is unjust. Consider the following: if we provide bad, inedible food to prisons, prisoners riot and lawmakers start writing bills. But there are no repercussions for us when we provide ‘spent hens‘ and bacteria-infested meat that doesn’t meet McDonald’s quality standards to children. If children misbehave we medicate them, providing employment for doctors who over-diagnose ADHD and other conditions and over-prescribe drugs like Ritalin that make billions of dollars for pharmaceutical companies that make these kinds of mind-altering drugs.

These are reasons why I find  shoddy and uninformed stances opposing investments in our children’s nutrition really disturbing. Here is Show-Me Institute intern Sarah Brodsky slamming what appears to be a notably successful effort in New Orleans (!) to improve access to nutrition:

I read further and saw that my guess was wrong. The “What We’ve Done” section of the website is all about school food. Of the 12 recommendations for change, two call for more local food in school lunches. One suggests that schools establish gardens on their premises because “Students need to grow fresh food and taste what they grow.”

Kids Rethink New Orleans Schools is lobbying for something peripheral to a great education. It doesn’t matter where school food was grown, as long as students get a nutritionally complete meal. And gardening, while it’s possibly educational and rewarding, is not a basic human need. If you think of school priorities, like creating a safe environment and teaching students to read, maintaining a garden would be pretty far down the list.

I hope Kids Rethink New Orleans Schools will reevaluate its goals and stay true to its original mission. A couple of questions to consider: Are the most pressing inequities already addressed, so that we can now devote our attention to gardens? Or do neighborhoods and parental income levels continue to keep a great education out of reach for many students, for reasons that have nothing to do with food?

The problems here are obvious! While it’s true that as adequate nutrition doesn’t necessarily have anything to do with where food came from, the status quo is so far from satisfactory that this FYI is meaningless. What is meaningful is that students now don’t have access to high-quality food. If it comes from local producers who don’t maximize yields, diluting nutrient content (as is the case with large agribusiness), the food is vastly better. If children aren’t eating meat that tests positive for salmonella four times more often than the meat McDonald’s accepts, or processed wheat products that have been stripped of their nutrient content and instead get access to food produced in less destructive ways, we are all better off!

Here’s the fundamental argument that Sarah’s blind opposition to local food ignores. Industrial food production and distribution happens on a national scale. Unfortunately, it is well documented that regulators don’t do their jobs well in regulating quality and safety. The compelling argument for local food is that being able to immediately hold specific people accountable and not depending on the bureaucracy of a federal regulatory body allows us to prevent children from eating contaminated meat and tortillas and things that would get a large fast food chain in a class-action lawsuit faster than you can say “where’s an attorney?”. Part of the basic economics of information holds that when information is specialized and decentralized it is harder to gather and interpret, meaning that consumers have less information, not more, about their choices.

There are three policy recommendations that I’d like to close with. The first is that we have more school gardens! Even if they’re not by themselves sufficient to feed an entire school the effort is still worthwhile. You get to start changing the outlook children have towards food and their environment and promote healthy living. And it’s a huge educational opportunity! A garden is a natural lab for chemistry and biology classes. It is a starting place for discussions about politics, fodder for historical and cultural education, and if you have a culinary arts program headed by someone like Brook Harlan at Rockbridge High (here is a good profile)here in Columbia, you’re really on to something.

The second is of course that this focus on local food is good. There are inefficient ways and bad thinking that can characterize the advocacy for local food and it is important to be unbiased and scientific; that being said, I think I have made a compelling argument that local food is good because you get what you pay for.

The third policy recommendation is that we encourage more school districts to end the monopoly on providing food services that they retain or contract out to large corporations. Allow multiple private vendors to provide food of certain quality and let competition drive at least part of the increase in quality. In economic language we can note more formally that expanding the market increases the amount of both consumer and producer surplus. It also protects our obligation to ensure basic services to our children. This is really the libertarian way out of the problem and it’s a good example of where interactions between public and private entities provide better services than the status quo, which is dominated by public schools granting monopolies to private lunch contractors.

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Feb 11 2010
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Economics, Food, politics

Against Sarah Brodsky: In Defense of Good Food

I’ve recently come across a series of posts on food by Sarah Brodsky at the Show-Me Institute  (a libertarian think tank here in Missouri) that I thought deserved a clearly articulated response. Sarah’s writing generally touches on the topics of local and sustainable agriculture in ways that I think don’t show much appreciation for the nuances of real-life markets and processes.

It is important to understand that I think of libertarian ideals in a different way most of the Show-Me Institute bloggers; my intellectual framework includes a rich appreciation of transaction costs and Coasian ideas along with the notion that comparative market analysis suffers if it does not account for the wide range of parameters that can characterize widely disparate markets. Other ideas I subscribe to in that vein are concepts from chaos theory that talk about self-organization and complexity and the idea that the interactions between public and private institutions are often far richer than the simple dichotomy between market and government that characterizes the public discourse.

