This fun little post talks about how the economics of pinball changed as it became more and then less popular.
In 1986, Williams High Speed changed the economics of pinball forever. Pinball developers began to see how they could take advantage of programmable software to monitor, incentivize, and ultimately exploit the players. They had two instruments at their disposal: the score required for a free game, and the match probability. All pinball machines offer a replay to a player who beats some specified score. Pre-1986, the replay score was hard wired into the game unless the operator manually re-programmed the software. High Speed changed all that. It was pre-loaded with an algorithm that adjusted the replay score according to the distribution of scores on the specified machine over a specific time interval.
In the US, when you make under $20,000, there are government subsidies available to help you out. Between $20-40,000 per year, those subsidies are less available, which makes it difficult for people to cross the gap between one and the other.
In fact, until you get past $40,000 a year, any raise or higher paying job you get might actually sink you deeper into poverty.
(via migurski)
In a New Yorker book review this week, Elizabeth Kolbert tears Levitt and Dubner a new one over the geoengineering chapter of SuperFreakonomics, calling the pair's thinking on the issue "horseshit".
Given their emphasis on cold, hard numbers, it's noteworthy that Levitt and Dubner ignore what are, by now, whole libraries' worth of data on global warming. Indeed, just about everything they have to say on the topic is, factually speaking, wrong. Among the many matters they misrepresent are: the significance of carbon emissions as a climate-forcing agent, the mechanics of climate modelling, the temperature record of the past decade, and the climate history of the past several hundred thousand years.
The airlines that added the most fees (for food, to check bags) in the past few months saw their revenues decline the most.
I thought about his rant this week as the nation's largest carriers reported first-quarter earnings. Or, more accurately, first-quarter losses. Except for AirTran and JetBlue, they all lost money. The legacy airlines -- Delta/Northwest, American, United, Continental and US Airways -- lost a lot of money. Collectively about $1.9 billion, in fact. Their revenue plummeted, too.
And do you know what most of them wanted to talk about? You guessed it. The baskets of ancillary revenue they're harvesting by charging us fees for checking bags, choosing coach seats or whatever. Forget that their houses are burning down. They found a tap in the bathtub with some water leaking out, so they're thrilled.
(via @kyleridolfo)
In Kashiwa, Japan, there was briefly an unusual cafe where you recieve whatever the person in front of you ordered...and you're ordering for the person behind you.
The Ogori cafe was an unforgettable travel moment, and an idea that has stuck with me: It was a complete surprise in our day. It encouraged communication between total strangers or, in this case, members of the Kashiwa community and a couple of weird guys from Oregon. It forced one to "let go", just for a brief moment, of the total control we're so used to exerting through commerce. It led you to taste something new, that you might not normally have ordered. It was a delight.
(via mr)
An article in Forbes postulates which countries billionaires could purchase, factoring in their estimated worth and the countries' GDPs. On the list: Bill Gates, Warren Buffet, George Lucas, Zambia, Haiti, and Belize.
Update: A valid point to make here is that a billionaire's income isn't an accurate measure of their ability to "purchase" a country based on their GDP, especially if you think of the GDP as the equivalent of rental income. For instance, if a person's net worth is $9 billion, which is equivalent to the Bahamas' GDP, that doesn't mean the billionaire could buy the islands. He or she could only rent it for a year, theoretically. Then again, the idea of countries being up for sale, and individuals purchasing (or renting) them, is a somewhat silly premise. (thx, ian)
Update: Perhaps purchasing countries isn't such a silly premise after all. In 2003, the entire principality of Liechtenstein was up for rent. The tiny country, which borders Switzerland and Austria, attempted a "rent-a-state" program sponsored by Xnet. The idea was to draw attention to the tourist-friendly charms of Liechtenstein by essentially "renting" the country's hotels, restaurants, and sports stadiums en masse. (thx, colin)
Tom Chiarella took a stack of $20 bills with him to New York City just to see what he could get by offering them to the right people at the right time. Turns out, quite a bit. I probably linked to this a few years ago (it's from 2003), but it's worth another look. I just love this kind of thing...probably because I'm too much of a candy ass to ever attempt something similar.
A twenty should not be a ticket so much as a solution. You have a problem, you need something from the back room, you don't want to wait, you whip out the twenty.
I could have stood in line at the airport cabstand for fifteen minutes like every other mook in the world, freezing my balls off, but such is not the way of the twenty-dollar millionaire. I walked straight to the front of the line and offered a woman twenty bucks for her spot. She took it with a shrug. Behind her, people crackled. "Hey! Ho!" they shouted. I knew exactly what that meant. It wasn't good. I needed to get in a cab soon. One of the guys flagging cabs pointed me to the back of the line. That's when I grabbed him by the elbow, pulled him close, and shook his hand, passing the next twenty. I was now down forty dollars for a twenty-dollar cab ride. He tilted his head and nodded to his partner. I peeled another twenty and they let me climb in. As we pulled away, someone in the line threw a half-empty cup of coffee against my window.
A few months later, Chiarella tried the same technique in Salt Lake City, Vegas, and LA.
I pushed around; the ballsier I became, the more success I experienced. I got tablecloths, a personal garlic press, a dozen extra forks in one meal, chopsticks in a steak house. I bought primo parking spaces from people who had just parallel-parked.
Aha, turns out I linked to a similar article by Chiarella in which he haggles on items like hot dogs, TiVos, and gasoline. (via big contrarian)
Update: Ah, I've also previously linked to this one, from Gourmet in 2000.
It's just after 8 P.M. on a balmy summer Saturday and I'm heading toward one of New York's most overbooked restaurants, Balthazar, where celebrities regularly go to be celebrated and where lay diners like me call a month in advance to try and secure a reservation. I don't have a reservation. I don't have a connection. I don't have a secret phone number. The only things I have are a $20, a $50, and a $100 bill, neatly folded in my pocket.
(thx, david)
A bunch of odd economic indicators that I have read about recently. The use of the 2nd Street Tunnel in Los Angeles in car commercials:
According to FilmL.A., the nonprofit organization that coordinates on-location shooting in the city, no permits have been issued in 2009 for car commercials. Although commercial production in the city is flagging anyway -- down 34% in the first quarter -- the 100% drop in tunnel permits suggests "very tough times in the car business," FilmL.A. spokesman Todd Lindgren said.
The reinstatement of the £90 lingerie-and-blouse allowance at London law firm Clifford Chance:
Inevitably dubbed the "90 nicker knicker allowance", this may or may not be the most reliable indicator yet that the credit crunch is over. (Business is apparently so hectic that the firm has also installed sleeping pods.)
And from this article, several others, including:
The baked bean index -- my colleague Anthony Reuben noted in the spring how the value of sales of baked beans -- a classic recession food -- had risen 21.6% in April compared with the same month last year. Could a reverse signal the start of a recovery?
The number of people signing up to dating agencies offering extra-marital affairs, on the basis that demand goes up either in times of excessive confidence -- "I won't get caught"; or depression -- "I don't care". (Sex had to figure somewhere.)
(via schott's vocab log)
Update: But wait, there's more! Sex dolls, vendor gifts, and the Puma Index.
Update: The 90-pound knicker allowance is bollocks. (thx, cheryl)
Update: How about the closing speed of car salesmen around a prospective buyer?
Here's an indicator economists should study as they study GDP: speed with which, upon entering a store, you are surrounded by salesmen. (I would record both gather-rate-in fractions of a second-and density.) I was approached by the first salesman as I came in the door, picked up another as I went by the reception desk, picked up a third as I skirted a Buick Enclave. I looked back when I reached the Corvettes. There must have been ten salesmen back there and more coming, spilling out of offices and break rooms like police cruisers appearing from side streets to chase Burt Reynolds in Smokey and the Bandit. We moved in a buzzing cloud around the Corvette. From a distance, we would have made a fine subject for a painting in the National Gallery: Salesmen and Commission; or, Depression and Its Discontents. When I stood and stared and pretended to think, they stood back and stared and pretended to think. "You know, it's not so expensive if you realize you're buying it over the course of three years."
Update: And a bunch more from Time's Cheapskate blog.
Update: And still more! Hair dye (more is sold in down times) and complimentary kids crayons at restaurants (50% fewer crayons per package).
Paul Krugman writes in How Did Economists Get it So Wrong? (where the "it" is the 2008 recession):
As I see it, the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth. Until the Great Depression, most economists clung to a vision of capitalism as a perfect or nearly perfect system. That vision wasn't sustainable in the face of mass unemployment, but as memories of the Depression faded, economists fell back in love with the old, idealized vision of an economy in which rational individuals interact in perfect markets, this time gussied up with fancy equations. The renewed romance with the idealized market was, to be sure, partly a response to shifting political winds, partly a response to financial incentives. But while sabbaticals at the Hoover Institution and job opportunities on Wall Street are nothing to sneeze at, the central cause of the profession's failure was the desire for an all-encompassing, intellectually elegant approach that also gave economists a chance to show off their mathematical prowess.
Unfortunately, this romanticized and sanitized vision of the economy led most economists to ignore all the things that can go wrong. They turned a blind eye to the limitations of human rationality that often lead to bubbles and busts; to the problems of institutions that run amok; to the imperfections of markets - especially financial markets - that can cause the economy's operating system to undergo sudden, unpredictable crashes; and to the dangers created when regulators don't believe in regulation.
He goes on to describe the history of macroeconomics (in brief) and how the current theories are flawed. Very interesting long read.
If you can figure out what words are gonna trend on Twitter, you can use the pretweeting site to buy and sell words to make fake money.
Make a (virtual) profit by buying and selling words on twitter. Predict what's going to be hot and buy it up before it hits twitter, and you'll make a killing once people start talking about it.
This is like Google Adwords except with play money. (via waxy)
Unsurprisingly, the MLB teams currently drawing the most benefit from the lessons of Moneyball are those with lots of money operating in big markets.
Well, of course, the big-market teams figured it out. They hired their own Ivy League consultants. They bought even better computers. Walks is only one tiny aspect in it ... but who leads the American League in walks this year? The New York Yankees. Last year? The Boston Red Sox. The year before that? The Boston Red Sox. And so it goes. Now, six years later, it seems to me that the small-market teams are really grasping and trying to find some loophole, some opening that will allow them to win in this tough financial environment.
Parking is heavily subsidized in the US; spaces in cities can cost between $10,000 and $50,000, a high price to pay to house hunks of metal that don't do anything for 95% of the day.
Who pays for this? Everyone. The cost of building all that parking is reflected in higher rents, more expensive shopping and dining, and higher costs of home-ownership. Those who don't drive or own cars thus subsidize those who do.
The argument comes from a book called The High Cost of Free Parking.
To the ever growing list of odd economic indicators (sushi, lipstick, Coca-Cola), we can now add the hotness of your waitress.
The indicator I prefer is the Hot Waitress Index: The hotter the waitresses, the weaker the economy. In flush times, there is a robust market for hotness. Selling everything from condos to premium vodka is enhanced by proximity to pretty young people (of both sexes) who get paid for providing this service. That leaves more-punishing work, like waiting tables, to those with less striking genetic gifts. But not anymore.
The same article also mentions the Overeducated Cabbie Index, the Squeegee Man Apparition Index, and the Speed at Which Contractors Return Calls Index.
Update: A possible related metric: the quality of street musicians.
Update: Yet another economic indicator: men's underwear.
"It's a prolonged purchase," said Marshal Cohen, senior analyst with the consumer research firm NPD Group. "It's like trying to drive your car an extra 10,000 miles."
Cameron Lester, a partner at a VC firm, on A Golden Age for Venture Capital:
For 14 months, we at Azure Capital tried to invest in companies but could not reach an agreement with entrepreneurs and existing investors on valuation and terms -- the gap was too great. Despite meeting with hundreds of companies and reaching the point of discussing terms with a few, we did not make a single new investment.
That gap no longer exists. We recently invested in a company called BlogHer in May. It is an exciting company, whose team and investors were wise enough to realize that taking money now would give them a competitive advantage. And last week we invested in SlideRocket, our second new investment in less than two months.
It is as if the venture-funding environment has finally hit the reset button.
Translation: Now that money is tight, venture capital firms are able to fully dictate the terms of their investments. Entrepreneurs, prepare to part with more of your companies than you wanted to and receive less for the pleasure. Lester goes on to hand-wavingly assert that this is a good thing for entrepreneurs.
Daniel Suelo, who lives in a cave near Moab, Utah, has gone without using money since 2000.
"When I lived with money, I was always lacking," he writes. "Money represents lack. Money represents things in the past (debt) and things in the future (credit), but money never represents what is present."
The idea started to take shape when Suelo was on a Peace Corps mission to Ecuador. As he monitored the health of the population of the village he was staying in, he noticed that their health declined as they made more money -- "It looked like money was impoverishing them." You can find out more about Suelo's philosophy on his web site and follow his adventures on his blog, both of which he updates at the public library.
Malcolm Gladwell's piece in this week's New Yorker about the psychology of overconfidence is pretty much a transcript of the speech he gave at the New Yorker Summit a couple of months ago. Gladwell's thesis is that the overconfidence of experts caused the current financial crisis.
