Coercion and External Costs: Auckland Beast With Two Backs Edition

From our old pal Eric Crampton, something I gather must be a "problem" for undergrads: noisy dorm room canoodling. The GTM had a piece here a while back on side payments for dorm rooms at Duke. The relevant take-away from that story is that room accommodations for students tend to be part of bundled contracts: they're tied to attendance, and typically, no one raises a stink when the housing department leans a little to the thuggish side.

And why should anyone, so long as the conditions aren't too gulag-ish? The kids are out of the house for the first time in their lives, so they're happy. The parents just got one of their rooms back to use for their own externality generation, so they're happy, and the community sure doesn't want roving gangs of young adults churning the local rental markets, so they're, well, they're not unhappy. Universities can get away with a whole lot more coercion with 18-22 year old kids than they might with, say, people my age.

But officials still should probably let students find their own mutually beneficial solutions to common pool problems, right? Being especially rigid with room assignments seems peculiar. Roth has all these cool matching algorithms to perhaps make initial assignments better. You, know, maybe have something like OKCupid for dorm rooms, and then why not have exchanges or something for the fine tuning?

I suppose this is what they call a bleg: at your university, how do administrators determine room assignments? What could be done to make the process better? Is this even an important problem?

The Base of the Pyramid

It's pretty easy to live day to day in the heady atmosphere of the commanding heights with not so much as a second thought to what lies beneath. All the vigorous machinery of commerce and history that delivers commonplace treasures onto our desks, across our shoulders, into our bellies, these are the vasty artifacts that slumber unseen but for the tiny bit of elephant we actually graze blindly in our daily labors. Leonard Read's classic essay stands as a fine example of what it might look like if we took the blinkers off for a short moment to gaze unprotected into the fiery heart of the web of production, to ponder the deceptively simple power of something as mundane as a number preceded by a printers' mark for currency. And even then, prices are still but a proxy for what is, distilled, a gossamer global phlogiston of minds in their capacity as thinking, agreeing, calculating, and yes, even loving meat machines.

It is valiant, necessary, worthwhile to judge the outcomes seen in the commanding heights and decry profound unfairness, intolerable injustice, to rail against outrageous fortunes. Circumspection serves us best when we consider that policy tends to affect the stones at the base of the pyramid, meddling directly with vital price signals, clutching to the unaccountable hope that the intervention will eradicate the despair witnessed on the capstone.

Circumspection isn't sexy. It doesn't make the news, it doesn't get pageviews. Bombast, pulpit-pounding, fire, brimstone, confrontation, these are the elements of attention. Caution, prudence, restraint, these are the elements of being on the receiving end of a trifling yawn. 

It's compelling to say, "that ain't euvoluntary pool, let's fix it." It's drab as dishwater to say, "that might not be such a great idea." Thinking deeply about problems and having a light touch never put anyone in the history books. More's the pity.

Christopher Walken's Lesser Known Brother, Jay

From the Twitter, an interesting conversation between EE peeps Pamela J Stubbart, Adam Gurri, and Zac Gochenour, plus commentary from "Dr. Phil of Economics", the content of which can be found here. Again, the threading is a little hard to follow, so let's see if I can parse.

Peej: Aggressive but genuinely competent jaywalking still has pretty serious negative externalities because other pedestrians are taking cues from you.

Zac/Dr. Phil: That's an abuse of the language of economics. You're talking about information transmission, and negative externalities are what happens when a third party incurs costs of a transaction of which they are not a part. This doesn't count, since the decision of the other pedestrians in your example still have to make the rational decision whether or not to jaywalk.

Peej: Rational? What are you talking about? I'm talking Kahneman here, not Demsetz. Try to keep up, boys.

Adam: lol, pwned. But it's still hard to call that an externality. Even if the mental processing is not de facto rationally conscious, it's not like the classical examples where avoidance costs come from outside sources. Think of Coase's train sparks and cornfields. There's no farmer mulling over a private calculus, there are burning crops. The two just aren't equivalent.

Peej: Theory of mind much, Adam? What happens in your head is as "real" as what happens in physical space. [SLW note: Pamela didn't actually press this point, this is more me furthering the argument for didactic purposes]

Dr. Phil/Adam: Information transmission is how civilizations happen. We are human thanks to our habit of mimicry.

Peej: So you admit I'm right. That's what I thought.

And then she took a picture of herself in a victory pose.

What do you think? Does jaywalking impose mimicry costs on others? In a court of law, you wouldn't be able to make a case of actual physical coercion, but what of a sort of soft coercion centered on a weakness of will or overconfidence or whatever other cognitive bias might influence a novice (or a child) jaywalker-to-be?

Can we extend the example? Does pro wrestling bear some responsibility for idiot kids breaking their necks in the backyard when they try to recreate Wrestlemania XXIX with their idiot buddies? Do savvy day traders bear responsibility for overenthusiastic amateurs' dabblings in uncovered short sales? I don't mean in a legal sense, I mean in a pedestrian heuristic sense.

I think the ol' "I learned it by watching you, dad" cry is commonly brought to bear when convenient. Parents will storm the studios of MTV when their kids parrot what they see on Jackass (can you tell how long it's been since I've watched TV regularly?), but they're more likely to do the Justification Tango when it's their own behavior that might be suspect. Construal Level Theory strikes again.

It's also very interesting to revisit Munger's norms arguments in light of jaywalking. Nobody, and I mean but nobody jaywalks in Seattle. This is not true in Boston. Why? Is it more euvoluntary in Beantown? How did it get that way? Curious stuff, people.

Retirement

If you'll permit me to channel the latest econ-themed Twitter parody account for a moment, let me state bluntly that retirement ain't a public good. Just get that nonsense out of your head right now (maybe something about your kids too).

The most expansive definition of a public good carries with it two criteria (one of which is suspect as-is, and the other is suspect over a long enough time horizon), so let's judge retirement against the most stringent criteria: rivalry and excludability.

I admit to feeling a little foolish for this, but I want you to ask yourself if your consumption of your own retirement prevent others from consuming your retirement? Now, you might claim that state-provided pension funds mean that your drawing from a common-pool fund means that I have fewer funds available for my retirement, but that's not rivalry in retirement, it's an aspect of public funding of retirements. It's a fiscal externality, if you will. Your retirement is your lunch. No one can eat it for you. It's completely rival.