So this series of posts will talk about food, a subject that I love. Today’s specific topic is the whole concept of local food, a concept that Brodsky seems curiously against. An excerpt:

Second, this is another instance of the government endorsing the idea that locally grown produce is superior to food from other sources. Anyone is free to hold this conviction; however, their belief has no place in policy until they come up with evidence for it. Supporters haven’t demonstrated a connection between local food and health. In fact, some dietitians even recommend frozen produce over fresh:

“[F]rozen produce actually can be healthier than the fresh variety. It is on the plant or tree longer than the fresh variety, so it’s packed with a higher nutrient value.”

If a public school near you is giving preference to food grown nearby, watch out. Your government might begin advocating local food as the correct choice for you, too.

Comments of that ilk are frequently distributed throughout Brodsky’s advocacy. While I’ll save the discussion of what role government should play in advocating policies designed to promote public health for later, today’s discussion will be about the unsupported claim that ‘supporters haven’t demonstrated a connection between local food and health’. First, let’s note that Brodsky conflates the notion of local food with the idea of non-frozen food, which doesn’t follow logically. One can grow vegetables and freeze them or prepare them for long term storage via canning or other preservation methods and this is not logically inconsistent with the idea that locally produced food is ceteris paribus better than the products of industrial agriculture.

But let’s talk about the list of reasons why locally produced food might be better than industrial agriculture. But it’s important to understand that I don’t disagree with the concept of industrial agriculture; some products are far more efficiently produced in quantities that allow us to take advantages of economies of scale in production and distribution. The reality of industrial agriculture is however far different, as markets tend to be dominated by large corporations that (horror!) use their resources to engage in rent-seeking behavior.

But some products do suffer when you increase yields without regard for other parameters. Winemakers have known for a long time, for instance, that it’s hard to make great wine without some regard for controlling grapevine yields. What’s true for grapes is also true across the board and it has a name: nutritional dilution. This topic is well addressed in the literature; here is an excerpt on the subject worth reading:

An explanation of exactly what happens in genetically engineered dilution effects may be helpful. Over many years of using yield potential as the dominant criterion in developing improved varieties, while average yields have risen, plant root systems have not been able to keep pace in drawing more needed micronutrients from the soil. When breeders selectively breed for one resource, using a selected trait like yield, fewer resources remain for other plant functions as the study explains.

“There may be trade-offs between the number of seeds and their size or between yield and growth rate and pest resistance. In tomatoes, there are trade-offs between yield which is the harvest weight and the dry weight, or between yield or fruit size and vitamin C, and between lycopene which gives tomatoes their the primary color and beta-carotene which is the precursor to vitamin A.”

This information on nutritional decline and selective breeding is nothing new to agricultural researchers and scientists. Science journals began publishing writings on nutritional decline over 20 years ago. A 1981 review in “Advances in Agronomy” discussed the widely cited “dilution effect,” in which yield-enhancing methods like fertilization and irrigation may decrease nutrient concentrations, an environmental dilution effect. Recently, evidence has emerged that genetically based increases in yield may have the same result, a genetic dilution effect. An explanation of exactly what happens in genetically engineered dilution effects may be helpful. Over many years of using yield potential as the dominant criterion in developing improved varieties, while average yields have risen, plant root systems have not been able to keep pace in drawing more needed micronutrients from the soil. When breeders selectively breed for one resource, using a selected trait like yield, fewer resources remain for other plant functions as the study explains.

Here is the link to the Davis 2004 study internally cited in the article above which was published in the Journal of the American College of Nutrition. What this establishes that large-scale agricultural production yields crops with far less nutrient value than crops where yields are relatively lower, a situation that typifies many small, local producers. Brodsky’s argument I think assumes that none of this is true and it is clear that her stance is articulated without reference to any of the relevant literature.

In a broader sense, there are other costs and benefits that Brodsky just assumes away throughout her advocacy. Most specifically, we can talk about the negative externalities of industrial agriculture. How, for instance, would she account for the pesticides and herbicides that make large-scale agriculture mostly possible? Without passing a moral judgment of the use of chemical manipulation in agriculture, there do exist negative externalities from the large-scale use of pesticides (for example) that are not reflected through prices. Refined sugar, for instance, is a great example: the average American eats 150 pounds of sugar a year.

The sugar industry, which receives federal subsidies, has let massive amounts of fertilizer and pesticide-polluted waters run off into the Everglades for decades. This has has horrendous environmental effects, the extent of which I won’t go into here, but a simple Google search will reveal plenty of literature on. Worse, subsidies allowed American sugar producers to undercut other sugar producers internationally. The market distortions that this policy create are large in scale and have far reaching consequences, including crushing domestic sugar production and agricultural economies in places where they are most needed (3rd World nations). Worse, the negative health effects of consuming large amounts of nutrient-deficient refined sugar have contributed in great part to America’s obesity and diabetes epidemics (Gross et al 2004, Jenkins et al 2004). Literally none of this is reflected in the market price of sugar.

