Month: August 2003

Galbraith II

James K. Galbraith (son of John K.) has a strange review of William Greider’s The Soul of Capitalism in today’s Washington Post. He doesn’t say much about Greider’s book but does offer the following:

More deeply, we may question the book’s premise. Has the United States really solved the scarcity problem? That may have been more true five decades ago when a tract called The Affluent Society first made the case. Then, the United States was the world’s dominant industrial power. Today, our material abundance rests on fragile strands: our military reach, the willingness of the world to export cheap goods to us and to lend us the means to pay for them.

In the past 50 years real GDP per-capita has almost tripled (and this doesn’t account for improvements in the quality of many goods and services) and yet it may have been more true 50 years ago that the scarcity problem was solved?!! This is taking family fealty too far. The explanations for our fragile abundance are not too convincing either. Put aside the fact that the US is less dependent on trade than most other industrial nations. More interesting is that Galbraith thinks that the hundreds of billions of dollars we are spending on military adventures in Iraq, Afghanistan and elsewhere are a net positive for the economy. Why? Later he suggests that the Iraq war is about a “tenacious drive for oil.” Where then is the oil dividend? Has Galbraith filled up at the pump recently? In truth, Empire rarely pays and whatever the political case for war it will never turn a profit.

For the fanatic


The Cost of a Sibling

Having siblings costs you money over the course of a lifetime, just ask Ohio State sociologist Lisa Keister.

How much? Holding a variety of relevant factors constant, individuals with one sibling have an average net worth of $62,000. If you have another sibling, it drops to $49,000, then to $40,000, then to $24,000. Seven or more siblings, you have on average net worth of $6,000. Keister suggests, consistent with the research of Gary Becker, that parents invest less in each child when they have more children.

Keister herself has three brothers. See this summary of the research.

I am surprised that the effect from one child to two, or from two to three, is so small. And how much stems from a change in parental investments? Some fraction of the parents with more kids did not expect the pregnancies but rather made planning mistakes. If you think that planning/execution capabilities are carried in the genes, you would expect the offspring to be worth less for genetic reasons. So the Becker effect may be weak rather than strong, at least for the first few children.

Keister’s research also argues that much of the black-white wealth gap is due to the lesser willingness of African-Americans to put their money into stocks and mutual funds. It has long been a puzzle to economists (see here for one account) why individuals do not invest more money in the stock market, given that American stocks have outperformed bonds by significant margins over all previous twenty to thirty time horizons. Keister’s research both deepens the puzzle and hints at the relevance of psychology and context for understanding investment decisions.

Our shrinking arms industry?

The Washington Post reports on our shrinking arms industry:

A few numbers tell the story…the aerospace-defense industry workforce shriveled from 1.3 million in 1989 to 689,000 at the end of 2002, roughly the number employed in 1953…Between 2002 and 2008 nearly half of the industry’s workforce…will be eligible for retirement…universities are churning out few replacements.

Overall military spending is up, but only for 2003 has the weapons procurement allocation gone up. Here is a piece on the beginnings of the downward trajectory in some categories of spending.

But I don’t buy the Post’s account as stated. Procurement more generally is up across the agencies and stable within DOD, see this recent GAO report. In fact it appears that “A few numbers” do not tell the story. For the DOD, information technology accounts for 46 percent of the procurement total over the last five years. We are spending to make weapons smarter, not spending less on weapons. Not to mention that ship spending has risen 128 percent, again over the last five years. Aircraft spending is up 42 percent.

In part we simply like the weapons we have, and thus we are building more of them, or upgrading their quality. And since we are investing in information technology, it is hard to argue we are mortgaging our future. If we are underspending in any areas, look toward Iraqi reconstruction and intelligence, two areas where our failures have been obvious.

Endowment effects and trader experience

The Economist has a good write-up on the work of experimental economist John List. As you may know, an endowment effect arises when you value something more, simply because you own it. In the context of laboratory experiments, often people will value a coffee mug more, much more (say five times more), once someone gives them the mug as theirs. In contrast, economic theory suggests that your willingness to pay for the mug should only be slightly less than your willingness to give up the mug for money (willingness to be paid). Here is a piece by recent Nobel Laureate Daniel Kahneman on the same topic.