"I'm good at that. I must be good at this, too," we tell ourselves, forgetting that in wars and on Wall Street there is no such thing as absolute expertise, that every step taken toward mastery brings with it an increased risk of mastery's curse.
Eight Michigan credit unions are offering an unusual way to save: putting $25+ into a one-year CD comes with an entry to a raffle with a monthly prize of $400 and a yearly grand prize of $100,000.
This unusual CD is federally guaranteed by the National Credit Union Administration and pays between 1% and 1.5% annual interest, a bit lower than conventional rates. In 25 weeks, the program has attracted about $3.1 million in new deposits, often from people who have never been able to set money aside.
This reminds me of a recent observation by Sam Arbesman:
An intriguing coincidence: The repayment rate of individual loans in Kiva (a broker for individual loans around the world) is 98.50%, which is quite similar to the payback percentage of Las Vegas slot machines.
Why not put the lottery effect to work with Kiva? Instead of straight-up loans, enter lenders in a raffle and slightly decrease the return rate to account for the prize money. I bet (ha!) the lending rate would increase accordingly. (via waxy)
Update: Several people pointed out that British Premium Bonds have worked this way for decades. (thx, christopher)
How do you follow up a kooky-titled bestseller like Freakonomics? With a book called SuperFreakonomics. It's due out on October 20 and has a subtitle of "Tales of Altruism, Terrorism, and Poorly Paid Prostitutes".
As an avid player of Flash games (when I've got time), I found Dan Cook's post on the economics of the Flash game platform really interesting and applicable to anyone who is offering content online and wants to get paid for it.
Flash games are currently the ghetto of the game development industry. Compared to the number of players it serves, the Flash game ecosystem makes little money, launches few careers, and sustains few developer owned businesses. Despite the vast potential of the ecosystem, Flash games contribute surprisingly little to the advancement of game design as an art or a craft.
This is just the first installment...two or three more are yet to come. (via @anildash)
I, Pencil is a 1958 ode to mass production, industrial specialization, commodity economics, and the invisible hand using the manufacture of a simple graphite pencil as an example.
Consider the millwork in San Leandro. The cedar logs are cut into small, pencil-length slats less than one-fourth of an inch in thickness. These are kiln dried and then tinted for the same reason women put rouge on their faces. People prefer that I look pretty, not a pallid white. The slats are waxed and kiln dried again. How many skills went into the making of the tint and the kilns, into supplying the heat, the light and power, the belts, motors, and all the other things a mill requires? Sweepers in the mill among my ancestors? Yes, and included are the men who poured the concrete for the dam of a Pacific Gas & Electric Company hydroplant which supplies the mill's power!
Really great. A nice illustration of embodied energy to boot.
Update: A old Cardigan article by Dean Allen shares a certain kinship with I,Pencil.
First, you need some water. Fuse two hydrogen with one oxygen and repeat until you have enough. While the water is heating, raise some cattle. Pay a man with grim eyes to do the slaughtering, preferably while you are away. Roast the bones, then add to the water.
Update: From Transparent Things by Vladimir Nabokov:
Now let us not lose our precious bit of lead while we prepare the wood. Here's the tree! This particular pine! It Is cut down. Only the trunk is used, stripped of its bark. We hear the whine of a newly invented power saw, we see logs being dried and planed. Here's the board that will yield the integument of the pencil in the shallow drawer (still not closed). We recognize its presence in the log as we recognized the log in the tree and the tree in the forest and the forest in the world that Jack built. We recognize that presence by something that is perfectly clear to us but nameless, and as impossible to describe as a smile to somebody who has never seen smiling eyes.
Thus the entire little drama, from crystallized carbon and felled pine to this humble implement, to this transparent thing, unfolds in a twinkle. Alas, the solid pencil itself as fingered briefly by Hugh Person still somehow eludes us! But he won't, oh no.
(thx, matthew)
David Galbraith calculates that if buildings by famous architects were priced like paintings, a Le Corbusier building would be worth more than the entire US GDP.
The top floor of Corbusier's Villa Stein (one of perhaps the top 500 most important houses of the late 19th/early 20th centuries - i.e. a Van Gogh of houses) is for sale for the same price per sq.ft. (approx $1400) as buildings in the same area of suburban Paris, designed by nobody in particular. Meanwhile, Van Gogh's Portrait of Dr. Gachet sold for an inflation adjusted price of $136 million yet a poster of similar square footage and style costs around $10.
In terms of signaling, it's difficult to hang a house on one's parlor wall...buying a Corbusier means living in it wherever it happens to be located, at least part of the year.
Tyler Cowen previews a portion of his upcoming book, Create Your Own Economy, for Fast Company.
More and more, "production" -- that word my fellow economists have worked over for generations -- has become interior to the human mind rather than set on a factory floor. A tweet may not look like much, but its value lies in the mental dimension. You use Twitter, Facebook, MySpace, and other Web services to construct a complex meld of stories, images, and feelings in your mind. No single bit seems weighty on its own, but the resulting blend is rich in joy, emotion, and suspense. This is a new form of drama, and it plays out inside us -- with technological assistance -- rather than on a public stage.
I've got two follow-ups to share with you regarding Atul Gawande's New Yorker piece about healthcare costs in the US (kottke.org post). In the Wall Street Journal, Abraham Verghese argues that in order for a healthcare reform plan to be successful, it has to include cost cutting.
I recently came on a phrase in an article in the journal "Annals of Internal Medicine" about an axiom of medical economics: a dollar spent on medical care is a dollar of income for someone. I have been reciting this as a mantra ever since. It may be the single most important fact about health care in America that you or I need to know. It means that all of us -- doctors, hospitals, pharmacists, drug companies, nurses, home health agencies, and so many others -- are drinking at the same trough which happens to hold $2.1 trillion, or 16% of our GDP. Every group who feeds at this trough has its lobbyists and has made contributions to Congressional campaigns to try to keep their spot and their share of the grub. Why not? -- it's hog heaven. But reform cannot happen without cutting costs, without turning people away from the trough and having them eat less. If you do that, you have to be prepared for the buzz saw of protest that dissuaded Roosevelt, defeated Truman's plan and scuttled Hillary Clinton's proposal.
In Gawande's example, what Verghese is saying is that you can't just make McAllen's healthcare system adopt an El Paso type of system without a whole lot of pain.
Gawande addressed some of the criticisms of his article on the New Yorker site. One of the major criticisms was that McAllen's higher costs were associated with higher levels of poverty and unhealthiness:
As I noted in the piece, McAllen is indeed in the poorest county in the country, with a relatively unhealthy population and the problems of being a border city. They have a very low physician supply. The struggles the people and medical community face there are huge. But they are just as huge in El Paso -- its residents are barely less poor or unhealthy or under-supplied with physicians than McAllen, and certainly not enough so to account for the enormous cost differences. The population in McAllen also has more hospital beds than four out of five American cities.
In an analysis of the global financial system, Duncan Watts says that we should limit the complexity of these sorts of systems because "once everything is connected, problems can spread as easily as solutions".
Traditionally, banks and other financial institutions have succeeded by managing risk, not avoiding it. But as the world has become increasingly connected, their task has become exponentially more difficult. To see why, it's helpful to think about power grids again: engineers can reliably assess the risk that any single power line or generator will fail under some given set of conditions; but once a cascade starts, it's difficult to know what those conditions will be - because they can change suddenly and dramatically depending on what else happens in the system. Correspondingly, in financial systems, risk managers are able to assess their own institutions' exposure, but only on the assumption that the rest of the world obeys certain conditions. In a crisis it is precisely these conditions that change in unpredictable ways.
No one, for example, anticipated that an investment bank as old and prestigious as Lehman Brothers could collapse as suddenly as it did, so nobody had that contingency built into their risk models. And once it did fail, then just as the failure of a single power line increases the stress on other parts of the system, leading to further "knock on" failures, so too did Lehman's unlikely collapse render other previously unlikely failures suddenly much more likely.
This is essentially the same point that Nassim Taleb makes in The Black Swan re: Extremistan and Mediocristan.
On the Freakonomics blog, Dmitri Leybman tells us about the three main ways that the President's political party can have an impact on the economy.
This tendency of Republican presidents to preside over growth that occurs so close to re-election has been cited by Bartels as the main reason why Republican presidents have been so successful in achieving two-term presidencies in the post-World War II era. Voters, Bartels believes, are economic myopists, paying attention only to the most recent economic outcomes and not the overall outcomes experienced under a president's rule.
Altruism in business and behaviorial economics is a topic that comes up quite often on kottke.org, even when it's not explicit. (For instance, the central issue in the Atul Gawande article I pointed to yesterday pits the individual financial desires of doctors vs. the health of their patients.) This article from Ode Magazine takes a look at the research done in this area so far and how the idea of altruism in economics is currently on the rise.
The theory is based on the premise that humans evolved in small groups with strong social contracts and plenty of contact with strangers. Cooperation within the tribe was advantageous so long as free riders were punished. It was also the best gambit on encountering strangers. Cooperation, particularly in times of famine, was the only means of survival, so altruism became a favored evolutionary trait.
One of my favorite books on altruism and economics is Robert Wright's Nonzero.
Atul Gawande discovered that McAllen, Texas spends more per person on healthcare than El Paso (which is demographically similar to McAllen) and set out to find out why. Along the way, he encounters a curious relationship between the amount spent on healthcare and the quality of that care: higher spending does not correlate with better care.
When you look across the spectrum from Grand Junction to McAllen -- and the almost threefold difference in the costs of care -- you come to realize that we are witnessing a battle for the soul of American medicine. Somewhere in the United States at this moment, a patient with chest pain, or a tumor, or a cough is seeing a doctor. And the damning question we have to ask is whether the doctor is set up to meet the needs of the patient, first and foremost, or to maximize revenue.
There is no insurance system that will make the two aims match perfectly. But having a system that does so much to misalign them has proved disastrous. As economists have often pointed out, we pay doctors for quantity, not quality. As they point out less often, we also pay them as individuals, rather than as members of a team working together for their patients. Both practices have made for serious problems.
Obama, you're reading this guy's stuff, yes? Get him on the team.
Update: Dr. Peter Orszag is the Director of the Office of Management and Budget for the White House and is working on some of the problems that Gawande talks about in this article. Here's a 40-minute video of Orszag speaking on "Health Care - Capturing the Opportunity in the Nation's Core Fiscal Challenge". (thx, todd)
I changed the bit in the first paragraph about El Paso and McAllen being "nearby". Funny, I thought 800 miles in Texas *was* nearby. (thx, stephen)
I also changed "lower spending correlates with better care" to "higher spending does not correlate with better care"...those two statements are not the same. I misread the results of one of the studies that Gawande mentions. (thx, patrick)
Both houses of Congress have recently passed credit card legislation which will cut down on credit card companies abusing their customers. The NY Times has a guide to what the new legislation could mean for consumers. The bill that passed the House contains some interesting provisions on how card companies can use type.
The House throws in what ought to be called "The Fine Print Rule." Card companies must print their account applications and disclosures in 12-point type or greater. A supervisory board will also probably declare certain hard-on-the-eyes fonts off limits. The Senate is silent on typeface but imposes many other communication requirements.
From the bill itself:
SEC. 14. Readability requirement.
Section 122 of the Truth in Lending Act (U.S.C. 1632) is amended by adding at the end the following new subsection:
"(d) Minimum type-size and font requirement for credit card applications and disclosures. -All written information, provisions, and terms in or on any application, solicitation, contract, or agreement for any credit card account under an open end consumer credit plan, and all written information included in or on any disclosure required under this chapter with respect to any such account, shall appear-
"(1) in not less than 12-point type; and
"(2) in any font other than a font which the Board has designated, in regulations under this section, as a font that inhibits readability.".
I haven't seen a credit card application or bill in years (we're paperless)...what unreadable fonts are these companies using? Do they set their terms and conditions sections in 6-pt Zapf Dingbats a la David Carson?
Edmund Andrews, an economics reporter for the New York Times, confesses that he got caught up in "catastrophic binge on overpriced real estate" and signed a "reckless mortgage" for more money than he and his new wife could afford.
What about my alimony and child-support obligations? No need to mention them. What would happen when they saw the automatic withholdings in my paycheck? No need to show them. If I wanted to buy a house, Bob figured, it was my job to decide whether I could afford it. His job was to make it happen.
"I am here to enable dreams," he explained to me long afterward. Bob's view was that if I'd been unemployed for seven years and didn't have a dime to my name but I wanted a house, he wouldn't question my prudence. "Who am I to tell you that you shouldn't do what you want to do? I am here to sell money and to help you do what you want to do. At the end of the day, it's your signature on the mortgage - not mine."
Andrews and his family aren't all that bad off, but my mouth got all cottony while reading this as I extrapolated from his story to the millions of people who made similar deals under much more dire circumstances. A chilling first person tip-of-the-iceberg tale. (via the laboritorium, which calls the piece "an instant classic of economic crisis journalism")
Update: According to a nice bit of reporting by Megan McArdle, Andrews failed to mention that his second wife has declared bankruptcy twice, once while married to Andrews.