And stories like these are not the exception. They are the norm. While I hazard that on the concepts underpinning libertarian thought I might have common ground with Brodsky, they form a very primitive lens for interpreting the detail-rich market and institutional structures that comprise reality. I, for one, would expect a master’s candidate in economics to present more thorough work, particularly when using a well-regarded think tank as a platform for one’s views.

My next few posts will address the school lunch/breakfast debate from this perspective and hopefully also the issue of government and its role in the public discourse (hint: it’s a lot more complex than you think!)

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Jan 26 2010
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Economics

On Overcoming Biases: The Wine Critic

Lisa Perotti-Brown, MW, solicited comments from sommeliers on how many wines one can reasonably taste and evaluate in a day. I found this answer to be particularly worth noting:

“I reckon the optimum amount of wines to taste blind is 60 in a day,” commented Andrew Caillard MW of Langton’s Auction House in Australia.  “This is enough to taste, write a reasonable tasting note, review and memorize. Anything significantly over this is a struggle and requires short cutting. Anyone who says they can do more than this truly effectively is having him or herself on. The late Dr John Middleton of Mount Mary used to say it is 12 wines. Fatigue is a real issue and leads to inaccuracy. More alarming is the poor allocation of points and the lack of empathy for other cultural values that pervades among wine critics. Critics applaud individuality but assume that taste and received wisdom is homogenous across cultures.”

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Jan 26 2010
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Economics

How To Start A Bank Panic Using Twitter

From the Irish Times, May 16, 2009:

POLICE IN Guatemala have arrested a Twitter user and confiscated his computer for inciting financial panic after he urged people to remove funds from a state-owned bank.

Jean Anleu Fernandez (37) was jailed for posting the 96-character message on the micro-blogging website earlier this week.

It is thought to be the first such case in central America.

Police raided the IT worker s home in Guatemala City on the orders of the public ministry division in charge of banks, according to local media.

The head of the banking system, Genaro Pacheco, said Mr Anleu admitted sending a message about Banrural, a rural development bank at the centre of a murder mystery which has engulfed the government in a political storm.

Mr Anleu sent the message on Tuesday of this week. It said: First concrete action should be remove cash from Banrural and bankrupt the bank of the corrupt.

Inciting financial panic is an offence in Guatemala, which like much of Latin America has a history of economic volatility.

Mr Anleu is due to be held in jail until payment of a EUR 4,800 fine, after which he will be placed under house arrest pending trial.

The detention prompted a backlash from the Twitter community.

Mr Anleu s message has been resent by other Twitters and funds are being collected to pay the fine.

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Jan 22 2010
2 Comments
Economics, politics

Cheap at the Price: A Libertarian Theory of Regime Change

A story from the Washington Post by DeYoung and Abramowitz (9/27/07), contains this tidbit that caught my eye:

Less than a month before the U.S. invasion of Iraq, Saddam Hussein signaled that he was willing to go into exile as long as he could take with him $1 billion and information on weapons of mass destruction, according to a report of a Feb. 22, 2003, meeting between President Bush  and his Spanish counterpart published by a Spanish newspaper yesterday.

The meeting at Bush’s Texas ranch was a planning session for a final diplomatic push at the United Nations. The White House was preparing to introduce a tough new Security Council resolution to pressure Hussein, but most council members saw it as a ploy to gain their authorization for war.

Spain’s prime minister at the time, Jose Maria Aznar, expressed hope that war might be avoided — or at least supported by a U.N. majority — and Bush said that outcome would be “the best solution for us” and “would also save us $50 billion,” referring to the initial U.S. estimate of what the Iraq war would cost. But Bush made it clear in the meeting that he expected to “be in Baghdad at the end of March.”

I want to make an argument about how we should have gone about regime change in Iraq. I argue that we should have credibly offered Saddam Hussein to accept cash and exile in return for regime change (the rest of the story seems to indicate President Bush was never serious about the offer). Even a relatively expensive bribe ($1 billion-$10 billion) would have enabled a transfer of power far less bloody and expensive in human and fiscal terms than the war that President Bush initiated.  Using cost-benefit analysis, that conclusion seems obvious to me; even a pure fiscal comparison between the current costs of the Iraq conflict (a little over $702 billion at present according to www.costofwar.com) would have indicated the relative merits of an exile deal.