Now ask yourself if (again, apologies for the silliness of the question) you can exclude others from consuming your retirement. Is your snowbirding in Boca Raton tantamount to busking?

Your retirement is rival and excludable. It is not a public good. So it's odd to me that economists so quickly fret over the "sustainability" or solvency of SSI. Worries about unfunded liabilities seem to tacitly accept that it's meet and proper for the state to supply something for which there is no market failure either theoretically or empirically.

Now then, you might claim that retirement planning is non-euvoluntary since we know of hyperbolic discounting and have heard plenty of stories of ex post regret. Okay, well that's another story. Individuals can be unlucky or short-sighted. Perhaps there's some other moral intuition going on outside of the strict economics. And that's cool. But the arguments (for and against!) don't typically start from there. And when they do, it still seems a mighty leap to claim systematic error.

Remember, people: widespread and systematic are two very different things. To be systematic, the decisions of one person must necessarily influence the decisions of other people. You know how to make that happen? Nationalize retirement accounts.

Now, perhaps there is room for coercion in there somewhere. I actually think it would be a fine, fine idea to have opt-out quasi-mandatory personal retirement accounts. This is a perfect opportunity for the nudge folks to shine. But OASDI as is? It's the opposite of euvoluntary, whatever that is.

ULAFT: unfunded liabilities are future taxes, and boy howdy are they ever substantial.

Also recall that a better ratio of fiscal health is (total discounted future liabilities)/(total discounted collectible tax receipts). This debt/GDP ratio is a red herring, and you know it.

Anjie Brings the Heat (Again!)

Via The Ümlaut, a smashing Castillo piece on the directional euvoluntarity of female sexuality.

EE quote:

Female porn stars provide one case study. These women enjoy Bergner’s vision of uninhibited female sexuality and make money doing it. They preform sexually diverse acts, à la Bailey, and reside at Meanda’s commanding heights of male desire. While many are drawn to the sex industry under less than euvoluntary conditions, we can compare their preferences and outcomes to those of other women of similar socio-economic status. If the first order preference of sexual satisfaction is stronger for these women than the second order preference for a traditional family, we should expect porn stars to be happier and less desiring of monogamy on average than similarly-situated women outside of the porn industry.

While the male porn stars harbored few regrets from their time in “the biz,” many of the women were rattled or reeling. Their fame, power, and sexual satisfaction came at the extreme price of a diminished shot at a normal, “oppressive,” marriage and children. Undoubtedly, social stigma against sex workers is largely to blame for their plight. For better or for worse, the sexual cartel is a harsh mistress. Still, it is worth noting that some women who unwittingly live la vida Bergner jealously eye their sisters’ “shackles.”

People, the sexual menu is expanding. With heterogeneous preferences, Ozzie and Harriet are still on the table, but now so is Caligula. More choices, less stigma? That's the EE way.

Adjustable-Rate Mortgages

I am a home owner. Or if I've been playing too many video games, I am a home pwner (your domination is my vacation). Because of this, I tend to get reams of junk mail offering me fantastic refinancing deals. Hooray!

Now, since you've likely deduced that I've a bit of a training in economics, it naturally follows that I have no idea what the yield curve looks like on any particular day. I am however unusually blessed with an eagle-eyed spouse who takes every opportunity to keep from forking over cash moneys to lenders. She loathes interest, whereas I'm stupid enough to think its social benefit is all unicorn glitter and ballerinas pirouetting in a, I don't know, a glade or something. I flatter myself to think I'm on the side of a larger truth, whereas she actually keeps our household ledger in the black. It should be immediately obvious to anyone that she far and away provides a much larger marginal benefit to our household, so it should come as no surprise that she tracked down a few of these offers and looked a little closer.

Surprise, surprise, the ones that sound too good to be true are precisely that. They're either 15 year mortgages (we're not even remotely able to handle that) or they're adjustable rate.

For those of you who've never had to wrangle with the niceties of home financing, an ARM works a little like this: you start out for a couple of years with a relatively low fixed (say, 3%) interest rate on your loan, and when this sweetheart period is up, you start paying interest a bit over the floating market rate. Here, look at this:

That's what a yield curve looks like when it's at home. Source. How you'd calculate your floating rate is that you'd consult your crystal ball to see what this guy will look like each payment cycle down the life of your loan, find the time left on your mortgage on the abscissa, follow it up to the curve then head West young man to the rate on the ordinate. Since you're not the US Treasury, you pay some basis points above that (I'm not sufficiently familiar with the system to say exactly how much). If you're lucky enough, the yield curve will remain nice and low so that you don't get rear-ended by bigger and bigger interest components of your mortgage payment.

Which is what happened to folks in 2008.

Five years ago.

I'll not try to parse the substance of the response to the financial crisis. What I will do is ask why the Ban Barnstormers haven't so much as wiggled their wings at what seems to be an exploitative lending practice. Compared to, say, payday lending, the ARM seems a hell of a lot more deceptive.

Or does it? There's really no information asymmetry to speak of, right? Borrowers in effect become speculators, taking rather large uncovered positions over future market movements (think of the tremendous downside risk implicit here), but it's not like they're being tricked by lenders. In contrast, under a fixed rate mortgage, it is the lender (well, actually the taxpayer so long as we have Fannie and Freddy) who accepts the long-tail downside risk. But who should (normative claim alert!!!) accept the downside risk? It seems to me as if most folks hew to the opinion that it ought to be the big, faceless, indifferent corporations. People get all bent askew over Glass-Steagall (really!), but not so much as a lifted eyebrow when there's this huge industry-wide practice that heaps systemic risks on the shoulders of ordinary citizens.

Don't get me wrong, I think that as long as folks actually understand what it is they're agreeing to (and they have a pretty strong incentive to learn about what it is they're agreeing to for the next thirty years!), any ex post regret is their own ever-loving fault. But I also think that this moral and economic calculus applies in equal measure to other lending markets that people have at various times lit the pitchforks and grabbed the torches over.