Moreover, pesky bad luck isn't really the picture painted by either filing. Rather, Ms. Barreiro seems to have spent most of the last two decades living right up to the edge of her income, and beyond, and then massively defaulting. If you structure your finances so that absolutely everything has to go right, it's hard to blame the mortgage company when you don't quite make it.
Andrews has been admirably open about many of the poor decisions and the wishful thinking that led him deep into debt. Nonetheless, he has laid much of the blame onto irresponsible bankers and mortgage brokers. The missing bankruptcies substantially undermine this basic narrative arc of Andrews' story. Particularly in his book, the bankers are the villains, America's current troubles are the inevitable denouement of their maniacal greed, and the Andrews household stands in for an American public led, by their own greed and longing and hopeful trust, into the money pit.
Seen through this lens, it's not so much that Andrews was done in by a overly large mortgage...it was that he married a financial anchor.
Update: Andrews responds to McArdle's claims:
These bankruptcies did occur, but they had nothing to do with our mortgage woes. They were both tied to old debts from before we were married or bought a house. They had nothing to do with my ability to get a mortgage; nor did they have anything to do with our subsequent financial problems.
And McArdle responds to his response. (This is getting complicated!)
Andrews seems to now be arguing that the Chapter 7 filings are not relevant because they didn't affect his ability to get a mortgage. But of course the article and the book is not just about him--rightly, because unless your marriage is pretty dysfunctional, it's a financial partnership. The two bankruptcies seem to reveal that one partner has demonstrated a historic inability to live within their means. So though the bankruptcies don't tell us anything about their ability to get a mortgage on their house, they may tell us quite a bit about their willingness to take on a mortgage. This decision is at least as important as the bank's. I'm sure banks would have given me all kinds of stupid mortgage loans in 2004, but I didn't avail myself of the opportunity.
(thx, pamela)
Ticket prices at the new Yankee Stadium are so high that if a New Yorker wants to watch a Mariners/Yankees game from the best seats, it would be a lot cheaper to fly to Seattle, stay in a nice hotel, eat fancy dinners, and see two games.
Option 1: Two tickets to Tuesday night, June 30, Mariners at Yanks, cost for just the tickets, $5,000.
Option 2: Two round-trip airline tickets to Seattle, Friday, Aug. 14, return Sunday the 16th, rental car for three days, two-night double occupancy stay in four-star hotel, two top tickets to both the Saturday and Sunday Yanks-Mariners games, two best-restaurant-in-town dinners for two. Total cost, $2,800. Plus-frequent flyer miles.
(thx, david)
The big themes of the day so far are confidence and experts: should we and do we have confidence in the experts? Malcolm Gladwell kicked off the morning with a talk about overconfidence. He talked about the three types of failure possible in a situation like the financial crisis:
1. Institutional failure. The regulators and regulations were not sufficient.
2. Cognitive failure. The bankers weren't smart enough and got in over their heads.
3. Psychological failure. The bankers were overconfident and failed to recognize the direness of their situation.
Gladwell argued that the financial crisis was caused largely by overconfidence, which has two key effects. One is that people become miscalibrated. They think that the predictions that they are making are actually a lot better than they are. Secondly, there's an illusion of control problem in which people think they have control over things that are impossible to control. Fixing the situation will be hard because overconfidence is a useful trait to possess and experts are hard to purge from systems (they're the experts!).
[Experts talking about how experts are wrong! My brain is seizing up.]
Next up were Nassim Taleb and Robert Shiller. Shiller believes that confidence drives the economy and that macroeconomics is flawed because there's no humanity in it. Taleb was very quotable and the most full of doom of all the panelists so far. He doesn't like economists. Like wants them gone from the world, or to at least marginalize their effects so that their opinions and decisions don't affect the lives of normal people. In talking about why this crisis is different than similar situations in the past, he argued that globalization, the Internet, and the efficiency of global financial markets has created an environment where very large and very quick collective movements of money are possible in a way that wasn't before. Taleb had the last word: "people who crashed the plane, you don't give them a new plane".
The panel moderated by Suroweicki was a little odd. Two out of the three panelists kept repeating in reference to the solution to the very complex financial crisis: "this isn't that complicated". There has also been a undercurrent to the discussion so far that the goal of any solution to the financial crisis is to get the economy back to where it was. I'm with Taleb on this one: where we were wasn't very good, why do we want to go back.
Feeling undervalued, some magazines are raising their prices and gaining both readership and revenue.
The Economist is leading the charge on expensive subscriptions, and its success is one reason publishers are rethinking their approaches. It is a news magazine with an extraordinarily high cover price -- raised to $6.99 late last year -- and subscription price, about $100 a year on average.
Even though The Economist is relatively expensive, its circulation has increased sharply in the last four years. Subscriptions are up 60 percent since 2004, and newsstand sales have risen 50 percent, according to the audit bureau.
I'm always amazed that something as great as The New Yorker can be had for a buck an issue when people routinely pay $4 for burnt coffee, $10 for crappy movies, and $12 for -tini drinks.
I don't think he's talked about it on his site yet, but Tyler Cowen has a new book coming out called Create Your Own Economy: The Path to Prosperity in a Disordered World.
As economist Tyler Cowen boldly shows in Create Your Own Economy, the way we think now is changing more rapidly than it has in a very long time. Not since the Industrial Revolution has a man-made creation -- in this case, the World Wide Web -- so greatly influenced the way our minds work and our human potential. Cowen argues brilliantly that we are breaking down cultural information into ever-smaller tidbits, ordering and reordering them in our minds (and our computers) to meet our own specific needs.
Create Your Own Economy explains why the coming world of Web 3.0 is good for us; why social networking sites such as Facebook are so necessary; what's so great about "Tweeting" and texting; how education will get better; and why politics, literature, and philosophy will become richer. This is a revolutionary guide to life in the new world.
I never properly reviewed Cowen's last book (sorry!), but I found it as enlightening and entertaining as Marginal Revolution is. (via david archer)
Nassim Nicholas Taleb lists ten principles for a Black Swan-proof world. Most points relate directly to the current economic situation in the US.
No socialisation of losses and privatisation of gains. Whatever may need to be bailed out should be nationalised; whatever does not need a bail-out should be free, small and risk-bearing. We have managed to combine the worst of capitalism and socialism. In France in the 1980s, the socialists took over the banks. In the US in the 2000s, the banks took over the government. This is surreal.
It was difficult to choose just one of Taleb's points to excerpt; they're all worth considering. BTW, a Black Swan is an event that is rare, has a large impact, and is deemed predictable after the fact. I might have to push Taleb's book of the same name to the top of my reading list.
New Scientist has collected a bunch of studies related to the pychological impact of money on people.
Almost all of us, for example, are "loss averse" -- it hurts more to lose £50 than it feels good to win £50. We also value money in relative rather than absolute terms -- we consider £10 irrelevant when buying a house but not when paying for a meal. Similarly, finding £100 will give many people more pleasure than having a heating bill cut from £950 to £835, even though this gains them more in real terms.
Jonas Moody, who has lived on Iceland for the past seven years, takes Michael Lewis to task for some inaccuracies and other odd things in his Vanity Fair piece about the country's economic crisis.
5. "Icelanders are among the most inbred human beings on earth -- geneticists often use them for research."
Now this is insulting. Icelanders' DNA shows their roots to be a healthy mix between Nordic Y chromosomes and X chromosomes from the British Isles. The reason genetic-research company deCODE uses Icelandic genes for its research is not because the codes are so homogeneous, but because the population has kept excellent genealogical records dating back thousands of years.
I sort of shrugged my shoulders at this stuff when I read the piece and forged ahead for the financial meat and potatoes, but it doesn't read so well when collected all in one place like this. Was the piece supposed to be a farce? If not, it doesn't reflect well on Lewis or his editors at VF. (thx, micah)
Mother Jones magazine has a list of ten people who have profited from the current financial crisis.
[John] Paulson is a hedge fund manager who has been ridiculously successful betting against banks and other entities that had exposure to the subprime crisis: In 2007, his funds were up $15 billion. In 2008, he didn't do as well: His main fund rose 38 percent in a year when the S&P 500 fell almost 40 percent. His 2007 earnings were in the neighborhood of $3.7 billion. According to Forbes, while 656 billionaires lost money last year, Paulson was one of the 44 who added to their fortunes.
This is the peculiar thing about financial markets: if you know something bad is going to happen (you know, like the global collapse of the financial markets), you can either sound the alarm and save a lot of people a lot of grief or you can make a billion dollars.
Right or wrong, How the Crash Will Reshape America, Richard Florida's analysis of how different areas of the United States are going to be affected by the current financial crisis, is full of fascinating bits.
The University of Chicago economist and Nobel laureate Robert Lucas declared that the spillovers in knowledge that result from talent-clustering are the main cause of economic growth. Well-educated professionals and creative workers who live together in dense ecosystems, interacting directly, generate ideas and turn them into products and services faster than talented people in other places can. There is no evidence that globalization or the Internet has changed that. Indeed, as globalization has increased the financial return on innovation by widening the consumer market, the pull of innovative places, already dense with highly talented workers, has only grown stronger, creating a snowball effect. Talent-rich ecosystems are not easy to replicate, and to realize their full economic value, talented and ambitious people increasingly need to live within them.
And:
But another crucial aspect of the crisis has been largely overlooked, and it might ultimately prove more important. Because America's tendency to overconsume and under-save has been intimately intertwined with our postwar spatial fix -- that is, with housing and suburbanization -- the shape of the economy has been badly distorted, from where people live, to where investment flows, to what's produced. Unless we make fundamental policy changes to eliminate these distortions, the economy is likely to face worsening handicaps in the years ahead.
Others have written about it elsewhere, but the few paragraphs Florida devotes to Detroit are stunning. (thx, peter)
The Trough of No Value is the period in the lifetime of most objects between when they are new (and therefore valuable) and when they are old, rare, and collectable (and therefore valuable).
Who wanted to keep old lunchboxes around? They weren't useful any more. They weren't worth anything. And, since they were almost all used for their intended purpose, many were damaged or worn by use (I vaguely remember owning one that was rusty and had a dent). People naturally threw them away. The "trough of no value" for lunchboxes was long and harsh. That's why they're not so common today as you might guess -- because not that many made it through the trough.
My unsharpened NeXT pencil is still very much stuck in the trough, but I have endless patience. I hope to sell it for 75 cents someday. (thx, danny)
kottke.org contributer Cliff Kuang asks: what can we learn from the classic Bill Murray flick Groundhog Day? A: Lessons physic, lessons Buddhist, and lessons economic.
The first time Phil Conners lives out Groundhog Day, he knows nothing about how events will unfold, and acts accordingly -- self centered, short sighted and rash. But by the time Conners lives out his last Groundhog Day, he has perfect knowledge of how everyone around him will behave. He acts accordingly -- maximizing his happiness and the happiness of those around him. The metaphor gets pretty loose, but in this interpretation, Phil's last day is analogous to classical economics, where people act with perfect knowledge and rationality.
Marginal Revolution has been posting an ongoing series of posts on countercyclical assets: things are doing well even though the economy as a whole is struggling. The latest example is that shoe repair shops are doing a booming business. One Florida cobbler's repair volume is up 50%.
Some other examples are increasing activity on Second Life, cocoa futures, unusual pets, gold coins and wine, evangelical churches, tasers, high end prostitutes, beer, and household safes. Sounds like a hell of a party.
My own countercyclical hunch is that Internet use will rise dramatically over the year because a) it has become something that people need (even more than TV...you'll see people scaling back on cable before they send back their cable modem) and b) spending more time using it doesn't cost extra. Plus, unemployment = lots of time to spend online screwing around "updating your resume".
The current inactivity at Port of Long Beach is indicative of larger problems in the highly coupled global economy. Americans are buying fewer goods, including those made abroad, so no new goods are coming in to the port and those that have already arrived are sitting on the docks, including 165+ acres of Toyota cars. Because Americans are not buying foreign goods, China has slowed production. Slowed production means that they don't need cardboard boxes for packaging. Since we ship our used paper to China for recycling into cardboard boxes, hundreds of tons of paper are sitting on the docks, unshipped. The strengthening of the dollar abroad means that American made goods aren't selling and the ships hauling them are unable to leave the port. Nothing is selling anywhere so everything sits in the now-constipated port.
From the New Yorker last week, Atul Gawande on how the US should nationalize healthcare. His answer: nationalize slowly, use what's already in place, and don't rebuild the whole system from scratch.
Every industrialized nation in the world except the United States has a national system that guarantees affordable health care for all its citizens. Nearly all have been popular and successful. But each has taken a drastically different form, and the reason has rarely been ideology. Rather, each country has built on its own history, however imperfect, unusual, and untidy.