This subject is an underexplored subject in the literature as far as I know. An SSRN search came up with two working papers that I thought were immediately relevant, both taking a stance on the option of offering exile to Saddam for regime change. The first paper, by Michael Scharf at Case Western in 2006, notes particularly that:

Admittedly, thousands of lives could have been spared if Hussein had accepted the deal. But at the risk of being accused of blindly embracing Kant’s prescription that “justice must be done even should the heavens fall,” this Article argues that it was inappropriate for the Bush Administration even to make the offer, and that if implemented the exile-for-peace deal would have seriously undermined the Geneva Conventions and the Genocide Convention, which require prosecution of alleged offenders without exception.

The second article, by Leila Sadat of Washington University in 2006, agrees, noting:

Second, this Article challenges the conventional wisdom that “swapping justice for peace” is morally and practically acceptable. Instead, I argue that international negotiators offering exile are neither morally nor legally justified in doing so. Indeed, although it is beguiling to imagine that offering exile to Saddam Hussein would save thousands of lives, or that the Lord’s Resistance Army of Uganda would have laid down its weapons in return for automatic immunity, the evidence suggests the contrary: that warlords and political leaders capable of committing human rights atrocities are not deterred by the amnesties obtained, but emboldened. As will be discussed below, the cases of Sierra Leone, the Former Yugoslavia, and Haiti suggest that amnesties for top-level perpetrators imposed from above or negotiated at gunpoint do not lead to the establishment of peace – but at best create a temporary lull in the fighting. Indeed, amnesty deals typically foster a culture of impunity in which violence becomes the norm, rather than the exception.

I find both statements rather, well, wrong. I think it’s true Scharf and Sadat woefully underestimate the real costs of war; Scharf says “thousands of lives could have been spared” with Saddam in exile and Sadat says those who offered exile are neither “morally or legally justified in doing so”. I don’t think that either scholar evaluated the true impact of not exiling Saddam; Scharf notes the value of robustly enforcing international legal conventions like the Geneva conventions, ignoring the possibility that a pre-emptive war against Iraq would almost certainly involve greater circumventions of the Geneva conventions than exiling Saddam. Indeed, this turned out to be the case, as many well-documented cases of extra-legal rendition, torture, and violations of civil liberties turned out to be the modus operandi of the organization (President  Bush’s administration) prosecuting the war. Sadat’s article talks about the morality of exiling criminals, but portrays this debate in a vacuum that does not include the costs of war and forced regime change.

I do have the sense that offering amnesty or exile to those in nations where institutions are extremely unstable ( particularly those in Africa) may not be a good idea for practical reasons and also that there is a very real difference between offering amnesty and offering exile. In any case I think there are clear differences between the offering of amnesty or exile to African warlords than to Middle Eastern dictators and that both Scharf and Sadat never really articulate clear reasons why clearly different scenarios are functionally the same (I understand that this is not a completely clear statement and that I haven’t come close to establishing the basis under which I think it is true but that’ll come soon as I progress in this direction).

But I digress. Let’s start from another angle. The difference between the cost of exiling Saddam and the nominal fiscal current cost of the war is staggering, about $701 billion. Even if you are very generous about estimating the cost of getting Saddam’s organization into exile and assume a tenfold increase ($10 billion) the answer is still obvious. Even with an absurdly expensive transition involving substantial amounts of US troops providing security while Iraqis were able to organize elections and start the process of governmental change, we can presume that war still looks like an unattractive option. If we expand our notion of the fiscal cost of war to account for the casualties of the war and the internal conflict that followed (roughly 5,000 coalition members and roughly 100,000 civilian casualties), the comparison is bleakly compelling.

What is the cost of a human life? If that question sounds like evidence that economics is a bleak, amoral science, rephrase the question. What is the value of preventing a human fatality? The US Department of Transportation uses the estimate $5.8 million as the basis for its cost analyses, and also runs the analyses for the higher estimate of $8.4 million. Using $5.8 million as the value for preventing the average human fatality, a rough estimate of the cost of the Iraq war is now

Fiscal Cost ($702 billion) + human cost ($5.8 million x 105,000=$609 billion) = $1.311 trillion

Using the higher value, $8.4 million, the cost of the Iraq war is $1.584 trillion.

Note, furthermore, that the cost estimates here don’t even begin to incorporate other large scale costs associated with the war, like foregone GDP growth, or the implicit costs of the damage done to the US’s status. At this point I really am beating a dead horse with a rather large club, so I’ll move on and save my energy for the seals.

What is the opportunity cost of the Iraq war? What alternative policy options could we come up with for equal to or less than $1.3-1.5 trillion dollars that would leave us better off? The sheer magnitude of the difference between the explicit initial costs of exile vs. the explicit initial costs of invasion would seem to be worth it; even if Iraq devolved rapidly post-Saddam and we still committed the same fiscal resources post-Saddam to the country we still save on the cost of the invasion and are likely to have far fewer civilian casualties.