So how about it? Are the regrets felt by ARM holders of the right type to make this type of loan non-euvoluntary? What does that imply for the regulatory scheme? Do we have different caveat emptor goalposts here? What to do about it?

Journalism

When "reporting" becomes ancillary to the regime, how many commonplace transactions become non-euvoluntary?

Will it or no, and I make no character assessments whether you do or don't, your commerce o'er amber waves of grain suffuses agents of the state with the lard they seek to pack the bearings of the war engines sent abroad to rain fire and death.

Don't get me wrong. I admit some bias as a pacifist, but I acknowledge that with unbiased (and by this, I mean the technical definition bit where omissions are random rather than systematically skewed) information, the median voter could still pretty easily come to the conclusion that violence against foreign nationals could be consistent with a rational moral and economic calculus. I might disagree with the rationale that leads to such an outcome, but the thing is, when (h/t Abby Hall) the Secretary of Defense refers to "intervention" in Syria as an option, it beggars belief that a responsible journalist would parrot this language. Or ever stoop to using the term "kinetic action" or any of the other kayfabe-laden doublespeak that oozes from between the lips of politicians.

Commerce that sends tax money to DC to fund fluffy bunny wars isn't euvoluntary.

Commerce that sends tax money to DC to rain hellfire on schools and orphanages is euvoluntary, provided that a) you're aware that this is part of the cost of war and b) you agree that the marginal benefits outweigh the marginal costs.

That the news organizations have selected for editors and journalists who dutifully refrain from approaching the regime with such skepticism suggests to me that the median voter, if better informed, would more likely find foreign aggression to lie a bit further afield from the national interest.

Also, this is probably more of a tweet than a blog comment, but if you really worry deeply about the plight of the oppressed, perhaps a better solution is to offer asylum instead of marching off to war. Just sayin'.

Remittance Payments and Directional Euvoluntarity: Buttercoin and Brito

Jerry Brito (along with our pal Andrea Castillo) is busy doing the heavy lifting when it comes to the economics (and political economy) of Bitcoin, and since his work already addresses EE points, I have ruled it prudent and polite to keep from sailing upwind of his research. If you'll forgive a note of conceit, I'd like to cross tack just this once.

Buttercoin is a nascent startup aimed at slashing the tendon of Western Union's business model using Bitcoins as the medium of exchange* in lieu of the staple currency: US dollars. Their praedicatum is that the extant firms are circumstantially coercive. Expats have little recourse but to submit to being "gouged" to the tune of 10% per transaction. These guys call shenanigans and say that they can operate for less.

I for one hope they're right. Now, I don't claim to know what the "correct" price is here by any stretch, but I do know the following:
1) Overseas postal workers are far far more likely to steal from parcels and letters than US workers.
2) Setting up an international account with a bank is a hassle the likes of which most Americans have no idea.
3) Even if you do manage to safely and securely get your cash from point A to country B, you're still not out of the woods, since as cash shifts hands, you're not entirely unlikely to end up with a wad of counterfeit Russian bills lining your palms.

Given all that, 10% is often a lot better than the alternatives. Voluntary, as it were, though not euvoluntary. Buttercoin promises to sidestep all that. Bitcoin can't be counterfeited, can't be seized by unscrupulous agents of the state, and can be quickly and painlessly converted into the local currency. If it turns out that the prices charged are thanks chiefly to these technical hurdles, then the Buttercoin folks might well be able to successfully undercut them. If, as I fear might be the case, it's a matter of regime uncertainty (grease the right palms or your business license won't get through), it could well be that the 10% is there as a normal cost of doing business.

Fingers crossed, guys. Godspeed.



*this is sort of an interesting point of semantics here. In this application, is Bitcoin more a medium of exchange or a unit of account? It's a wonky question, and I'm not sure it really matters apart from some technical legal questions across regimes. After all, what really counts as "money" is a matter to be hashed out in arbitration, yes?

Post-Treatment Euvoluntarity Evaluation

An easy trap for a novice applied econometrician to fall into (and take it from me, I'm one myself) is to include variables that capture post-treatment effects in a regression. If you're interested in the effects of X on Y and you want to control for variance introduced by A, B, and C, you should pause for a moment and ask whether X itself influences A, B, and C. For example, if you want to know what influence a bit of crude oil tax policy has on prices at the pump, including reserve stock as a control variable can skew your results since the tax policy is likely to influence how much crude the firm warehouses.

Well, that might be a silly example. Ask Giberson or Kiesling if you want to know more about the actual econometrics of the oil industry. It's not exactly in my wheelhouse.

But euvoluntary exchange is and similar arguments apply to evaluating euvoluntarity apply. Take illicit drugs for example. If you want to discover whether or not a market in marijuana is euvoluntary, you must make your point of analysis free of the confounding influence of existing legislation. Feel free to include whatever other institutional factors you like, but the treatment is the legislation. You can't just say drugs are bad because they're illegal and they're illegal because they're bad. Even small children can recognize that such arguments beg the question.

And this problem is massively widespread when discussing a wide range of topics. Worried about the effect of immigration on public schooling? The way public schools are administered is the treatment, people. Ditto medicine, ditto deposit insurance, ditto lending markets. Ditto, well, take a quick peek at the volume of the Federal Register and make your own list.

Be very cautious about what actually counts in your EE calculus. I think you'll probably find that things aren't always as they might seem and there's quite a lot of exchanges that could be more easily categorized as euvoluntary but for the scritch-scratching of legislators' pens.

Ergodic Catastrophe and Moral Intuition: EE and Genetic Tinkering.

My man Adam G., longtime EE booster and all-around great guy wades hip deep into a tussle over the role of genetic modifications (a weird term, don't you think?). He pits the always-excellent Virginia Postrel against the irascible Nassim Taleb. The OP on The Umlaut (sorry Eli, Adam, and Angie, I can't be bothered to open my character map) can be found here: The Risks and Rewards of Genetically Modified Organisms [Edit]: Postrel's Time opening salvo article here.

Since it was a Postrel tweet that prompted Adam's musings, it should come as no surprise that the subsequent discussion unfolded there. Here's what he posted later, following a discussion with both Postrel and Taleb (and some minor side commentary from a few spectators): GMOs Rehashed with Virginia Postrel and Nassim Taleb. If you're confused after trying to wind your way through that Storify thread, you're not alone. The threading is kind of ragged, but as I read it, here's the gist of the dialog:

Postrel: Kickstarter is a cabal of Luddites. GMOs are the future. Standing athwart history impoverishes people yet born. Opposing them is monstrous.