As usual, Gawande makes a lot of sense. Whatever the solution, we should be doing all we can to avoid something like this from ever happening again:
"When I heard that I was losing my insurance, I was scared," Darling told the Times. Her husband had been laid off from his job, too. "I remember that the bill for my son's delivery in 2005 was about $9,000, and I knew I would never be able to pay that by myself." So she prevailed on her midwife to induce labor while she still had insurance coverage. During labor, Darling began bleeding profusely, and needed a Cesarean section. Mother and baby pulled through. But the insurer denied Darling's claim for coverage. The couple ended up owing more than seventeen thousand dollars.
My inbox is divided about the valuation of Facebook calculated using Burger King Whopper Sacrifice promotion (unfriend 10 people to get a Whopper). The majority say that even if you prevented people from refriending those they unfriended for a Whopper, a value of 12 cents for each friend link is too high and that most links are worth much less than that. That is, Facebook is awash in junk friendships of little value.
A smaller contingent is arguing that Burger King would have to pay much more to break some friendships and that Facebook's valuation is therefore higher than the straight calculation indicates. For instance, getting Johnny Shoegazer to unfriend that girl he likes might take a considerable sum of money. I agree that Facebook is worth more than $1.8 billion in Whoppers but not because some individual links are more valuable than others...it's about groups and networks of links. You might be able to get someone to part with 10 "junk" friends for $2.40 but could you pay them $22 more to essentially shut down their Facebook account for good? I don't think so. It's going to cost much more than that...and for some intense users of the site, the "buyout" amount might be surprisingly high. (I'd probably accept $24 to close my Facebook account. But I pay nothing to use Twitter and ~$25 a year for Flickr and it might take several hundred or even thousands of dollars to entice me to permanently close either of those accounts...I get so much value from them.)
The reason for this seems like it might have something to do with Metcalfe's Law:
Metcalfe's law states that the value of a telecommunications network is proportional to the square of the number of connected users of the system (n^2). [...] Metcalfe's law characterizes many of the network effects of communication technologies and networks such as the Internet, social networking, and the World Wide Web. It is related to the fact that the number of unique connections in a network of a number of nodes (n) can be expressed mathematically as the triangular number n(n - 1)/2, which is proportional to n^2 asymptotically.
Or for our economic purposes, the network effect:
In economics and business, a network effect (also called network externality) is the effect that one user of a good or service has on the value of that product to other users. The classic example is the telephone. The more people own telephones, the more valuable the telephone is to each owner. This creates a positive externality because a user may purchase their phone without intending to create value for other users, but does so in any case.
As Facebook accumulates users and friendship links, the service becomes more and more valuable for each user. In Whoppernomics terms, Facebook may well be worth the $15 billion that the Microsoft deal suggested, but there are obviously problems for Facebook in thinking about their value in this way. How do they extract that value from their users? Getting a user to accept a $500 buyout for their Facebook account is different than Facebook asking that user to pay $500 to keep using their account even though the monetary value of the account is the same in either case. What Facebook is betting on is that each user will put up with hundreds of dollars worth of distractions (in the form of advertising and promotions) from their primary goal on the site (i.e. connecting with friends). Also, as Friendster and MySpace and every other social networking site has learned, membership in these services is not exclusive and users may eventually find more value in some other network with (temporarily) less distraction.
Again, assuming that we're not taking this too seriously.
[Update: I had decimal point problems with my math. 100 users = 10 Whoppers = $24, not $240. More updates below...]
Burger King recently introduced a Facebook app called Whopper Sacrifice that allows users to delete ten of their friends in exchange for a Whopper sandwich. Watch the app in action.
What BK has unwittingly done here is provide a way to determine the valuation of Facebook. Let's assume that the majority of Facebook's value comes from the connections between their users. From Facebook's statistics page, we learn that the site has 150 million users and the average user has 100 friends. Each friendship is requires the assent of both friends so really each user can, on average, only end half of their friendships. The price of a Whopper is approximately $2.40. That means that each user's friendships is worth around 5 Whoppers, or $12. Do the math and:
$12/user X 150M users = $1.8 billion valuation for Facebook
That's considerably less than the $15 billion valuation assigned to Facebook when Microsoft invested in the company in October 2007 and the lower valuations being tossed about in recent months.
P.S. Other assumptions for the sake of argument: every user is eligible for the Whopper promotion (it's actually only valid in the US), you can sell all of your friends for multiple burgers (actually limit one per customer), and the "average user has 100 friends" means that Facebook users average 100 friends apiece (no idea what the reality is...if they're using the median instead of the mean then that number could be higher or lower). Oh, and it's also assumed that no one should take this too seriously.
Update: I'm getting some email saying that Facebook friendships require the assent of both parties. Is that the way it works for the BK thing? If I am friends with Mary and I unfriend her through the Whopper Sacrifice app, is she then unable to unfriend me to help get her burger? If so, then the $3.6 billion valuation drops to $1.8 billion because each unfriending event takes care of 2 friend connections, not just one. Anyone? Note: we are already taking this too seriously!
Update: Ok, it looks like unfriending on Facebook takes out two friendship connections, not just one. So that drops each user's share to $12 and the valuation to $1.8 billion. D. Final answer, Regis. (thx, everyone)
From The Last Traffic Jam in The Atlantic.
Unless we exercise foresight and devise growth-limits policies for the auto industry, events will thrust us into a crisis that will lead to a substantial erosion of our domestic oil supply as well as the independence it provides us with, and a level of petroleum imports that could cost as much as $20 to $30 billion per year. (This in turn would produce a staggering balance-of-payments problem for the United States, and give the Middle Eastern suppliers a dangerous leverage over our transportation system as well.) Moreover, we would still be depleting our remaining oil reserves at an unacceptable rate, and scrambling for petroleum substitutes, with enormous potential damage to the environment.
And:
In short, common sense dictates that we begin a transition to policies designed to avoid an energy impasse that could cripple out transportation system and imperil our economy. We must set growth limits that will allow the automobile and oil industries to maintain economic stability while conserving our resources and preserving our environment. Of course, such a reorientation will require statesmanship as well as public pressure. It will not happen unless corporate self-interest yields to a responsible outlook that serves the broader interests of the nation as a whole. Above all, this shift requires a thorough redirection of the aims of these two industries.
Believe it or not, those words appeared in the magazine in 1972. These views would have seemed out-of-date and old fashioned just a year or two ago but now all those chickens are coming home to roost.
The amount of spam email decreased by more than 66% last week after a single company was knocked offline by their ISP after the Washington Post dug into their activities. But sales of Spam, the midwestern delicacy, are up, up, up because of the crappy economy.
Through war and recession, Americans have turned to the glistening canned product from Hormel as a way to save money while still putting something that resembles meat on the table. Now, in a sign of the times, it is happening again, and Hormel is cranking out as much Spam as its workers can produce.
In a factory that abuts Interstate 90, two shifts of workers have been making Spam seven days a week since July, and they have been told that the relentless work schedule will continue indefinitely.
People are also buying fewer socks and more frozen pot pies. And Spam can be added to the list of unlikely economic indicators, joining sushi, Big Macs, cigarettes, and others.
Update: Oh, and lipstick.
An indicator based on the theory that a consumer turns to less expensive indulgences, such as lipstick, when she (or he) feels less than confident about the future. Therefore, lipstick sales tend to increase during times of economic uncertainty or a recession.
(thx, dann)
Now that he has a book coming out on the subject of genius and high achievement, the New Yorker finally lets Malcolm Gladwell write about David Galenson's work on age and innovation. (A previous effort was Gladwell's first article to be rejected by The New Yorker.) For an overview of Galenson's work, check out my post from August.
The most interesting bit of Gladwell's piece is his discussion of the economics of the two different types of artist. The conceptual artist's talent is noticed and rewarded immediately. But conceptual innovators need more help to reach their full potential.
Sharie was Ben's wife. But she was also-to borrow a term from long ago-his patron. That word has a condescending edge to it today, because we think it far more appropriate for artists (and everyone else for that matter) to be supported by the marketplace. But the marketplace works only for people like Jonathan Safran Foer, whose art emerges, fully realized, at the beginning of their career, or Picasso, whose talent was so blindingly obvious that an art dealer offered him a hundred-and-fifty-franc-a-month stipend the minute he got to Paris, at age twenty. If you are the type of creative mind that starts without a plan, and has to experiment and learn by doing, you need someone to see you through the long and difficult time it takes for your art to reach its true level.
Gladwell discusses the article in a podcast and will be answering reader questions about it later in the week.
In the US federal prison system, cans of mackerel have replaced outlawed cigarettes as the de facto form of currency.
"It's the coin of the realm," says Mark Bailey, who paid Mr. Levine in fish. Mr. Bailey was serving a two-year tax-fraud sentence in connection with a chain of strip clubs he owned. Mr. Levine was serving a nine-year term for drug dealing. Mr. Levine says he used his macks to get his beard trimmed, his clothes pressed and his shoes shined by other prisoners. "A haircut is two macks," he says, as an expected tip for inmates who work in the prison barber shop.
See also the economics of POW camps.
A British fruit company gave three economists the chance to increase the company's fruit harvest by tinkering with pay schemes of the pickers.
The owner had been paying a piece rate -- a rate per kilogram of fruit -- but also needed to ensure that whether pickers spent the day on a bountiful field or a sparse one, their wages didn't fall below the legal hourly minimum. Farmer Smith tried to adjust the piece rate each day so that it was always adequate but never generous: The more the work force picked, the lower the piece rate. But his workers were outwitting him by keeping an eye on each other, making sure nobody picked too quickly, and thus collectively slowing down and cranking up the piece rate.
Over the course of three summers, three different approaches raised the total harvest by 50% the first year, another 20% the second year, and by another 20% the third year.
The Russian/Georgian conflict has proven the McDonald's theory of war wrong. The theory stated that no two countries with McDonald's restaurants would ever go to war with each other. (via mr)
Update: Depending on what you consider a war, the theory has been proven incorrect before. (thx, lots of folks who sent this in)
Social scientist Dalton Conley on how rich people are now working longer hours than poor people in America.
This is a stunning moment in economic history: At one time we worked hard so that someday we (or our children) wouldn't have to. Today, the more we earn, the more we work, since the opportunity cost of not working is all the greater (and since the higher we go, the more relatively deprived we feel).
In other words, when we get a raise, instead of using that hard-won money to buy "the good life," we feel even more pressure to work since the shadow costs of not working are all the greater.
The increasing income inequality in the US is partially to blame, says Conley. Those in the middle and upper middle classes are working harder and longer, trying to keep up with the Joneses who are growing more wealthy at an even faster pace. Conley's got a book coming out in January on the same topic called Elsewhere, USA. (via ah)
This short NY Times profile of economist David Galenson reminded me that I never shared Old Masters and Young Geniuses with you. The book was recommended to me by Malcolm Gladwell -- which means that many of you can now form your opinion of it without even reading it -- through a talk that he gave a couple of years ago. Gladwell also wrote an article for the New Yorker about Galenson's work but it was rejected:
When Mr. Gladwell submitted an article about Mr. Galenson's ideas to The New Yorker, he suffered his first rejection from the magazine. "You buy this Galenson stuff?" Mr. Gladwell recalled his editor saying to him. "What are you, crazy?"
But never mind all that, Old Masters and Young Geniuses is one of the most interesting books I've read in the past few years. I haven't studied enough art history to know if Galenson's thesis is correct, but the book presents an interesting framework for thinking about innovation and how to best harness your own creativity.
The main idea is this. Instead of people being super creative when they're young and getting less so with age (i.e. the conventional wisdom), Galenson says that artists fall into two general categories:
1) The conceptual innovators who peak creatively early in life. They have firm ideas about what they want to accomplish and then do so, with certainty. Pablo Picasso is the archetype here; others include T.S. Eliot, F. Scott Fitzgerald, and Orson Wells. Picasso said, "I don't seek, I find."
2) The experimental innovators who peak later in life. They create through the painstaking process of doing, making incremental improvements to their art until they're capable of real masterpiece. Cezanne is Galenson's main example of an experimental innovator; others include Frank Lloyd Wright, Mark Twain, and Jackson Pollock. Cezanne remarked, "I seek in painting."
Galenson demonstrates these differences through analysis of how often artists' works are reproduced in textbooks, auction prices, and museum shows. The pattern is clear, although the method is less than precise in some cases and Galenson has since backed off his thesis somewhat. But the compelling part of the book is what the artists themselves say about how they work. The text is littered with quotes from painters, poets, writers, sculptors, and movie directors about how they perceived their own work and the work of their peers and predecessors. Their thoughts provide ways for contemporary creators to think about how their creativity manifests itself.
The transcript of Gladwell's talk is a good introduction to there ideas. Galenson's next book, And Now for Something Completely Different, appears to be available online in its entirety in a preliminary form. Much more information is available on his web site.
How a rough system of barter developed into a more complex system of trade in WWII POW camps. This is fascinating stuff.