There is the argument to morality that says we should punish the evil. What this analysis is designed to give is the sense that sometimes the costs of punishing the evil are too high. It is easy to see the evil that Saddam Hussein perpetrated throughout his career (some of it with US backing), but what is less easy to see are the thousands and millions of evils that perpetrate in the aftermath of a war. From the circumvention of international legal conventions on war and human rights, to the blatant corruption and crime that followed as the US gave contracts to private contractors operating as if they were their own law, to the warlords that sought to tear Iraq apart using their own militias, to the million small crimes against children and women and the weak that happen in the absence of law and order, the aggregate evils that flourish in the aftermath of war far outweigh the  singular qualms that we have in sending an accomplished elderly dictator into comfortable exile.

Of course, exile for such a person would never truly be comfortable. Even on the most remote island, Saddam in exile would fear for his life; one does not rule a nation with an iron fist for decades and not make the kind of implacable enemies that would seek extra-legal justice at any cost.

Some make the argument that we don’t want to incentivize dictatorship by paying off current dictators. In a world where the steady-state path seems to be towards liberal democratic governments and we only buy off the dictators in nations where the institutional facilities exist to make a successful transition of power viable, nations transition ineluctably towards democracy and dictators become an endangered species. If we relax these constraints and try to buy off dictators in countries at the margin of institutional continuity and anarchy, this strategy still works if we are able to facilitate the rapid creation of those institutions by stimulating economic growth and increasing the education level of the population.

Note that though I describe the heft of this argument as libertarian (the outcome I describe is achievable solely through voluntary trade and all parties are better off) liberals and conservatives should find much to like about this argument. First, I think liberals would like the argument that wars of these kinds (superpowers vs. marginal third world countries) are outmoded and needlessly wasteful and allow precisely those kinds of government encroachment into rights and liberties that democracies are designed to ameliorate. I think conservatives would like the idea that America can buy peace and profit from it. I think those among us with common sense would like the idea that we can pursue an aggressive foreign policy that doesn’t treat Islam as an enemy and spreads the notions of economic liberty and freedom. The Western victory happens when we get people of different beliefs to understand the idea that differences in religion and belief don’t matter as much as the freedoms and liberties that allow us to pursue wealth and prosperity.

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Jan 18 2010
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Economics, politics

Important Words from Arnold Kling

President Obama is getting flack from the nutjob nativists for his decision to grant temporary amnesty to Haitians illegally in the United States. This seems like the charitable thing to do to me; economist Arnold Kling at Econlog also notes that it is the libertarian thing to do:

Finally, on another subject, a reader asked me to say more about Haiti. Jeff Sachs offers a predictable proposal for a massive infusion of aid. I have to admit that compared to other things our government does with our money, I see little reason to object. But the libertarian approach to Haiti instead would focus on opening our doors to refugees.

Look at the track record of refugees in America. It seems to me to have worked out remarkably well in most cases, both for the refugees and for America. Now, compare the track record of American military occupation and nation-building, or the track record of foreign aid to underdeveloped countries.

It is my feeling that one of the great failures of the Republican Party is that it cultivates this ethos that America’s greatness and glory is beyond reproach and that America’s status as the sole remaining global superpower gives it the moral right to war with nations and intervene militarily in places like Iraq for the purpose of liberating others. But this dodges the lessons from our history; generally, our attempts at Third World nation-building and geostrategic dominance have met with muddled success at best and spectacular failure at worst.

I can explain this in another fashion. An integral part of the conservative narrative is that A) market solutions work and are generally superior to government policy, B) that the best government is limited government and here you find particularly good defenses of federalism. Both of those ideas seem fundamentally sound to me. But the narrative becomes intellectually bankrupt where it becomes part of the other narrative of American power and dominance. That’s because the narrative of American power as an unequivocal force for good is also a narrative of superior American knowledge and expertise coupled with moral obligation.  But this narrative does not wholly manifest itself as American exports of the ideas of economic liberty and freedom; it also manifests itself as geostrategic meddling, coupled with economic imperialism and schizophrenic focus on particular problems as they are relevant. Many of our problems in the Islamic world, for instance, are rooted in our defense of dictatorships against the Soviet threat, when we should have been directly supporting democracy and economic liberty.

It seems to me that Arnold’s argument is exactly right. The tragedy in Haiti deeply saddens me, but the deeper tragedy is also rooted in the inability of Haiti to sustain economic development and build the institutions that are key to rising GDP and human welfare. We shouldn’t forget that Haiti’s economy and government were critically damaged by a US occupation to preserve US economic interests in the nation, regardless of what the nation’s citizens actually wanted.

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Dec 16 2009
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Economics, politics

The Currency of Independence

A new player has emerged in the roiling political theater of the Caucasus: the tiny, destitute Pacific island nation of Nauru, which on Tuesday became the fourth country to formally establish diplomatic relations with Abkhazia, effectively recognizing its sovereignty.