Gurri: Hang on a tic. You're right about the potential upsides, but isn't there a corresponding downside risk? Taleb warns us that long-tail events are catastrophic and that the tails are thick.

Taleb: Yes Adam, and when Mother Nature shakes off her fleas, "catastrophic" is gently understated.

Dr. Phil: Not risk, ergodicity.

Taleb: Exactly. Not only are the potential downside outcomes unknown, but they're unknowable. Furthermore, they're irreversible AND they're tightly wound. A rogue GMO could wipe out all agriculture dudes. A perfectly reasonable application of the Precautionary Principle insists on some prophylactic prohibition.

Postrel: Ridiculous. By your logic, all of the great social changes we've had from ending slavery to the liberation of women to the gay rights revolution we're seeing right now should have been prohibited. They're all tightly wound, irreversible, and unknowable. Will you argue that ex ante, they were ill-advised?

[Several People]: B-but, that's not the same thing.

Postrel: Apply your principles consistently, people. Postrel out. *drops mic*

Gurri: Well that was certainly enlightening. I have more to think about.

It's that last line from Adam I want you to pay close attention to. For those of you who don't know him, Adam is one of the most thoughtful, circumspect people it is my privilege to know in real life. He routinely engages thorny topics like this with a toothy grin and joy most people reserve for, I don't know, puppies and caviar or whatever. And he's left with food for thought.

So here's my question: if this dude's ambivalent after talking with luminaries like Virginia Postrel and Nassim Taleb, how do you suppose it might be that ordinary folks are to form their attenuated policy positions grounded in common-sense moral intuition? How do people approach non-ergodic catastrophe? What does that imply for the Median Voter Theorem? For expected policy?

Look, we already know about cognitive biases that magnify rare, visible risks and ignore common, boring risks. That's why we see kids in homes with swimming pools alongside school bus terrorist drills. But it also may be empirically true that a substantial political upheaval can result in the untimely deaths of tens of millions of people and interminable oppression for generations. Not all ex post regret is equal, dudes.

My point isn't so much to ask if GMOs are euvoluntary or not, but to ask whether the casual voter, after mulling arguments for and against would think that they are. We know that there are a lot of crunchy granola types that oppose gene swapping for reasons that may not always be purely instrumental, but how closely do the opinion margins hew to the Taleb objections? And how much could we be giving up by yielding rein leather to puckerishness?

As Adam says, it's a lot to think about.

NJ to Ban Conversion Therapy

The AP (among numerous other sources) reports that NJ Governor Christie is expected to sign legislation banning so-called "conversion therapy," becoming the second state in the union to do so.

My thoughts haven't changed that much since California passed similar legislation last year. There's an agency problem when parents' moral and economic calculus is misaligned with the long-term interests of their children and they end up making systematically erroneous coercive decisions, but this does not seem to imply that the appropriate legislative response is a comprehensive ban.

Before I condemn too quickly on faint evidence, I might also consider tacit coercion. Okay, so one way to get a kid to attend conversion therapy is for the parents to twist their ears or haul them kicking and screaming to the center. Another way is to silently guilt them into it. Or to... well, use your imagination. Have you ever had to get a toddler to eat peas when she didn't want to? I think I may have been a little blithe when I said that California should have just banned the coercion instead of the therapy itself. When you're dealing with children, how can you even identify coercive behavior from afar?

What we seem to have here is an interesting application of the end-state precautionary principle: "The Republican governor also said the health risks of trying to change a child's sexual orientation, as identified by the American Psychological Association, outweigh concerns over the government setting limits on parental choice." This therapy has demonstrated harm: suicide, depression, anxiety. If it can't show commensurate benefits, practitioners should be shut down. Right? We have a double-whammy of coercion and regret. It is not okay to force kids into therapy of dubious worth against their will.

It's an interesting lesson to ponder, so let's hope that people think about it seriously. Let's hope that while they're thinking about it, they take the time to generalize the analysis and rethink the position that stuffing kids full of amphetamines so that they don't fidget in class is such a great idea.

It's okay to be Takei, but it's also okay to play. Skenazy and Sulu have at least this one thing in common: kids are human beings too, people. Lend them some dignity if you can spare it.

Club Goods, Networks, and Moral Obligation

Suppose you're not just popular because you're fun at parties or, like Mungo and me, look good in a string bikini. Suppose you're a well-connected celebrity academic, like Mungo, but not like me. Maybe you've got an extremely pleasant, tenured position at an institution you treasure in a part of the world that fits you just perfectly. Maybe it would take an Act of God to dislodge you from your big overstuffed comfy chair in your tastefully-appointed, yet delightfully cluttered office. Maybe you have no narrow, self-interested reason to obtain or maintain an account with a service like LinkedIn.

Should you do it anyway? Sure, you might not gain from it, but if you teach at an elite, or even just a middle-of-the-road graduate-degree-granting institution, your students, both current and former can use you as a particularly valuable node. If you even casually keep up with alumni, you have a much better idea of where to point students on the cusp of graduation. Moreover, you have a really good idea of who the best talent in the current crop of graduates is, much more so than can fit on a CV or can be easily communicated in a ten minute interview in a conference hotel room.

You're a club good. Your account is more than just merely euvoluntary. You generate a positive externality.

But the marginal cost to you of joining this probably exceeds the private marginal benefit. Ordinary relative price economics and Coase suggests that you should join and then be compensated by the beneficiaries. Of course, there's a bit of a dispersion problem that seems like it might wander a bit out of Ostrom territory. For most of the private common pool resource allocation solutions studied by Elinor and Vince Ostrom, there were good social ties that kept people from shirking. If you think it's worth it to subsidize Paul Krugman and Tyler Cowen's LinkedIn accounts, how would you design the subsidy? Who should bear the cost and how should it be administered?

If you give a good enough answer, I'll advertise it and who knows, you might get featured on MR.