We reached a transit camp in Italy about a fortnight after capture and received 1/4 of a Red Cross food parcel each a week later. At once exchanges, already established, multiplied in volume. Starting with simple direct barter, such as a non-smoker giving a smoker friend his cigarette issue in exchange for a chocolate ration, more complex exchanges soon became an accepted custom. Stories circulated of a padre who started off round the camp with a tin of cheese and five cigarettes and returned to his bed with a complete parcel in addition to his original cheese and cigarettes; the market was not yet perfect. Within a week or two, as the volume of trade grew, rough scales of exchange values came into existence. Sikhs, who had at first exchanged tinned beef for practically any other foodstuff, began to insist on jam and margarine. It was realized that a tin of jam was worth 1/2 lb. of margarine plus something else; that a cigarette issue was worth several chocolates issues, and a tin of diced carrots was worth practically nothing.
The cigarette soon became the coin of the realm and at camps with stable populations, there were shops operated by the senior British officer with cigarettes as the currency people used to buy and sell goods to/from the store.
One trader in food and cigarettes, operating in a period of dearth, enjoyed a high reputation. His capital, carefully saved, was originally about 50 cigarettes, with which he bought rations on issue days and held them until the price rose just before the next issue. He also picked up a little by arbitrage; several times a day he visited every Exchange or Mart notice board and took advantage of every discrepancy between prices of goods offered and wanted. His knowledge of prices, markets and names of those who had received cigarette parcels was phenomenal. By these means he kept himself smoking steadily - his profits - while his capital remained intact.
The article also discusses deflation, the shifting availability of currency, credit, price movements, futures markets, paper currency, and price fixing. (via migurski)
A list of fifty things being blamed on rising oil prices. Among them: pizza deliviery prices, weakened demand for wine, "gas rage", and more foot patrol for police officers.
The internet and other technologies have had differing impacts on the music and publishing businesses.
One of my friends proposed a theory I find compelling: Our cultural consumption exists on a spectrum from "individual" to "collective". Technology has shifted the balance for both books and music. Digital distrbitution and the iPod have made music consumption much more individualistic, while the internet and global branding have made book consumption increasingly collective.
(via short schrift)
New paper: fast food doesn't make you fat.
When eating out, people reported consuming about 35 percent more calories on average than when they ate at home. But importantly, respondents reduced their caloric intake at home on days they ate out (that's not to say that people were watching their weight, since respondents who reported consuming more at home also tended to eat more when going out). Overall, eating out increased daily caloric intake by only 24 calories. The results for urban and suburban consumers were similar.
(via marginal revolution)
Yesterday, New York raised the tax on cigarettes by $1.25. With the previous taxes, the city tax of $1.25, and the variable pricing one sees at retail outlets around the city, people are now paying somewhere between $8 and $12 for a pack of cigarettes in NYC. Some smokers are understandably upset about the price but how does it compare to other enjoyments? If smoking a single cigarette takes five minutes and at $10 & 20 cigarettes per pack, smoking costs a smoker $6/hour. Some other NYC diversions, priced roughly by the hour:
Ice skating in Central Park: $4.25/hr
Yankees game (cheap seats): $5/hr
Smoking: $6/hr
Visit to MoMA: $8/hr
After-work drinks: $10/hr
Movie w/popcorn & soda: $11/hr
Dinner @ McDonald's: $11/hr
Dinner @ Daniel: $85/hr
Helicopter tour of NYC: $600/hr
Spitzer-grade call girl: $1000+/hr
For reference, NY State minimum wage is $7.15/hr. (Digg this?)
Has the housing downturn had a more-or-less direct effect on the rising price of milk?
I was in Vermont over the weekend and talking to a dairy farmer about the rising price of milk. I was surprised when she said that higher sawdust prices was one of the causes. Sawdust? Sawdust, it turns out, is used for bedding the cows and the price of dust has doubled in the past year. I surmise that the downturn in housing construction has meant a reduced demand for lumber and thus less sawdust.
Lipstick as economic indicator.
Ms. Stein's rationale for buying lipstick echoes a theory once proposed by Leonard Lauder, the chairman of Estee Lauder Companies. After the terrorist attacks of 2001 deflated the economy, Mr. Lauder noticed that his company was selling more lipstick than usual. He hypothesized that lipstick purchases are a way to gauge the economy. When it's shaky, he said, sales increase as women boost their mood with inexpensive lipstick purchases instead of $500 slingbacks.
More economic indicators: sushi, Big Macs, steakhouses, Starbucks coffee, Coca-Cola, cigarettes, and Jay-Z.
The economics of high-end prostitutes.
Unlike their low-end counterparts, high-end call girls are expected to supply some level of companionship, and often accompany clients to dinners or parties. Because a beautiful and intelligent woman inevitably has other job (and marriage) options, a very high wage is necessary to encourage them to forgo other opportunities, and risk arrest, disease and shame.
And escorts must spend a great deal maintaining their value without immediate compensation. Much time and money is spent on grooming: hair removal, expensive hair-cuts (one stylist I spoke to claims several of his clients are escorts, who spend at least $1,000 a month on extensions and colour) and regular exercise. Many women have had plastic surgery (particularly if they were once men) and maintain an expensive designer wardrobe. Frequent visits to the doctor are necessary to protect against sexually-transmitted diseases.
Despite a common heritage, the social, economic, and political differences between the United States and Britain are, in some cases, great.
Like most west Europeans, Britons tend to have more left-wing views than Americans, but the first chart shows that this is often by a surprising margin. ("Left" and "right" are harder to locate than they were: here "left" implies a big-state, secular, socially liberal, internationalist and green outlook; right, the reverse.) The data are derived by subtracting left-wing answers from right-wing ones, for each country and for each main political grouping within each country. A net minus rating suggests predominantly left-wing views and a positive rating suggests a preponderance of right-wing views.
Compared to Britain, the US is a remarkably conservative nation. The companion chart is a good look at some of the data. (via gongblog)
Point. Being nasty can improve your life.
Next month sees the arrival of Asshole: How I got Rich and Happy by Not Giving a S*** About You, by New York author Martin Kihn. "I was the nicest guy in the world - and it was killing me," he says in the book. "My life was a dictionary without the word 'no'. If you asked me for a favour -- even the kind of favour that required me to go so far out of my way that I needed a map, a translator and an oxygen tank -- even if I didn't know you that well, I might hesitate a second, but I'd always say yes."
Kihn walked other people's dogs, traipsed out of his way to bring back the most complicated lunch orders for colleagues and handed over his money to whichever charity or sales scam asked for it. The result of such "kindness" was a dead-end job and a second-rate apartment.
While Gryzb recommends subtle personality changes, Kihn takes it a step further. He picked up tips from the masters - Donald Trump, Scarface and "the guy in my building with a tattoo on his face" -- and decided to "blowtorch away my old personality and uncover the rock-hard warrior within". In his book, Kihn devises a "10-step programme to assholism" for anyone wanting to acquaint themselves with their darker side. He himself signed up to the National Rifle Association, started kickboxing, screamed at colleagues and ate garlic bagels on public transport.
Counterpoint. The secret to happiness is giving.
Think you'd be happier if you won the lottery or just had a few extra bucks in your pocket? Think again. Overturning classic economic wisdom, new research shows that it's not how much you have that matters, it's how you spend it. People who donate their dollars to charities or splurge on gifts for others are more content than those who squander all the dough on themselves.
(via 3qd)
NY Times columnist and economist Paul Krugman wrote a paper when he was an assistant professor in 1978 called The Theory of Interstellar Trade. Here's the abstract:
This paper extends interplanetary trade theory to an interstellar setting. It is chiefly concerned with the following question: how should interest charges on goods in transit be computed when the goods travel at close to the speed of light? This is a problem because the time taken in transit will appear less to an observer travelling with the good than to a stationary observer. A solution is derived from economic theory, and two useless but true theorems are proved.
An economic discussion about the implications of trading with aliens. No, not illegal aliens.
Why is movie popcorn so expensive? Because it subsidizes movie prices for more movie goers. That and the theaters get to keep all the profit they make on consessions; that's generally not true for ticket sales.
The conventional theories in economics and politics contend that people act rationally. Elizabeth Kolbert reviews a pair of books that suggest that's not really the case.
Some of these heuristics were pretty obvious -- people tend to make inferences from their own experiences, so if they've recently seen a traffic accident they will overestimate the danger of dying in a car crash -- but others were more surprising, even downright wacky. For instance, Tversky and Kahneman asked subjects to estimate what proportion of African nations were members of the United Nations. They discovered that they could influence the subjects' responses by spinning a wheel of fortune in front of them to generate a random number: when a big number turned up, the estimates suddenly swelled.
In tied football games, the team that wins the coin toss often wins the game. Are there better ways to decide overtime games?
Dueling Kickoffs: To begin overtimes, each team will kick off to each other on consecutive plays. The team that advances the ball furthest will have possession at the point on the field where the ball was advanced. Sudden death is preserved.
Tyler Cowen on invisible competition and how it differs from competing with those around you.
Let's look at individuals. Human beings evolved in small groups and hunter-gatherer societies, in which virtually all competition was face to face. That is the environment most of us are biologically and emotionally geared to succeed in, and it explains why our adrenalin surges when a rival wins the boss's favor or flirts with our special someone. But in the new arena, with its faceless and anonymous competitors, those who are driven to action mostly by adrenalin will not fare well. If that's what they need to get things done, they will become too passive and others will overtake them.
To me, the most interesting challenge is maintaining motivation in the absence of visible competition. How do you win a race you might not even know you're running?
An attempt to decode the sex diaries of noted economist John Maynard Keynes. Keynes kept two diaries related to his sexual activities. The first was a straightforward listing of who/where/when.
The other sex diary is more puzzling and, in a way, more informative. An economist to the core, Keynes organized the second sex diary also year-by-year, but this time in quarterly increments.
Unfortunately for us, however, this second sex diary is in code. And as far as I know, no one yet has been prurient enough to crack it.
Here's what Keynes' tabulation looks like. For every quarter-year from 1906 to 1915, he tallies up his sexual activities and totals them under three categories: C, A, and W.
For each of these headings, he records the number of times each activity occurred, and also when. For example, between May and August, 1911, he performed (if that's the right word) C sixteen times, A four times, and W five times.
How does the GDP of the US today compare with that of other countries in the past?
China and India combined to produce nearly half the world's economic output in 1820 compared to just 1.8% for the U.S. Our remarkable growth since 1820 has benefited from democratic institutions, a belief in capitalism, private property rights, an entrepreneurial culture, abundant resources, openness to foreign investment, the best universities, immigration and relatively transparent markets.
Very interesting paper on the economics of prostitution by Steven Levitt and Sudhir Venkatesh.
The transaction-level data we collected suggests that street prostitution yields an average wage of $27 per hour. Given the relatively limited hours that active prostitutes work, this generates less than $20,000 annually for a women working year round in prostitution. While the wage of a prostitute is four times greater than the non-prostitution earnings these women report (approximately $7 per hour), there are tremendous risks associated with life as a prostitute. According to our estimates, a woman working as a prostitute would expect an annual average of a dozen incidents of violence and 300 instances of unprotected sex.
The authors also noted that a prostitute was "more likely to have sex with a police officer than to get officially arrested by one". (via marginal revolution)
Ten recurring economic fallacies, 1774-2004.
One of the most persistent is that of the broken window -- one breaks and this is celebrated as a boon to the economy: the window manufacturer gets an order; the hardware store sells a window; a carpenter is hired to install it; money circulates; jobs are created; the GDP goes up. In truth, of course, the economy is no better off at all.
This wasn't meant to be Tyler Cowen day on kottke.org, but you need to check out this concise barnburner of an article written by Cowen for the Washington Post on the cost of the war in Iraq. Taking the form of a letter to President Bush, the article explores the opportunity costs of the war and then offers the real reason why the war has been disastrous:
In fact, Mr. President, your initial pro-war arguments offer the best path toward understanding why the conflict has been such a disaster for U.S. interests and global security.
Following your lead, Iraq hawks argued that, in a post-9/11 world, we needed to take out rogue regimes lest they give nuclear or biological weapons to al-Qaeda-linked terrorist groups. But each time the United States tries to do so and fails to restore order, it incurs a high -- albeit unseen -- opportunity cost in the future. Falling short makes it harder to take out, threaten or pressure a dangerous regime next time around.
Foreign governments, of course, drew the obvious lesson from our debacle -- and from our choice of target. The United States invaded hapless Iraq, not nuclear-armed North Korea. To the real rogues, the fall of Baghdad was proof positive that it's more important than ever to acquire nuclear weapons -- and if the last superpower is bogged down in Iraq while its foes slink toward getting the bomb, so much the better. Iran, among others, has taken this lesson to heart. The ironic legacy of the war to end all proliferation will be more proliferation.
As a refreshing mint, check out the length of the y-axis on this graph comparing the cost of the war and the amount spent by the US govt on energy R&D. (thx, ivan)
Update: Noam Chomsky, in an August 2002 interview:
The planned invasion will strike another blow at the structure of international law and treaties that has been laboriously constructed over the years, in an effort to reduce the use of violence in the world, which has had such horrifying consequences. Apart from other consequences, an invasion is likely to encourage other countries to develop WMD, including a successor Iraqi government, and to lower the barriers against resort to force by others to achieve their objectives, including Russia, India, and China.