The announcement comes 15 months after Russia began lobbying its allies to recognize Abkhazia and South Ossetia, the two separatist territories at the center of its 2008 war with Georgia.

Nauru, an eight-square-mile rock in the South Pacific with about 11,000 inhabitants, was no pushover, according to the influential Russian daily newspaper Kommersant. In talks with Russian officials, Nauru requested $50 million for “urgent social and economic projects,” the newspaper reported, citing unnamed Russian diplomats.

The article is interesting throughout. Perhaps this is a good way to think about the process of statehood: you have to be clever and or lucky enough to be able to buy in.

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Dec 02 2009
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Economics, pop culture

The Economist and the M&M

The ubiquitous peanut M&M, incidentally:

Mr. Vernon, the renowned student of multinationals, was once employed by a multinational-in-the-making. In 1954 he went to work for Forrest Mars Sr., who built the Mars candy empire. Mr. Vernon was placed in charge of planning, finance and new products. He oversaw the development effort that led to chocolate-covered peanut M & M’s.

The new peanut variety was a success, and, in the candy industry, Mr. Vernon was called ”the man who put the crunch in M & M’s.”

The excerpt is from the New York Times obituary for Raymond Vernon, an eminent economist whose work is important in international trade. The full article is worth a read and contains much of interest.

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Nov 26 2009
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Economics

How To Solve African Desertification

From Africa News, Jan. 15th, 2008, accessed Lexis-Nexis:

But a conversation I had with someone on bus while travelling to Kitgum Town in northern Uganda shaded a new light on the reason why people do what they do. When I raised the issue of environmental impact of tree cutting on the future, my friend quickly reminded me that one worries about environment if they think there is a future. And indeed in the case of Northern Uganda people, it is not hard to believe that such is the prevailing attitude of the day. Life in camps give anyone very little hope of the future. Perhaps, that is the driving force behind desertification throughout Africa. The only solution to this problem is to provide people with alternative means of survival and to offer them basic environmental classes. Without quick change of attitude, Africa will burn and soon the rest of the world will follow. And none of the conservation on environment going on in the western world will mean a damn thing without saving Africa or any other third world continent like South America.

I guess I should file this in the ‘growth good’ file.

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Nov 26 2009
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Economics, pop culture

What Is Twitter Good For, Anyway? Probably a Lot.

It is obvious to anyone in the business of media, advertising, and promotion that Twitter and other social networking applications have been become critically important in the generation and dissemination of information. But what else could we do with this? I have a couple ideas.

1. Elections. I was at the Young Democrats of America national convention this August in Chicago where one side of the ticket led by current YDA President Crystal Strait had the election bought and paid for.  Part of why money was so influential in this election is that you didn’t have to literally buy the entire delegation from particular states; you only had to buy the state leadership because it is the state chair who tallies and reports delegate votes. State Young Democrat leadership also rents the hotel rooms and arranges travel with the implicit message that if you are not here to vote for the person they want you to support, you’re going to have to find your own way home. It is hard to maintain the integrity of a ballot when you can control all parts of that process.

How can Twitter change this? Simple. It would be a trivial exercise to have Twitter create an elections application based on their platform. You could register the phone numbers for individual delegates at registration or alternatively assign each delegate a secure ID that they use to tweet votes. No one votes who isn’t registered and cleared by the organization, since you’re able to control access to the voting mechanism, and as a (presumptively) independent and unbiased third-party organization, Twitter can maintain ballot integrity since it’s a trivial exercise for them to ensure the secrecy of the ballot. This guts the ability of state or national officials to control their voting blocs. And since everyone has cell phones anyway, the platform’s infrastructure is already in place. You get all the benefits of electronic voting and none of the disadvantages. There are a few other objections but I’ll address them without loss of generality later on.

2. GPS navigation devices. A friend and I were driving through St. Louis today and her GPS navigation system led us to a highway that was closed for construction (and had been closed for the better part of the past year) and I was reminded of a conversation I had a couple years ago with Dr. Ron Harstad, who presciently asked how we could use cell phone technology to route traffic more efficiently.

The operative principle is that the interface determines behavior. Imagine if there was a realtime integration of GPS navigation with Twitter. Instead of unique avatar names, you could identify posts with a unique identifier for the time and exact geographical navigation and scroll the most recent and most important posts along the sidebar. Crowdsourcing realtime information about traffic routes is both eminently feasible and pretty cheap, since the only additional work you’d have to do is add on a Twitter interface specific to the GPS system. Combatting things like spam or bad information is something that we’ve learned is really feasible through crowdsourcing and the only real work is to design the interface appropriately. You can take a look at Google Earth, where crowdsourcing has added incredible richness and value to an application that would be otherwise prohibitively expensive to engineer, or Facebook or Digg, where posts are subjected to realtime evaluation as users are able to evaluate which signals are valuable and which are not. Imagine the potential for coordinating and managing large emergency situations particularly.