Networks, Violence, Externalities, and Denominators: an Analytical Puzzle

Something recently occurred to me as I continue to slouch towards a finished dissertation. The modern, tech-savvy economist's eyes will twinkle as she tells you tales of network externalities, of how being embedded in ever vaster webs of personal connections and voluntary associations yields gloriously cheap transmission. The world is edging ever closer to the caricature of the Coase Theorem, where near-zero transaction costs imply a wildflowering of voluntary, personal conflict resolution. This could even be one way to (incorrectly, since it misapprehends his claim) stand athwart Tyler Cowen's Great Stagnation thesis. More choice today includes more choice over whom to associate with. As a quick example, I am Facebook friends with Bill Leeb, Martin Atkins, cEvin Key, mc chris, and a smattering of other minor celebrities.

Hell, I blog here with Michael f'-omg-ing Munger! I have scores of friends I've never met in person, and thanks to knock-on effects of ever-denser social networks, I can solicit communication freely from the leading lights of my larger community. If you're old enough to remember typewritten post and wooden cabinets filled with 3x5 cards at the library, you'll recognize what a boon this is.

The unsung downshot of this is that even as GDP figures from the 1970s are probably drastically understated when piled next to today's figures, so are the per-capita violent crime statistics. The dis-utility of a violent crime event spreads wider and faster than it did 40 years ago.

And that's a feature, not a bug! It's good that murders, robberies, and assaults incidentally harm more folks per incident. Why? Because it gives folks a greater personal incentive to re-arrange the parameters of the crime and punishment game, particularly detection. By now, I'm sure you've heard tales of intrepid Internet sleuths hunting down bullies, thugs, hit-and-run drivers, and the like and hauling them to justice. The SPNE of this is... less crime.

So fleshy, broad networks are good not just because of the direct upside benefits, but perhaps also because they help mitigate downside risks. This makes them super-euvoluntary. This probably also suggests that to really reap the benefits of downside risk mitigation, legislators should avoid hobbling Web community-based police work.

At any rate, for those of us who work frequently with panel data on violent crime, I'd love to hear some ideas on how to attempt to control for this effect. It's something more than just time fixed effects, but I'm worried that it'll inevitably get captured as such. Maybe a natural experiment discontinuity regression around an ISP outage or something? Hm. It might be worth thinking about a little more.

Abortion is not Euvoluntary

Few topics generate as much heat and as little light as abortion. I've found it interesting that it seems to come up relatively infrequently among those libertarians whose company I frequent. Something tells me that there's not a salience problem. Indeed, I imagine that almost every liberty-minded person out there has spent time mulling this thorny issue, wrestling with its complexity, weighing implicit, stochasic agency against predictable regret, noting likely BATNA scenarios. Giving the topic its due, as it were.

So it's particularly interesting for me to see a libertarian heavyweight tangle with arguably one of the most deservedly important living economists in the world. Bryan Caplan engages Richard Thaler.

Apart from Mario Rizzo's ongoing campaign against the camel's nose in the tent, the idea of soft or "libertarian" paternalism flared up again right here on EE with a post I wrote about the British Parliament's efforts to make salacious materials on the Web available to homes on an opt-in basis. Way off down under in the Land of the Kiwi, crazy Canuck Eric Crampton had similar thoughts at Offsetting Behavio[u]r. Professor Thaler emphatically denied the Nudge link on Twitter, even though "choice architecture" and his work was directly referenced by the politicians designing the scheme.

That's the funny thing about ideas. They're a common pool resource. It'd be nice if there were a lifeguard on duty, making sure nobody's running and that the splashing and horseplay is kept to a minimum, but sure as the day is long, that old burrito is bound to catch up with Smalls and he'll crap right in that pool. That's the nature of politics: it encourages, nay, demands that someone take a dump in the ol' swimmin' hole sooner or later. Virginia Political Economy details this mechanism with sufficient clarity and detail that James Buchanan won a Nobel Memorial Prize for it. I don't think he ever used any pool-pooping metaphors though. That undignified nonsense is 100% Sam. Point is, the originator loses control of an idea once ceded to a legislative authority. Perhaps this is obvious to me only because I'm a public choice student, and expecting others to share my esoteric knowledge is excessive. I should temper my expectations.

The conversation continues with Caplan posing a pointed question to Nudge Paternalists: why not nudge expectant parents away from the decision to abort a fetus? Included in the terms is what seems like a reasonable proposal, regardless of your stance on choice architecture: end government subsidies. After all, to get more of something, subsidize it, and I don't think that even the most staunchly pro-choice left liberal actively seeks more abortions, unless perhaps they subscribe to eugenic or NPG philosophies. Which they might. I know such people. Here's how Thaler responds: "what do you think the ban on government money does? Medicaid=poor. yikes!" Bryan follows up here.

I think Thaler's making a claim underpinned by EE conditions! One of the strongest arguments for keeping abortion legal is founded in BATNA considerations: one alternative to safe, legal abortion is dangerous, black market ("back-alley") abortion, which is riskier for the mother. Of course, that's an assumption. Elsewhere, JR has proposed a new logical fallacy: "I proclaim a new rhetological fallacy: the error of assumed opportunity, e.g. pursuit of leisure costs productivity, instead of leisure." It works well here, since the Right assumes that the alternative is childbirth and the Left assumes that the alternative is the medical equivalent of Jesse Pinkman in season 1 with a surgical mask... okay, let's leave the rest of that alone. More sophisticated arguments on both sides acknowledge multiple margins or a continuum, but most of what we hear are simplified platitudes. Hence the "much heat", "little light" above.

As the novelty account based on Dr. Phil lower in the Tweet thread notes, the median price for an abortion is around $470, and I checked about the Medicaid thing. Only 15 states allow Medicaid to help with the out-of-pocket cost of abortions. I can imagine how I would set up the econometric strategy to find out where the substitution margins actually are (it's not an easy specification, in case you were wondering), but something tells me that even carefully conducted empirical studies are unlikely to cause a whole lot of people to change their minds on this particular subject. It's pretty likely that this is based on strong moral considerations, not on dispassionate utilitarian evidence.