(thx, matt)
A plot of Japan's Phillips curve ("a historical inverse relation and tradeoff between the rate of unemployment and the rate of inflation in an economy") looks like Japan itself.
Two quick reviews of Elizabeth Currid's book, The Warhol Economy, which argues that New York's "vibrant creative social scene" is what makes the city go. First, James Surowiecki in the New Yorker:
Of course, everyone knows that art and culture help make New York a great place to live. But Currid goes much further, showing that the culture industry creates tremendous economic value in its own right. It is the city's fourth-largest employer, and generates billions of dollars a year in revenue. More important, New York has no real global rival for dominance in the culture industry. Using an economic-analysis tool called a "location quotient," Currid calculates that New York matters far more to fashion, art, and culture than to finance. To exaggerate a bit, if New York suddenly disappeared, stock markets could keep functioning, but we would not be able to dress ourselves or find art to put on the wall. Currid suggests that, in the fight among cities for business, being the center of fashion and art constitutes New York's true "competitive advantage."
And from The Economist:
New York's cultural economy has reached a critical juncture, argues Ms Currid, threatened by, of all things, prosperity. The bleak economic conditions of the 1970s allowed artists to flock into dirt-cheap apartments and ushered in the East Village scene of the early 1980s. The boom of the past decade, by contrast, has priced budding Basquiats out of Manhattan, pushing them across the water to Brooklyn and New Jersey. Studio flats meant for artists-in-residence get snapped up by bankers. The closure last year of CBGB, a bar that became a punk and art-rock laboratory in the 1970s (and whose founder, Hilly Kristal, died last month) came to symbolise this squeeze.
Ms Currid sees this expulsion of talent as a serious problem. The solution, she argues, lies in a series of well-aimed public-policy measures: tax incentives, zoning that helps nightlife districts, more subsidised housing and studio space for up-and-coming artists, and more.
The first chapter of the book is available on the Princeton University Press site.
Reaganomics Finally Trickles Down To Area Man.
The $10 began its long journey into Kellener's wallet in 1983, when a beefed-up national defense budget of $210 billion enabled the military to purchase advanced warhead-delivery systems from aerospace manufacturer Lockheed. Buoyed by a multimillion-dollar bonus, then-CEO Martin Lawler bought a house on a 5,000-acre plot in Montana....
Marginal Revolution and CNN (and New York magazine and Reddit and etc.) asked their respective readers: how much did you pay for In Rainbows, Radiohead's new album which is only available as a pay-what-you-want download. I paid around £8.50 (~ US$17), which splits the difference between a typical album price in the UK and the US. (Actually, what I did was download it from elsewhere because Radiohead's online store was down yesterday morning and then went back to pay for it just now.)
Tyler Cowen mentioned "green accounting" and William Nordhaus in a post the other day so I went looking for more information on the subject. Here's one of the more succinct descriptions I found of the problem that green accounting aims to address:
When a majestic, 300-year-old red-wood is cut down and turned into picnic tables, the logging and picnic table-building activities add to the gross domestic product (GDP), while no deduction is made for the loss of that tree and all the nonmarket services it provides. When a paper mill dumps dioxin-laden wastes into a river, the paper-making boosts the GDP, but no deduction is made for the costs associated with the water pollution. Conversely, no addition is made to the GDP for the air and water cleaned by wetlands or old-growth forests.
If you're keen on learning more about green accounting and William Nordhaus' contributions, check out Nature's Numbers and the perhaps not-so-riveting Recommendations to The Bureau of Economic Analysis On Improving the National Economic Accounts. (I will also humbly note that this relates to something I wrote for WorldChanging last December. "The global economy is driven by nature, and yet it's not usually found on the accountant's balance sheet.")
Everything is open for negotiation and for three months, Tom Chiarella tried to get deals on everything, from a hot dog to a gallon of gas to a TiVo.
Within weeks I discovered that restaurants will typically give you four desserts for the price of three if you ask for a sampler. That a draft beer is generally good for a free refill with a little prodding. That you can get an extra 20 percent off at Ikea by pressing past the cashiers, past the floor salespeople, up into the bottommost managerial rungs, by comparing the price of one perfectly well priced dresser with its slightly less well priced but better-sized counterpart one floor down.
Update: Bargainist has a piece about how to haggle that's worth a look.
NY Times columnist Paul Krugman writes, in the introduction to his new blog:
The story of modern America is, in large part, the story of the fall and rise of inequality.
Note that he says "fall" and then "rise", not the other way around. A graph in the post illustrates his point nicely.
From the abstract of a new paper on the influence of the Ku Klux Klan by Roland Fryer and Steven Levitt:
Surprisingly, we find few tangible social or political impacts of the Klan. There is little evidence that the Klan had an effect on black or foreign born residential mobility, or on lynching patterns. Historians have argued that the Klan was successful in getting candidates they favored elected. Statistical analysis, however, suggests that any direct impact of the Klan was likely to be small. Furthermore, those who were elected had little discernible effect on legislation passed.
The full paper is available on Fryer's web site. (via mr)
Steven Levitt notes a passage from Edward Conlon's Blue Blood about the difference in pay between the police and homeless panhandling heroin addicts. The answer might surprise you.
The personal lives of CEOs have come under scrutiny lately because what a CEO does in his off-hours seems to have a bearing on how well his company's stock performs. "It found that on average, the stocks of companies run by leaders who buy or build megamansions sharply underperform the market. The researchers don't claim to know why. They theorize that some of these executives might be focused more on enjoying their wealth and less on working hard." (via mr)
Also, I loved that the WSJ published the nickname of "Frederick E. 'Shad' Rowe Jr." Shad Rowe!
Over at Marginal Revolution, Alex Tabarrok is advocating a game show called So You Think You Can Be President? instead of debates to better educate voters about presidential candidates. "Presidential candidates have 12 hours to get a bitterly divorcing couple to divide their assets in a mutually agreeable manner. (Bonus points are awarded if the candidate convinces the couple to stay together.)" Awesome.
Chart of the price of cocaine in countries around the world. Cheapest price is in Colombia ($2/g) while New Zealanders have to pay ~350 times that.
A Brief History of Economic Time. "No 18th-century politician would have asked 'Are you better off than you were four years ago?' because it never would have occurred to anyone that they ought to be better off than they were four years ago." (via migurski)
Crime in the three biggest American cities (NY, Chicago, LA) is down...and up almost everywhere else. In part, this is due to the aging of the population in those cities. "Together they lost more than 200,000 15-to 24-year-olds between 2000 and 2005. That bodes ill for their creativity and future competitiveness, but it is good news for the police. Young people are not just more likely to commit crimes. Thanks to their habit of walking around at night and their taste for portable electronic gizmos, they are also more likely to become its targets." Young people, your gizmos are hurting America!
Adding sushi to the ever-growing list of everyday consumables as economic indicators: steak, Big Macs, Starbucks coffee, Coca-Cola, and cigarettes.
Are the USPS's "forever" stamps a good deal for the consumer? "Absolutely not." Stamp prices increase more slowly than the inflation rate so stamps are continually getting cheaper.
The price of a bottle of Coca-Cola remained a nickel for more than 70 years, until 1959. "The price of sugar tripled after World War I before falling back somewhat; over the past six decades, the price of coffee has gone up eightfold. Coke itself was taxed first as a medicine, then as a soft drink, and survived sugar rationing. All the while, the price stayed at a nickel."
Stephen Dubner and Steven Levitt (aka the Freakonomics guys) on the first-world phenomenon of doing menial labor as a hobby. Examples: knitting, cooking, gardening, lawn care. More on the Freakonomics site.
Graphs of the US minimum wage from 1938 to the present. If you take inflation into account, it's been falling pretty steadily since 1968. But also note that number of people directly affected by the minimum wage has declined as well to just over 2% of workers. (via rb)
Compared with Snapple, whiteout, and Pepto Bismol ($123.20/gallon), gasoline is surprisingly inexpensive. "$21.19 for WATER - and the buyers don't even know the source. No wonder Evian spelled backwards is Naive."
Update: Rob Cockerham did a more extensive analysis of liquid pricing a few years ago.
In a money game with anonymous rich and poor players, rich players will give up some money to help the poor but poor people are more likely to spend their money to make the rich players less rich. Reminds me of the ultimatum game in which people reject free money when they feel like they're getting a raw deal in comparison to someone else.
Short interview by James Surowiecki of Nassim Taleb about his new book, The Black Swan. "History is dominated not by the predictable but by the highly improbable -- disruptive, unforeseeable events that Taleb calls Black Swans. The effects of wars, market crashes, and radical technological innovations are magnified precisely because they confound our expectations of the universe as an orderly place." Malcolm Gladwell wrote an article on Taleb for the New Yorker in 2002, which Taleb said "put too much emphasis on the far less interesting, more limited -- and rather boring -- applications of my ideas to finance/economic, & less on the dynamics of historical events/philosophy of history, artistic success, and general uncertainty in society". See also an interview in New Scientist, a NY Times op-ed, and a long piece on the Edge site about the black swan idea.
People cruising the streets for parking meters do so because meter pricing is too low. "Underpriced curb spaces are like rent-controlled apartments: hard to find and, once you do, crazy to give up. This increases the time costs (and therefore the congestion and pollution costs) of cruising."
Ben Stein on "what's new and hot and exciting" in the world on money: "The most sought after jobs in the United States now are jobs in finance in which basically almost no money is raised for new steel mills or coal mines, but immense sums are raised to buy companies, recapitalize them -- which means pay the new owners immense special dividends and other payments for going to the trouble of taking over the company. This process results in fantastically well-paid investment bankers and private equity 'financial engineers' and has no measurably beneficial effect on the economy generally. It does facilitate the making of ever younger millionaires and an ever more leveraged American corporate structure."
Advertising Age reports (via gulfstream) that despite having spent as much as a reported $100 million on advertising and promotion, the (RED) campaign has raised only $18 million to fight AIDS in Africa. (RED) CEO Bobby Shriver responds by saying that the amount will soon be $25 million, they're in it for the long haul, and that there are non-monetary benefits to all of the advertising -- "A phenomenal benefit is that Gap, Apple, Sprint and other sales people are meeting Americans and explaining that 5,500 Africans dying daily of AIDS is preventable".
The (RED) campaign strikes me as part of a larger trend in the US (and perhaps elsewhere too): the idea that if you, the consumer, spend normally (or even increase your spending), it is possible to break the law of conservation of energy and somehow save more money or lives. Other examples of the spend-to-save trend include the Discover Card Cashback Bonus program, the Bank of America Keep the Change program, and hundreds of retail promotions where, golly, if you spend another $20 on something you don't need, you get a free something that you really don't need.
It seems to me that if The Gap really cared about stopping HIV/AIDS in Africa, they would just donate the $7.8 million they spend on (RED) advertising to the Clinton Foundation. If Discover really cared about saving you money, they'd lower their APR to prime + 1.
I realize that the entire US economy is a house of cards kept standing by the escalation of spending and credit card debt by American consumers, but the sad fact is that to save money, you need to cut spending or increase income. And if you really want to help fight AIDS in Africa, instead of buying that (RED) Gap t-shirt for which Gap will donate 50% of its profit to The Global Fund, buy a cheaper one at American Apparel and send the $13 difference to the Global Fund yourself.
The WSJ reports on economist J.C. Bradbury's new book The Baseball Economist, which sounds Moneyball-ariffic. Contrary to popular belief in "protection", Bradbury found that "a weak on-deck hitter makes a batter more likely to get an extra-base hit". Bradbury is also the author of the Sabernomics blog. (via biourbanist)
Joel Kotkin argues that the "superstar cities" (New York, LA, Chicago, Boston, San Francisco) are overrated and overpriced and that the real economic and social action in the US is happening in the more affordable cities (Charlotte, Houston, Las Vegas, Phoenix). This article contains a wealth of buzzwordy phrases...in addition to "superstar cities", Kotkin refers to a "Bloombergian luxury product", "trustafarians", the "Vailization effect", "neocon anti-urbanism", and "Mayor Bloomberg's luxury calculus". (via biourbanist)
A paper by Linda Bilmes of Harvard's John F. Kennedy School of Government concludes that in addition to the stated cost of the wars in Iraq and Afghanistan by the Bush administration, it will cost $350 - $700 billion for the US gov't to provide health benefits and care over the lifetimes of soldiers who served there. More from the Christian Science Monitor. (thx, marcus)
Long audio interview with Michael Lewis by economist Russ Roberts on "the hidden economics of baseball and football". "Michael Lewis talks about the economics of sports -- the financial and decision-making side of baseball and football -- using the insights from his bestselling books on baseball and football: Moneyball and The Blind Side. Along the way he discusses the implications of Moneyball for the movie business and other industries, the peculiar ways that Moneyball influenced the strategies of baseball teams, the corruption of college football, and the challenge and tragedy of kids who live on the streets with little education or prospects for success."
David Pennock on the steep rise of Apple's stock after announcing the iPhone: "Jobs's speech could not possibly have revealed over $8 billion in previously undisclosed information".
Update: On the other hand, analysts think that Steve Jobs' mere presence at the company is worth $20 billion.