Now to address objections. Generally speaking, objections to these proposals are all parametric questions that we can easily engineer around. Questions of security: how can we preserve a ballot’s integrity or prevent people from misusing realtime emergency navigation data can generally be addressed with the right set of protocols (you have a 3rd party control the voting platform or time-delay realtime emergency tweets in appropriate situations). Questions of workability: can we depend on telephone communications and satellites? What if Twitter goes down? These problems are generally managed by ensuring redundancy in the system. Questions of access: not everyone has a  cellphone (fortunately almost everyone does and they are really cheap).

Thoughts?

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Nov 23 2009
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Economics, politics

A Story of Revolution in Venezuela

Before Chavez there was Bolivar, before Bolivar there was Miranda, who is now known as El Precursor. Interestingly, the link is to the entry in the Encyclopedia Britannica, not Wikipedia (it is both jarringly strange and wonderful to me that Wikipedia has made the Encyclopedia Britannica irrelevant to me). This selection is from the excellent A Way In The World, a selection of autobiographical personal narrative by the Nobel Laureate V. S. Naipaul:

…Venezuela is a colony in the New World, with slave plantations, and it has all the divisions of that kind of place: Spaniards from Spain, who are the officials; a creole Spanish aristocracy; creole Spaniards who are not aristocracy; mulattos; the Negros of the plantations; the aboriginal Indians. This kind of place is held together only by a strong external authority. When that external authority goes, people can begin to feel they are sinking. Freedom for one group can mean slavery or oppression for another group.

So the Venezuelan revolution, as it progresses, deepens every racial and caste division in the country, encourages every kind of fear and jealousy; and the revolution begins to fail. The ordinary people of the country begin to go over to the other side, the side of old authority, and the reverences and law and religion they know.

Miranda appeals to the slaves to join him. They don’t listen; in fact, the slaves of Barlovento rebel, and there is a moment when it seems they might capture the capital, Caracas. And now, to buy peace, or at any rate to buy time, some of the very men who had called Miranda out from London, to lead their revolution, decide to hand him to the Spaniards. They wake him up one night and march him to the dungeon of a coastal fort.

There is some very interesting material here and many things to note. One is the sheer impact of Spanish colonialism, which as part of its economic and territorial imperialism has reshaped the human map of Venezuela in very vicious ways. I am curious about the evolutionary path of these kinds of coalitions and the strategic games they play and why particularly these coalitions aren’t able to mutually coordinate a revolution or (later stable non-authoritarian government).

The line of thought also plays out some interesting questions. It seems to me that bad governance is path-dependent and part of the story is that turmoil itself retards the formation and optimal evolution of institutions that make civil governance possible. If you have any thoughts of readings to point me further along this path please post them in the comments.

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Nov 18 2009
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Economics, politics, Uncategorized

On Reforming the Missouri Payday Loan Industry

This Monday I attended a legislative forum on payday loans held by Missouri House representative Mary Still (D, MO-25). Also on the panel were Representatives Stephen Webber (D, MO-23), Chris Kelly (D, MO-24), John Burnett (D, MO-40) and Charlie Norr (D, MO-137). Roughly 18 people were scheduled to testify though unfortunately I was only able to be there for the first 5-7 or so witnesses. Here is the Columbia Tribune covering; here is coverage from the Columbia Missourian.

The big concern with payday lending is that we want to prevent people from overborrowing. It is a simple scenario: people in financial difficulty borrow money and can’t repay the loan on time, so the loan rolls over with additional fees or interest, aggravating an already difficult financial situation. As an outcome, this is undesirable, particularly when the victims are vulnerable to exogenous economic shocks and politically weak, like single mothers, or people with terminal illnesses living on a very limited income.

So what are the problems with payday lending? My biggest problem with both sides of the debate is a lack of data. Or rather, a lack of clear data. Payday loan providers tend to show off their own data that claiming that people who take out these loans are generally financially stable and use them as bridge loans. But data from organizations dealing with complaints (473 in Missouri in 2008) about payday lenders show that people making complaints are generally low-income and not financially stable. Some complaints also highlight questionably ethical or downright illegal conduct by payday loan companies in collecting debts, from vicious harassment to threats of jail or violence (this is particularly undesirable when it impacts the poor and politically weak). But we don’t know the true size or magnitude of these problems since neither sides of the market have incentives to accurately self-report (we can safely assume some proportion of consumer complaints are efforts to game the system and not legitimate complaints, though the Better Business Bureau does distinguish between legitimate complaints and illegitimate complaints).