Maybe the reason libertarians don't like talking too much about this subject is because of the problem I'm having right now. I can't write a snappy concluding paragraph. I can't even beg you to consider the issue in a new light. You've heard the arguments, you know the positions. I have nothing new to add to the conversation. All I can say from an EE point of view is that in the exchange of services between a pregnant woman and a physician, the potential future human whose life is at stake gets no say in the transaction. That's it. I can make no further positive claims than that. This observation does not imply in any way any sort of policy position one way or the other and principled people can have legitimate disagreement over what to do next. This is a clash of values, not of beliefs. Our deontology here includes consequences, but the actual moral calculus is not ours to solve on your behalf.

Best wishes everyone, and sorry about the poop jokes. I get nervous when I tackle difficult subjects and it sometimes manifests poorly.

Update: another take here from Joe Colucci. I think he makes an excellent point when he notices that the nudge camp wants to quietly alter knife-edge behavior. Abortion is anything but. The decision to abort is fraught with distress, moral panic, and deep consideration. This is another reason why disinterested third parties have a very difficult case to make for interfering.

Global Markets: Voluntary?

At first I thought this was just typical economically illiterate reporting: 

The U.S. is now swimming in oil, thanks to the oil shale revolution that has turned places like North Dakota into the new Saudi Arabia. The U.S. still has a law on the books – passed during the oil shock of 1979 – that prohibits the export of crude oil, except to Canada and Mexico. The law, however, makes no mention of oil that has been refined into gasoline or diesel fuel. It's diesel fuel that is leading the petroleum export surge. 

The profit margins are higher and the international demand is stronger for diesel than gasoline. Much of the world's automobile fleet runs on diesel. But a number of consumer advocates have wondered aloud in recent months whether this rush to sell refined petroleum products to the rest of the world hasn't hurt the U.S. consumer. If we have so much excess petroleum product, why aren't U.S. pump prices lower?

To be fair, the author (Mark Hoffman) says, "wait, it's not that simple."

But there is actually a broader issue.  If the world price is above the domestic autarky price, it's always true that an open economy "hurts" domestic consumers, at least on that one commodity.  So, my question is this:  is participating in an open economy a voluntary act, by consumers?  What about producers, when the world price is below the domestic autarky price?  How are the property rights to access to global markets, or to foreclose access to global markets, distributed?

Don't say "politics," because that's true in every UNimportant respect.  If you think property rights are important, who owns this right?  If you think the answer is that no one can prevent someone else from engaging in a transaction, then how is that right to be enforced? 

Uncertainty and Harm: Goat Milk and the Precautionary Principle

From Maine, a curious tale of a young mother and her tussle with state officials. Her baby didn't much cotton to store-bought formula, so she swapped in a goats' milk confection. Her doctor reports this to DHHS and wouldn't you know it, they threaten to take her child away.

I'm still a little fuzzy on the arguments behind raw milk bans and the like, so I'll try to see if I can reason my way to this reaction from more elementary principles. Let's assume that there's some risk of harm that travels with consuming dairy products. When you combine that with illness severity, you can estimate roughly what the uncovered cost of raw milk is. If you're a fan of unintentional hilarity, you can check the FDA's site here to discover that between 1993 and 2006, a thirteen year period, well, let's let them use their own words:

[B]etween 1993 and 2006 more than 1500 people in the United States became sick from drinking raw milk or eating cheese made from raw milk. In addition, CDC reported that unpasteurized milk is 150 times more likely to cause foodborne illness and results in 13 times more hospitalizations than illnesses involving pasteurized dairy products.

See the dodge? See how to lie with statistics? We've got 1500+ folks who "became ill", then they moved right on to talking about hospitalizations, hoping that you'll assume that all those roughly 100 folks a year ended up in the ICU rather than with a case of the hershey squirts or upended over a porcelain throne barking their groceries to the Great God Ralph. I especially love that last bit, as if the base rates associated for pasteurized milk is something to incite terror in the great masses of men. Thirteen times close to zero is still pretty close to zero, people.

And really, that's like 115 people a year. Even if these were fatalities, and they're not, the numbers are still too small to be reported by the CDC. Link.

So here we've got a known problem: the baby can't handle store-bought formula, and we've got an unknown solution: homemade goat milk formula (and recall that the risk priors for raw milk are for cow's milk), so how does the cost-benefit calculus employed here justify coercive correction? What's the moral intuition?

For this to really stick, we'd need some way of showing that the mother (and by extension, all mothers) are systematically biased when it comes to risk assessment, that state officials are more accurate when it comes to dispassionately assessing the relative risk-adjusted costs and benefits of different menu options. This either assumes supernatural knowledge on the part of these officials or it relies on the moral warrant that children are the responsibility not of those who whelped them, but to the whole of the democracy. If that's the case, it's a moral warrant that seems entirely at odds with the everyday practice of moral behavior. Should children be removed from homes with pools? From homes with antifreeze in the garage? From homes with dogs? The CDC link above has a list of causes of infant mortality, maybe the state has an interest at minimizing all those risks, consequences be damned.

If this idea of the precautionary principle is to really have any meaningful teeth to it, and if you agree with the notion of equality in the eyes of the law, no one is innocent. No home is safe. If, on the other hand, you hold that the purpose of commercial regulation is to safeguard against manifest risk and extant fraud, you'll probably agree that these Maine officials and those of their ilk are a clowder of tax-funded bullies picking on a teen mother.

But then again, there's very little that has to do with children that could be considered euvoluntary. That's reason #1 to be wary of political speech that ever once references the little tykes.

Should It Be Illegal to Buy Hair?

Women's hair is quite valuable.  A good head* of long hair is worth at least $500.  Hard to trace, easy to sell. 

So, people are stealing it.  Especially in the "People's Paradise" that Sean Penn (pronounced by as "Champagne!" by Emilio) is such a fan of, for the poor people.

My question:  is the purchase of human hair wigs ethical, given that the chances of it being stolen hair are increasing?

Before you answer, remember that saying "No, make human hair wigs illegal" will substantially increase their value.  And that will make the black market demand for stealing hair go UP, making the problem worse.  All you get by making wigs illegal is that warm "I'm a do-gooder, and I like to do good!" feeling.  You actually hurt poor people with your moral smugness.

Of course, it may be worth it.  Moral smugness is VERY valuable.


*Don't start.

You Gonna Eat That?