James Surowiecki discusses the waste of holiday giving. "Waldfogel's main finding is that, in general, people spend a lot more on presents than they're worth to those who receive them, a phenomenon that he calls 'the deadweight loss of Christmas.'" This is one of my big problems with the whole Christmas thing. Related: gift cards worth billions of dollars are left unredeemed each year.
Muhammad Yunus, who came up with the idea of microcredit, received his Nobel Peace Prize yesterday. His Nobel lecture is available in text and video formats.
Although Nintendo finds itself in third place in the video game console wars behind Sony and Microsoft, the company is doing really well financially while Sony and MS are maybe breaking even with their efforts. "Nintendo knew that it could not compete with Microsoft and Sony in the quest to build the ultimate home-entertainment device. So it decided, with the Wii, to play a different game entirely."
Tariffs on imported sugar and ethanol imposed by the US government keep our sugar expensive and is keeping the US from using more efficient methods of saving energy and, oh, by the way, helping the environment. This excerpt from the last two paragraphs of the piece is a succinct description of what's wrong with contemporary American politics:
Tariffs and quotas are extremely hard to get rid of, once established, because they create a vicious circle of back-scratching-government largesse means that sugar producers get wealthy, giving them lots of cash to toss at members of Congress, who then have an incentive to insure that the largesse continues to flow. More important, protectionist rules flourish because the benefits are concentrated among a small number of easy-to-identify winners, while the costs are spread out across the entire population. It may be annoying to pay a few more cents for sugar or ethanol, but most of us are unlikely to lobby Congress about it.
Maybe we should, though. Our current policy is absurd even by Washington standards: Congress is paying billions in subsidies to get us to use more ethanol, while keeping in place tariffs and quotas that guarantee that we'll use less. And while most of the time tariffs just mean higher prices and reduced competition, in the case of ethanol the negative effects are considerably greater, leaving us saddled with an inferior and less energy-efficient technology and as dependent as ever on oil-producing countries.
Maddening. Partisan politics is a not-very-elaborate smokescreen to distract us from this bullshit.
Surprising factoid from an article on legalizing kidney sales: "America already lets people buy babies from surrogate mothers, and the risk of dying from renting out your womb is six times higher than from selling your kidney". (via mr)
There's evidence that the dot com bubble wasn't all that bad. A study found that "the attrition rate for dot-com companies was roughly 20% a year, which is no different from what occurred during many other industries, such as automobiles, during their early boom periods" and that the market could have supported more smaller niche companies during that time. Also of note: the Business Plan Archive "collects and preserves business plans and related planning documents from the Birth of the Dot Com Era so that future generations will be able to learn from this remarkable episode in the history of technology and entrepreneurship".
Profile of economist Kevin Murphy, who none other than Steven Levitt calls "the smartest guy in the field".
At PopTech a few weeks ago, Lester Brown, who has been a leading advocate of environmentally sustainable development for almost 30 years, spoke about the impact of the increasing production of ethanol. As more corn gets used for making automotive fuel, that reduces the amount of grain available for food production. As demand rises, so will the price...no matter what people are using the corn for, be it fuel or food. The countries that will really suffer in this scenario are those that import lots of grain for food.
When Brown said this, I immediately thought of Mexico. When you consider the food culture of Mexico, one of the first things to mind is corn. Corn (maize) was likely first domesticated in Mexico and remains the cornerstone of Mexican cuisine; in short, corn is far more Mexican than apple pie is American. In 1491, his excellent book on the pre-Columbian Americas, Charles Mann tells us that despite corn's high status, Mexico is increasingly importing corn from the United States because it's cheaper than local corn:
Modern hybrids are so productive that despite the distances involved US corporations can sell maize for less in Oaxaca than can [local farmer] Diaz Castellano. Landrace maize, he said, tastes better, but it is hard to find a way to make the quality pay off.
Those great tortillas you had at some local place while on vacation in Mexico? There's an increasing chance they're made from US corn. Mmm, globalizious! Of course, Mexican farmers are getting out of the farming business because they can't compete with the heavily subsidized US corn and Mexico is losing control over one of their strongest cultural customs. Now that ethanol is changing the rules, there's a bidding war brewing between Americans who want to fill their gas tanks and Mexicans who want to feed their children. Odds are the tanks stay fuller than the stomachs.
For reference, here's what increasing ethanol production has done to the price of corn over the past three months:
And that's despite a fantastic US corn harvest. The graph is from this article in the WSJ, which contains a quick overview of the effects that the growing ethanol industry might have.
The Malthusian trap is "a return to subsistence-level conditions as a result of agricultural production being eventually outstripped by growth in population".
Video of a Steven Levitt talk on the economics of gangs and why gangbanger is not such a good vocation (for one thing, the job pays less than McDonald's). The board of directors stuff made me think of the co-op on The Wire.
The economic case against philanthropy: charity is selfish. "Those organizing fund-raising drives for the United Way tend to be disproportionately real estate agents, insurance brokers, car dealers, and other people with something to sell."
Tyler Cowen takes a closer look at the recent "600,000 deaths in Iraq" claim. "We all know that the political world judges Iraq by the absolute badness of what is going on (which means Bush critics find a higher number to fit their priors), but that is an incorrect standard. We should judge the marginal product of U.S. action, relative to what else could have happened. In that latter and more accurate notion of a cost-benefit test, U.S. actions probably appear worst when deaths are rising over time, and hitting very high levels in the future."
Interesting story from Steven Levitt: stuck in a Vegas poker tournament with a $3000 first prize but needing to go to the airport to catch the last flight of the night, he starts playing very aggressively in order to win big or lose everything so that he can leave. (via gulfstream)
A pair of economists looked at the number of parking tickets accrued by diplomats at the UN (tickets for which they are not charged) to determine each country's corruption level. "Since, as their study reports, there is 'essentially zero legal enforcement of diplomatic parking violations,' the authors hypothesized that any cross-national variation in parking-violation rates should flow from culture alone." The worst offenders were the Kuwaitis, followed by Egypt. Diplomats from Canada, Israel, Norway, Sweden, and Denmark had 0 parking tickets. Here's the whole paper. (thx, susan)
For those unlucky enough not to get a slot, running in a marathon can be achieved by buying somone else's bib or just photocopying a friend's. Bibs for the upcoming NYC marathon are going for a few hundred dollars on eBay and Craigslist. (via clusterflock)
Malcolm Gladwell on how the demographics of companies affects their financial health. At the time of its bankruptcy in 2001, Bethlehem Steel "had twelve thousand active employees and ninety thousand retirees and their spouses drawing benefits. It had reached what might be a record-setting dependency ratio of 7.5 pensioners for every worker." More from Gladwell on the piece here and here.
Fascinating charts of how the US Senate votes on issues from a liberal-conservative perspective and a social issues perspective. More charts here. You'll notice that the lines on the graphs are mostly straight up and down which means "it's all economic; all the noise about social issues never actually flows thru into the legislative agenda." That is, the Senate decides issues, even social issues, based mostly on economics.
During the depths of the dot com bust, Julian Dibbell looked online for a job and found one as a commodities trader in the Ultima Online virtual world. During one particularly productive month, he made almost US$4000. Dibbell has a book coming out about the experience, Play Money: Or, How I Quit My Day Job and Made Millions Trading Virtual Loot. In addition to being available at bookstores in meatspace, Play Money will also be on sale in the virtual world of Second Life in the currency of that world (Linden dollars). From the press release:
In-game versions of Play Money designed by Second Life coder/publisher Falk Bergman are available for L$750. These copies can be signed by Dibbell at his in-Second Life interview with journalist Wagner James Au on July 27th. For the Second Life resident who needs something a bit more tactile, L$6250 buys a real-life copy of Play Money, shipped with care to the buyer's real life address, in addition to the standard in-game version.
(At the time of this press release, Linden dollars are trading at approximately L$300.00 to the US$1.00. Adjusted to US dollars, an online copy costs US$2.50, and the price of a real-life copy bought in-game is around US$20.85.)
Dibbell will be signing his virtual books in Second Life on July 27th. Caterina read Play Money and has some thoughts on its relation to her work/play at Ludicorp. And here's a preview of Chinese Gold Farmers, a documentary on gold farming sweatshops in China.
Will Moore's Law slow down due to a lack of research funds? I've wondered for awhile whether Moore's Law didn't have more to do with the economics of the semiconductor industry than with engineering limits.
Larger portions of food cause people to eat more. Anyone who has eaten at Chili's and observed the girth of their clientele already knows this. Related: I remember seeing some research that showed as the size of an HTML textarea increases, the more words people write in it. (via mr)
Update: A self-refilling soup bowl experiment suggests that "visual cues of portion size may influence intake". (thx, justin) Also, adding lanes to heavily traveled roadways increases traffic; that is, supply increases demand.
Research shows that the lifetime earnings of graduates who enter the job market during recessions are lower than their boom-time colleagues. "Even a decade or more later, the class of 1988 was still earning significantly less. They missed the plum jobs right out of the gate and never recovered."
Big Mac index, meet the Coca-Cola index. The more wealthy, democratic, and the higher the quality of life, the more likely a country's inhabitants are to drink Coke. See also Starbucks as economic indicator.
The World Bank has a comprehensive package on World Cup 2006 and its relation to economics, including an economic analysis of who's gonna win and how the Cup influences economies in the winning/losing countries.
Update: Goldman Sachs has a 50+ page report on World Cup 2006 and economics [PDF link] as well. (thx, beau)
Lottery idea: instead of earmarking revenues for education, why not use the money for individual retirement accounts? The piece includes this startling fact: "Some 20 million Americans spend at least $1,000 a year on lottery tickets". !!!!
"The cluster effect is the effect of buyers and sellers of a particular good or service congregating in a certain place and hence inducing other buyers and sellers to relocate there as well."
Friends and finances in 21st century America: "More friends and acquaintances are now finding themselves at different points on the financial spectrum, scholars and sociologists say, thanks to broad social changes like meritocracy-based higher education, diversity in the workplace and a disparity of incomes among professions."
James Surowiecki fills us in on a new investment opportunity, housing futures. "If housing futures work the way they're supposed to, they will shift risk from those who are less able to bear it (individual homeowners with hefty mortgages) to those who are more willing to (speculators looking for a big upside on their investments). In the process, they will effectively provide a form of house-price insurance."
New coinage by Simon Willison: pokemonetise, v., "to make money by appealing to the stupid human instinct to collect dumb things".
Launch party tonight (4/14) at Eyebeam for Yochai Benkler's new book, The Wealth of Networks. "His book shows why labor done outside the constraints of free markets and giant corporations can still have a huge impact on the economy and social relations. He argues that a 'third mode of production' offers the promise of a more free society, but only if we make the right collective decisions."
Hobo financial indicators, or how to tell what the stock/bond markets are going to do based on how well hobos are living. Short discarded cigarette butts = bad, lots of dogs getting dental work at the vet = good, lots of litter on the floors of movie theatres = good. (thx, zacharie)
eBay bidders..."would you rather pay $10 and have free shipping or pay $5 and pay $6 for shipping?" Most prefer the latter.
Beautiful people commit less crime. "Other studies have shown that unattractive men and women are less likely to be hired, and that they earn less money, than the better-looking. Such inferior circumstances may steer some to crime, Mocan and Tekin suggest."
People are changing how they spend their money, opting for buying experiences rather than things. "Just as we moved from a goods to a service economy, now we are shifting from a service to an experience economy." (thx, malatron)
CEO pay and perks can be a good indicator of how healthy a business is, so it makes sense that investors are interested in just exactly how much chief executives make. "We shouldn't expect to see a dent in executive compensation anytime soon. But in the long run companies that don't balance pay with performance tend to suffer where it matters most -- in the stock market."
Three economists share a cab, getting off at three different destinations. How do they split the fare? For answers, you might look to John Nash or the Talmud.
Surowiecki on the differences between Europeans and Americans when it comes to work. "But since more people work in America, and since they work so many more hours, Americans create more wealth. In effect, Americans trade their productivity for more money, while Europeans trade it for more leisure."
Surowiecki on the economics of textbooks, i.e. why they cost so damn much. "You can often buy the same textbook abroad for significantly less than it costs in the U.S., so students have learned to buy directly from places like the U.K., and a host of small businesses have sprung up to import books."
In-game space station recently purchased for $100,000. The game, Project Entropia, lets players earn real-world cash in the game, so it's not such a silly investment. (via cd)
Debate between economist Milton Friedman, John Mackey (CEO of Whole Foods) and T.J. Rodgers (CEO of Cypress Semiconductor). The discussion centers around Friedman's assertion that "the social responsibility of business is to increase its profits". (via mr)
James Surowiecki on insider trading and members of Congress. From 1993-1998, "senators beat the market, on average, by twelve per cent annually". Here's a piece on the same study from the FT early last year.
A Brief Economic History of the World, 10,000 BC-2000 AD, consisting of several PDFs. I only read the intro, but it seems pretty interesting if you're interested in such things.