Payday loan companies might be truly reporting the consumer data that they have. But there is no guarantee that their data is correct. Generally the only vetting of clients happens through an employment check, and clients may have incentives to provide deceptive or misleading information to get loans. So that data set may have serious problems. But data from organizations like the Better Business Bureau also faces some selection bias: it is likely that their survey data comes from people looking to use these legal structures to force a renegotiation of their loan terms or have registered complaints about the conduct of loan companies (I was unable to find a methodological note on their 2007 survey of 3,700 borrowers, which is important given that the industry did 2.8 million loans in Missouri in 2008). So BBB data may not include input from a representative sample of customers. I also don’t trust a lot of the data on industry profits, which this study by Tobacman and Skiba puts at around 10.1% (here is a Columbia Tribune article that provides an unattributed statistic of 6.6% for the 5 biggest payday lending companies). The problem with profit data from payday lenders is that a large number of transactions happen in cash, which leads me to believe that  there is some level of revenue that companies have the option of keeping off their books.

Here more data is useful in determining the size of the market and the impact of regulation. But we don’t need it to claim that the existence of claims alleging serious misconduct by businesses merits attention. What we do need is a cost benefit analysis that examines the incentives the market faces. Specifically, if regulation is enacted (and it is fairly well demonstrable that even basic regulations curtail payday lending operations substantially) where does the market re-locate? A possibility is that some of this business becomes part of the black or grey market. Is it worse to be gouged by regulated providers (companies with business licenses) or gouged by unregulated providers? Do markets with unregulated providers have better ability to vet clients, make better loans, and have fewer negative outcomes, since they aren’t constricted by the law? Do those markets have better social outcomes, despite the absence of legal protections for either party? Or do black markets end up looking up like the Mafia? This line of questioning is to me unanswered, but there are valuable lessons for the market in the economic literature.

Jon Zinman of Dartmouth has a forthcoming paper in the Journal of Banking and Finance that examines credit market substitutions that consumers make in the absence of access to credit. It finds that the market looks different when interest caps are in effect: payday loan providers start charging larger service fees where they still exist and households shift to credit cards and bank overdrafts to find liquidity. Zinman finds particularly Oregon interest rate caps left households worse off when their options for liquidity were curtailed by the exit of payday loan providers.

So there are two differing theories on expensive loans. First there is the idea that access to expensive credit leaves a percentage of users (we don’t know what percentage) worse off, because they aggravate the financial distress of people already struggling. There are several models in the economic and behavioral literature that support this. I point particularly to Rabin and O’Donohue in 2006, along with Carrell and Zinman 2008 (payday loans make airmen in the USAF worse off), and Campbell et al 2008 (where payday loans exist people are more likely to have their bank accounts involuntarily closed).

On the other side of the debate are arguments that restricting access to credit is bad. Here is Karlan and Zinman defending usury in the Wall Street Journal. Here is Deyoung also in the WSJ, looking at firm-level microdata from Colorado and concluding that regulation increases the cost of credit which leaves consumers worse off. Here is Adair Morse, who examines data from disaster financiers during the San Francisco earthquake and finds out that even expensive credit is key to maintaining the pre-disaster trends in human well-being (using human welfare indicators like the number of births, deaths, foreclosures, and substance abuse). And here is Greg Elliehausen who finds that consumers act rationally in calculating the costs of high-interest loans (my thought: the fact that consumers make rational calculations doesn’t mean that calculations are right or that outcomes are optimal, ex: the subprime loan market).

The problem that we face is that both sides of the debate are true in some fashion. Studies on both sides are hobbled by selection biases at some level. Morse, particularly, notes that her study faces a huge selection bias: people applying for disaster financing in San Fransisco are not representative of people applying for payday loans in conditions of economic instability, nor are the data on outcomes generally capable of catching people who are left worse off. Interesting aside: Morse references the Italian immigrant who later founded the Bank of America after events left him in a position to be a monopoly supplier of loans after the earthquake.

Perhaps regulation should focus on improving the vetting process, to select out the people who are likely to be worse off if they obtained a high interest loan. That avenue isn’t attractive to me because as a libertarian I distrust paternalistic government, but if we can establish that some level of regulation minimizes or eliminates undesirable social outcomes then it is better than the status quo. I do caution against regulations that drive this market underground because that hurts our ability to be conscious of its existence and as social engineers the limits on what we know about populations is very meaningful in terms of what we can or can’t conceptualize in terms of solutions.

I think that the lesson from the economic literature is that populations are not homogenous, generally, and that there are sectors of the market that would benefit from regulation, specifically the slice of consumers who would be left worse off in the case of default. It is also a very pertinent question of social policy as to how we can aid or assist this sector of the population without incentivizing free-riders. The difficulty lies in tranching the payday loan market without closing it.

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