I assume this is a goof, but if the remarks from the SF Health Department are legitimate, it's a goof that has officials flustered.

It's an app that allows strangers to finish your lunch for when you can't cram the whole thing down your facehole yourself. My initial thought (beyond "this is a silly joke") is "f-ing nasty, man", but you know, different strokes and all. If someone wants to risk, I don't know, mononucleosis or something for a lukewarm, sloppy Reuben, that's their business. Caveat comedor.

What do you think? Public health hazard? Price discrimination? Recycling? What's the right analytical approach? Is LeftoverSwap euvoluntary?

EE Goes to the Movies Ep. 2: Amistad

I'm going with Amistad here instead of Django Unchained, because while the slave revolt aspect is interesting in its appeal to moral intuitions, Amistad more directly incorporates elements of coercive commerce.

The Atlantic slave trade, for those of you who remember your high school history, stood on three legs: the Africa-to-Caribbean chattel run, where most of the horror occurred and where most of the cinema is set; the Caribbean-to-Roanoke sugar run; and the Roanoke-to-Africa rum run. Other triangles, such as with Boston or Lisbon as vertices operated at various times. The details are not particularly salient for the moral questions hinted at by the movie.

We need neither the wisdom of sages nor the patience of ages to know that the forced transportation of captives for bonded labor is immoral. The East-West leg of the triangle was an abomination. Does this also imply that the other legs were as well? One ship, one skipper, three loads of cargo. Is the sugar necessarily soaked in the blood of the men and women pitched overboard upon sight of a British Naval vessel?

I think most people would say "yes" for both consequential and deontological reasons. But how about secondary markets? How about knock-on firms? Does a pastry chef fold the innocent tears of orphaned children into his brioche every time he buys a pound of sugar from his wholesaler? Is that dram of rum spiced with shackle iron? How far does the contagion of immorality spread?

It's not an idle question either, confined to the distant mists of an uncivil past. Violent drug cartels (for example) claim quite a bit of shadow GDP. How many degrees of separation from their money laundering operations do you need to be to claim moral cleanliness? Does the fact that gangsters might by proxy use foreign deposit institutions render these so-called "tax havens" dirty?

And how about across time? The US rail network was subsidized by the non-euvoluntary labor of Chinese immigrants who were treated horridly during and after their work was finished. Is part of the locavore movement underpinned by an aversion to frequenting these artifacts of oppression? I haven't heard this argument forwarded with any seriousness before, but absence of evidence is not evidence of absence and all that, you know.

I admit to being a little ambivalent. I won't intentionally buy stolen goods, but if you put a few more transactions between me and the original thief, and don't make it an express point to tell me about it, I think I would probably be okay with it. Similarly, if I buy a  hamburger made from cows that were fed with hay harvested by farmers who drove tractors assembled by slave labor, I'd be distraught at the idea that there exists slave labor, but my outrage would be entirely disconnected from my meal. Heck, the country I live in used involuntary labor in conduct of war and I don't lose sleep over that. Unless I make the specific effort to reflect on it, of course.

I pretty freely admit that this is my own moral calculus. I also admit that your mileage may vary. Because there's lots of moral elbow room here, I also find myself extremely leery of legislation that tries to hem in the scope of the market based on these sorts of moral contagion threats. If there's a problem with a product or the way it's made, it seems a lot more reasonable to expand the choice set available to the laborers. It's hard for me to imagine a society getting systematically richer by curtailing the extent of its markets. Peace, easy taxes, a tolerable administration of justice. That's what's called for, not embargoes, not boycotts.

Same goes for the current furor over Russia's treatment of homosexuals. You want to help Russian gays? Petition your government to offer them asylum in your home country. Boycotting vodka or the Olympics helps them how, exactly?

Voluntary Sales and the City

(with apologies to Carrie and the girls...)

The city of Richmond, CA is making residents a voluntary offer they can't refuse.

Excerpt:

[A northern California city, Richmond] recently sent notice to the holders of more than 620 so-called underwater home mortgages in the city, asking them to sell the loans to the city. 

It would buy the mortgages for 80 percent of the fair value of the homes, write them down and help the homeowners refinance their loans. "Our sense is that those so-called voluntarily loan sales would not be very voluntary," said Freddie Mac's general counsel William McDavid in a conference call with reporters to discuss the company's second-quarter financial results. "They're loan sales under pressure - in fact, under a threat of seizure by eminent domain. We would consider taking legal action." 

Freddie Mac and its larger sister company, Fannie Mae, are some of the biggest buyers of private home-loan bonds. The two government-backed companies' finances would be affected if the eminent domain plan went forward and wiped out the worth of those bond investments. "Fannie Mae and Freddie Mac are investors in these securities. This is an issue that we are discussing," said Denise Dunckel, a spokeswoman for the companies' regulator, the Federal Housing Finance Agency. Both companies, operating under conservatorship since they were taken over by the government in 2008 during the financial crisis, would need the Federal Housing Finance Agency's permission to take legal action against the city of Richmond and possibly block the eminent domain seizures. 

The FHFA itself has previously raised concerns with an approach like Richmond's. Using eminent domain in this fashion to force banks and other investors to sell mortgages is novel. Historically cities have used the power to force the sale of properties if they obstruct the construction of a project deemed beneficial to the wider community, such as a road or bridge.

Thoughts?  It would appear that there are two big government entities fighting over who gets the boodle.  I'm always surprised when people thing governments are "not for profit."  They are clearly in fact all about profits.  They just don't have stockholders.

ATSRTWT

Meta-EE and the Constitution Part 18: Twenty-Second Amendment

Term limits.

Section 1. No person shall be elected to the office of the President more than twice, and no person who has held the office of President, or acted as President, for more than two years of a term to which some other person was elected President shall be elected to the office of the President more than once. But this article shall not apply to any person holding the office of President when this article was proposed by the Congress, and shall not prevent any person who may be holding the office of President, or acting as President, during the term within which this article becomes operative from holding the office of President or acting as President during the remainder of such term.

Section 2. This article shall be inoperative unless it shall have been ratified as an amendment to the Constitution by the legislatures of three-fourths of the several States within seven years from the date of its submission to the States by the Congress.