From a Washington Post article about google.org, Google's philanthropic effort:
Shareholder activists said Google's charitable commitment raises questions about whether this is an appropriate use of company cash or whether company founders Sergey Brin and Larry Page ought to make donations to their favorite causes personally. The foundation of Bill Gates, the founder and chairman of Microsoft Corp. and the nation's richest person according to Forbes, gave away more than a billion dollars last year to fight poverty, hunger and disease around the world. But Gates donates through a personal foundation, rather than through Microsoft itself.
"The board of directors should make it clear to the company's founders what should be personal and what should be corporate," said Patrick S. McGurn, special counsel to Institutional Shareholder Services Inc. "Google is spending shareholders' money, and it raises questions if there is not a valid corporate purpose."
Shareholder activists? You've got to be kidding me. You'd think that stock shareholders are a bunch of babies that need their noses wiped and hands held to go potty or something. If you don't want to support Google's philanthropic efforts and think that they're throwing your money away by doing so, there's an easy way to opt out: DON'T BUY GOOGLE STOCK. It's a free country and open market...vote with your money on what you think is a "valid corporate purpose". There are thousands of other companies to invest in that are doing other things, many of which operate exactly the same...nice and safe and by the book. The information on what these companies are doing with their shareholders' money is freely available...get informed about what you're buying. Given their P/E ratio, unique corporate approach, and incredible rate of growth, Google might just be the riskiest large-cap stock opportunity out there, but the potential upside (as well as the downside) is a lot greater than all of those companies playing it safe. As long as it's stated (and I believe Google certainly has made their views very clear), risk isn't something from which shareholders should be warned away.
Wonderful interview of Milton Glaser by Chip Kidd from a couple of years ago. Touches on his iconic I [heart] NY logo, the updated version (which the NY Commerce Dept. tried to sue him for), and the economics of design. (via df)
Nimble companies like FedEx have helped stabilize the US economy by becoming more flexible. FedEx keeps 5 empty planes flying over the US each night to help fill in surprise delivery gaps as needed.
Joel Kotkin rebutts Richard Florida's argument that what cities need to thrive are "gays, twentysomethings, and young creatives". Florida's ideas, which are laid down in The Rise of the Creative Class and Cities and the Creative Class, have been adopted in cities around the world with, Kotkin says, little success. Kotkin stresses that "great cities need schools for families, transport that works, jobs for the middle and the aspiring working classes".
Freakonomists Dubner and Levitt propose a solution for people who don't clean up after their dogs in NYC: a mandatory doggie DNA database against which sidewalk dookies are compared and fines mailed out for offenders.
September sales of SUVs were down sharply from last year. "Sales of F-Series pickup trucks plunged 30 percent. Sales of Ford's large SUVs, including the Ford Explorer and Expedition and the Lincoln Navigator, sank by more than 55 percent each. At GM, overall sales of trucks, minivans and SUVs dropped 30 percent." Most blame the $1/gal difference in gas prices from a year ago, but auto execs blame poor inventory after summer sales. Perhaps everyone went to the movies instead of car shopping.
The Army's Be All You Can Be ads don't really work all that well, despite being the 25th largest advertiser in the US. Recruiting is actually correlated more closely with the economy...the economy goes bad and the number of recruits goes up. Here's a better way to spend that ad money: give it to incoming recruits as bonuses...the same strategy Amazon uses in offering free shipping to customers rather than spending that money on TV ads. (thx garrick)
Update on the Million Dollar Homepage...it's actually starting to fill up. He's sold almost $100,000 worth of space so far. This is beginning to look like an absolutely brilliant idea.
Interview with Edward Castronova, video game economist. Quite an interesting thought from him about using MMORPGs to test economies and social systems. "I think the smart thing for the US state department to do today is build a game about Islam but make it a democracy. And set it up so that every 16-year-old from Morocco to Pakistan can go into that world when they get a computer. Not say anything overt about democracy but have them play -- have them vote, for example." (via bbj)
Suroweicki on gas prices and Katrina: "Americans are happy with the free market when it allows them to buy cheap T-shirts and twenty-nine-dollar DVD players, but they tend to like it less when they have to pay fifty dollars to fill up their gas tanks."
James Surowiecki, the New Yorker's resident economist, weighs in on the tipping debate. (Previously discussed here.)
Fun speculation that the purpose of Google's big stock sale is to grease the skids for their entrance into the S&P 500. Lots of new people buy the stock of a company just added to the index and the stock sale would make that inventory available. (Or do they need money to buy Skype? Or are Google execs getting jittery about being in a bubble and want to cash in?)
A table of gas prices from around the world. A gallon of gas in Amsterdam is $6.48 while it's only $0.12 in Venezuela. It's always so weird to see these types of lists where the US has more in common with Third World and non-democratic countries than with Europe, Japan, etc. (via rw)
Grant McCracken offers an alternate theory for why crime fell in the 90s: rap music replaced violence among urban youths as a way to gain esteem. Compare with Levitt and Gladwell.
Freakonomists Levitt and Dubner: where did all the crack cocaine go? Well, it didn't. Go. But the crime did.
Tom Standage says bottled water is "bad to the last drop". It's more expensive than gasoline, doesn't taste any better, and isn't any safer.
How the DVD is changing Hollywood and the movie business. "Most important, the new DVD audience is so diverse that companies can target niche markets and still sell millions of disks. Because specialized markets are more predictable, the risk of failure is much lower, and so small-to-mid-budget movies can be very profitable indeed."
In the past 5 years, I've probably been to a theater an average of once every two weeks to see a movie. Even though it costs a small fortune, I almost always get a soda and popcorn (topped with "butter"[1]) to go with the show. Many of the larger chains offer a deal if you purchase a large popcorn and a large drink together. This "Super Combo" costs a lot less than ordering a L popcorn and a L soda separately from the menu but often it will actually cost you less than a L popcorn/M soda, M popcorn/L soda, or even a M popcorn/M soda (?!??). Why such a steep discount when the theaters make so much of their money on concessions? I've developed a few theories over the years but would like to hear your thoughts before sharing them.
[1] The proper way to butter movie popcorn is to fill the bag half full, apply butter, fill the rest of the bag and apply more butter. This results in fairly even application of butter to kernel throughout the bag. Due to a lack of focus on service and an increasing number of theaters moving to DIY butter application, it's getting more and more difficult to buy a good bag of buttered popcorn at the movies.
Racial disparities in tipping taxi drivers. African-American drivers were tipped 1/3 less than white drivers and African-American passengers tipped 50% less than white passengers.
Pokernomics: Steven Levitt is researching the economics of poker. If you send him statistics from your online games, he'll share the results with you.
Here's a list of reasons that Hollywood is in trouble, with nary a mention of the piracy bogeyman. "These trends do not appear reversible in the short run. It is not just that this year's movies mostly stink."
"Ireland today is the richest country in the European Union after Luxembourg". Ireland "today has a per capita G.D.P. higher than that of Germany, France and Britain".
Finding a rough model for how films fare at the box office. "They assume that revenue relies on three major factors: the size of the possible audience, the initial desire of audience members to see the film (which is often dictated by the amount spent on marketing and publicity), and audience response to the film."
Keith Chen is doing economic research with monkeys; teaching them how money works. "When taught to use money, a group of capuchin monkeys responded quite rationally to simple incentives; responded irrationally to risky gambles; failed to save; stole when they could; used money for food and, on occasion, sex."
The Neiman Marcus Paradox: How dumb rich people end up in debt. "14 percent of people with more than $5 million in assets have credit-card balances [which is] mystifying since credit-card cash is perhaps the most expensive form of money legally available."
Maybe the high price of oil isn't such a bad thing. "When you look closely, it is hard to know what effect, exactly, oil prices have on the economy."
Two years ago, Stephen Dubner wrote an article for the NY Times Magazine on Steven Levitt, an economist with a knack for tackling odd sorts of problems. Last year, Dubner and Levitt collaborated on an article called What the Bagel Man Saw about the economic lessons gleaned from a man who's been successfully selling bagels on the honor system in offices for more than 20 years. Now Levitt and Dubner are out with a new book called Freakonomics: A Rogue Economist Explores the Hidden Side of Nearly Everything, an overview of Levitt's work and collaborations with other economists.
Dr. Levitt was kind enough to answer a few questions I had about the book:
jkottke: In Freakonomics, you state that you're interested in applying economic tools to "more interesting" subjects than what one may have learned about in my high school economics class. What's your definition of economics? Is it a tool set or a science or what?
Steven Levitt: I think of economics as a worldview, not a set of topics. This worldview has a few different pieces. First, incentives are paramount. If you understand someone's incentives, you can do a pretty good job of predicting their behavior. Second, the appropriate data, analyzed the right way are key to understanding a problem. Finally, political correctness is irrelevant. Whatever the answer happens to be, whether you think it will be popular or not, that is the answer you put forth.
jkottke: Your talent for ignoring seemingly applicable but ultimately irrelevant information (not that different from a professional-grade batter taking cues from certain aspects of a pitcher's mechanics and ignoring the extraneous ones in order to hit well), where does that come from? Good genes or was it all the books in your childhood home?
Levitt: If nothing else, I had an unusual home environment. My father is a medical researcher whose claim to fame is that he is the world's expert on intestinal gas (he's known as the King of Farts). My mother is a psychic who channels books. From an early age, my life was different from that of other kids. For instance, when I was in junior high, my father would wake me up at night to drill me with questions in hopes that I would be the star of the local high school quiz show.
jkottke: In looking at the world through data, you've investigated cheating schoolteachers, falling crime rates due to abortion, and the parallels between McDonald's corporate structure and the inner workings of a crack-dealing gang. What's the oddest or most surprising thing you've uncovered with this approach? Maybe something you still can't quite believe or explain?
Levitt: It's not the oddest result I've ever come up with, but there is one finding I have always puzzled over: when cities hire lots of Black cops, the arrest rates of Whites go up, but no more Blacks get arrested. When cities hire White cops, the opposite happens (more Black arrests, no more White arrests). It was an amazingly stark result, but I'm not quite sure what the right story is.
jkottke: In the chapter on the effect of abortion on crime rates, you and Stephen take care emphasizing what the data says and the strong views that people in the US hold on the issue of abortion. Still, if someone wants to twist your observations into something like "abortion is good because it lowers crime", it's not that difficult. Have your observations in this area caused any problems for you? Any extreme reactions?
Levitt: I have gotten a whole lot of hate mail on the abortion issue (as much from the left as from the right, amazingly). What I try to tell anyone who will listen -- few people will listen when the subject is abortion -- is that our findings on abortion and crime have almost nothing to say about public policy on abortion. If abortion is murder as pro-life advocates say, then a few thousand less homicides is nothing compared to abortion itself. If a woman's right to choose is sacrosanct, then utilitarian arguments are inconsequential. Mainly, I think the results on abortion imply that we should do the best we can to try to make sure kids who are born are wanted and loved. And it turns out that is something just about everyone can agree on.
jkottke: In the book, you say "a slight tweak [in incentives] can produce drastic and unforseen results". If you were the omnipotent leader of the US for a short time, what little tweak might you make to our political, cultural, or economic frameworks to make America better (if you can forgive the subjectivity of that word)?
Levitt: I would start by increasing the IRS budget ten-fold and doing a lot more tax audits. If everyone paid their taxes, tax rates could be much lower and otherwise honest people wouldn't be tempted to cheat. For some reason, everyone hates the idea. But we can't all be cheating more than average on our taxes. I think it would be for the better. And after I got done with that, I'd legalize sports betting, and I would also do away with most of the nonsense and hassle that currently goes into airport security.
jkottke: In the war between the film and music industries and their customers, there's an argument over how much the explosive increase in Internet piracy affects sales of CDs, movie tickets, and DVDs. Using the same data, the music/movie industry argues that sales are down because of piracy (or at least diminished from what they "should" be in a piracy-free marketplace) while the other side argues that sales are up and that piracy may actually have a beneficial effect. The question of "how does piracy affect record/movie sales?" seems well suited to your particular application of economic tools. Have you looked at this question? And if not, do you have sense of which special view of the data might reveal an answer?
Levitt: I have not myself studied the issue. I have a former student who has studied this issue. Alejandro Zentner. He argues that music sales are way down as a consequence of downloading. He uses the availability/price of high-speed internet across areas and relates that to patterns of self-reported music buying.
But on the other hand, I have a good friend Koleman Strumpf who has also written on this and comes to the opposite conclusion using a whole bunch of clever arguments.
This is a great issue - an important one and a tough one. Having studied both of these papers, I don't know which one to believe.
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Thanks, Steven. For more information on Freakonomics, check out the book's web site -- which includes a weblog written, in part, by the authors -- or buy the book on Amazon. Check out also this email conversation between Levitt and Steve Sailer on the connection between legalized abortion and reduced crime in the 1990s, a short profile in Wired, and this profile in Esquire (free subscription required).
Update: Here's a Freakonomics excerpt from Slate on how distinctively black or white names affect a child's course in life.
Study: tall, slender, beautiful people get paid more. "They showed that women who were obese...earned 17 percent lower wages on average than women [of recommended weight]". 17%! That's quite a disparity.