List had the ingenious idea to see which traders were most subject to this ownership bias. So he took people who traded sporting cards and gave them other sporting memorabilia. The key result is this: the more real world trading experience a person had, the weaker the ownership or endowment effect. Professional dealers hardly seemed to be biased at all. The lesson is simple: asset markets work well when traders have the necessary experience. List also showed that sellers learn how to trade properly, without much of a bias, more rapidly than buyers do, which may explain why neophyte buyers get taken advantage of in stock markets, and why upward-moving bubbles may start. (Researchers have found that other distinctions may matter as well, you may value the mug more if you won it in a tough competition, as opposed to receiving it as a gift.)

Al Roth has a good general site on experimental economics, as does Vernon Smith’s ICES group, who are colleagues of ours at George Mason.

The psychology of defeat — hope for Iraqi reconstruction?

Here is a money quote from The Culture of Defeat by Wolfgang Schivelbusch:

“Losers who have completed the first stage of reaction to defeat – surprise, dismay, disbelief, and the search for scapegoats – begin to examine their history for the deeper reasons behind their failure. Forced to admit that they took a wrong turn somewhere, they try to ascertain where they strayed from the true path.” (p.69)

It gets better: “…conquered societies…strive to emulate the victors…” (from the inner flap).

There are some good examples: France after the Franco-Prussian War, Germany and Japan after World War II, parts of Germany after the invasion of Napoleon, or Russia after the 1905 war with Japan. Attaturk and Turkey, following the collapse of the Ottoman Empire. Or Argentina after the Falklands. But I can think of exceptions. Did losing territory cause Peru to mimic Chilean organization? Did it do much for Bolivia? Poland has lost many wars, but fortunately stuck to its course rather than emulating the Russians.

What about contemporary Iraq? Here is a good review of Schivelbusch that raises the right questions. In any case reading his book made me more optimistic, though I would still like a comparative study of the successes and failures. Thorough defeat appears to be one key for later success. Schivelbusch suggests that allowing for a certain feverish insanity — including crazed dancing — after the defeat, might be another.

Road pricing, taken to an extreme

Iain Murray reports on the new London five pound fee (about eight dollars, and enforced by a penalty), charged to each car entering central London. It turns out the fee has been set too high, and traffic has fallen by more than the projected fifteen percent. Nor does the fee appear to be maximizing revenue. Mayor Livingstone wants to continue the high fee, however, because he likes the environmental effects of much lower traffic, despite a serious hit to London retail sales.

By the way, over 100,000 people are refusing to pay their penalty notices.

Addendum:, an excellent source, offers some follow-up and commentary.

Nathaniel Branden and Ayn Rand on Alan Greenspan




African food scandal

Zambia, Lesotho, Malawi, Ethiopia, Mozambique, and Zimbabwe — not exactly marvels of good nutrition — have been destroying food shipments from America. Why? This will sound like a sick joke, but they are afraid of genetically-modified foods. These countries have now expressed official opposition to American food entering their country, at a time when almost 3 million Zambians, to cite just one example, desperately need food aid.

There is another villain in the story, namely some of the European nations. The Africans fear that if they accept genetically-modified foods, the seeds will mix with their current crops. Europe will then be reluctant to import African foodstuffs. By the way, Greenpeace opposes the food shipments as well.

Peter Pringle offers a good survey of the debates on genetically-modified foodstuffs.

Is Alan Greenspan underpaid?

If you look at what different central bankers earn, Alan Greenspan is way down on the list with his $172,000 a year. Is the Finnish central banker really worth more money?

The deeper question is whether we need to pay American central bankers more. How many of you have heard of Matti Vanhala? Well, he is the Finnish central banker. Greenspan earns a greater fame (and power) return. The head of the Hong Kong central bank makes over a million dollars a year. High public sector salaries are useful for limiting corruption, but this is not an obvious danger in the case of the American Fed. The head of the New York Fed makes $315,000, almost twice what Greenspan does, but how many of you could produce the name of Bill McDonough at the drop of a hat?

Virtual economies

What does it mean to have property rights and prices in the virtual world of computer games? Did you know that you can buy a “virtual sword” on ebay? Did you know that the male avatars sell for more than the female avatars, despite having the same capabilities? What are virtual economies all about? Read this article, fascinating but sometimes incoherent as well, for a take on these new developments.

Even the Christians Can’t Agree



China’s trade deficit



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