At about 3:45 in the above video, there's a paean to the adequate, forgettable, occasionally regrettable caretaker presidents of the USA.

I won't bother listing the usurpations the unforgettable presidents have wrought for considerations of space, but recall the apocryphal Chinese curse: may you live in interesting times. Lemma to the Curse (A): may you be subject to an interesting chief executive. The 22nd is at least a nod at cooling the ambition of an over-interesting Commander-in-Chief.

Look ye upon the price controls and rationing of the 30s and 40s for a hint whether a zealous presidency curtails the scope of euvoluntary exchange, and you should have an idea about whether this amendment helps steer the course of things towards a sturdier raft of EE.

Ceteris paribus, naturally.

GDP vs EE IV: Metric or Target?

Ignore for a moment some of the shortcomings of GDP accounting. Consider instead its role. The positivist, ecological economist sees the "circular flow" model with clinical detachment: a cash-flooded Venturi nozzle, measuring the force and vigor of commerce. She marks and notes relationships between suites of external factors that influence and may in turn be influenced by the adsanguinity of the economy. But even with close scrutiny, she hews ever close to the Lucas Critique.

The normative, engineering economist sees instead GDP as a challenge. Poring diligently over periodic 10-K reports, he sketches up "potential GDP" artifacts using sophisticated econometric techniques based on historic data and cautious assumptions about future behavior. In the specifications of this economist, GDP is a policy goal, and its shibboleths are legion: aggregate demand, targeting, stimulus, RBCT, so on, so forth, & al. In this land, the conductor leads the orchestra, the coach heads the team, the coxswain skippers the gig.

These two approaches are not wholly uncomplementary, but they do reflect deeply different default views about the relationship between the citizen and the state. The first approach yields to individuals the residuals of their actions. If you want to work, that's great: you get paid for producing something others want. If you want to stay home and putter in the garden, that's also fine since it's you that bears the costs. In contrast, the marginal couch potato in the engineered world imposes external costs: each hour of leisure, each minute of factory downtime, each ounce of excess inventory takes away from our collective hale and well-met productive merit.

When GDP is an end, anything you elect to do that doesn't contribute to measured national prosperity imposes a negative externality.

The lemma to this is, of course, almost nothing is euvoluntary. Get hurt in a skydiving accident? Your foregone productivity is a social cost. Crack your skull open on the pavement because you're too stupid to wear a helmet? Your recuperation means time away from work. Shame on you, worker. Like to stay at home and get high? You're a drag (heh) on the economy, you loathsome parasite. Internal costs are cleverly inverted here, and even when no other possible collective action problem can be identified, this "lost productivity" is an easy donkey to flog. An orchard of meddlesome political art is too soon then to blossom.

Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice; all the rest being brought about by the natural course of things. All governments which thwart this natural course, which force things into another channel or which endeavour to arrest the progress of society at a particular point, are unnatural, and to support themselves are obliged to be oppressive and tyrannical.

-Adam Smith via Dugald Stewart, Lectures in Edinburgh as noted in the introduction to WoN.

Nails and Consequences

The AP reports on a scuffle in a nail salon. Proprietors resist state authorities there to enforce occupational licensing statutes.

The state is always ultimately violence. Resist and you'll inevitably end up on the wrong side of a truncheon.

And that's the danger of petitioning the state. It's an act of violence. Sometimes it's plausibly worth threatening others. But for nail polish? Is a manicure that non-euvoluntary?

Blessed are the tased.

Labor is not Euvoluntary: Labor Edition

I don't know what your experience is, but I can't recall Cesarean section births being all that common when I was a youngster. I still recall my surprise upon hearing that there was such a thing as a convenience C-section, usually scheduled well in advance. At first, I dismissed this as a fringe trend, disconnected from the actual experience of women, confined mostly to elite upper-middle class mothers.

I was wrong. From the CDC:

Source.

There are a lot of series on that graph, but the interesting one is the dashed line, for all births. In 1996, 19.7% of births were by C-Section, compared with 31.3% in 2011. It's a pity the time series doesn't go back farther, as I'd like to see what the rates were when we here at EE were born (the 50s and the 70s for Mike and me, and I think JR was born in the 80s), but the opportunity costs of fetching the data are too damn high. At any rate, this sort of thing doesn't happen just by accident: whoops, I tripped, fell on your scalpel and a baby popped out. No, there must be a tale of incentives, institutions, and relative prices in there.

And it wasn't until a chat with Mrs Spivonomist yesterday that I found the missing puzzle piece. Short-term disability.

At least here in the Commonwealth, short-term disability covers 6 weeks for vaginal birth and 8 weeks for C-section. Moreover, [employer redacted] grants extra paid time off for C-section recovery and no such benefit whatsoever for vaginal birth. I don't know if that's industry standard or not, but if it is, there's your story right there. Even more over, according to what I've been able to glean, this [employer redacted] policy is relatively new, a response to legitimate concerns that women who had medically necessary C-sections were being unfairly penalized by employment requirements. And that's true; recovery from invasive surgery takes time.

Knowing all that, it's kind of surprising that the slope on the graph above isn't steeper. Though, it is possible that the stale labor market has changed the relative prices. No sense shipping your good apples if nobody's buying. At any rate, it's kind of a relief to have a bit more insight into this odd outcome. I think it's at least a little bit easier to reject alternative hypotheses like all of a sudden placentas all across America have shifted out of place.

The last empirical question has to do with long-term outcomes. Will there be any interesting repercussions 20 years down the road? My priors say no, as I chiefly suspect that the big social ills come not from delivery method but from bad policy. Still, some economist two decades from now could do worse than to include a term for C-section birth rates in her regressions.

What are your moral intuitions about childbirth? How do you feel about midwifery? About scheduled C-sections? Should politicians and bureaucrats attempt to tinker with incentives that influence mothers' decisions? Why or why not? What's the appropriate moral calculus? Fairness? Justice? Care? What's the correct policy scale? National? State? Local? Personal? Please explain.

And if you do elect to have this conversation in class or with friends or family, please feel free to share your experiences in the comments or by e-mail. I'd love to follow up on the topic. I have one daughter and she was born at home, despite systematic pressures to deliver in a hospital under the supervision of a physician.