Equality vs Efficiency once again

The NBER reports:

If you provide very generous unemployment insurance, you may end up with more long-term unemployment. That's what economists Peter Kuhn and Chris Riddell find when they compare the long-term impact of a highly generous unemployment insurance (UI) program in the Canadian province of New Brunswick with the more modest UI program in the neighboring state of Maine. In Maine's northernmost countries, about 6.1 percent of employed men worked fewer than 26 weeks (half a year) in 1990. Across the Saint Croix River in New Brunswick, the comparative figure was more than three times as high, 20.8 percent. The more-generous UI program in New Brunswick accounts for about two-thirds of this difference, the authors estimate.

PARIS - beaubourg + happy therapy cocktail, ora-ito gallery + antoine marquis opening, france fiction + black calvados + le baron, 9/28/06

PARIS - salon de la jeune cr�ation exhibition opening, la bellevilloise, 9/27/06

How indebted is the U.S. government?

Here is a good graph from yesterday's congressional testimony of CEA chair Eddie Lazear (click on the graph to enlarge). The bottom line: The level of U.S. government debt, either now or in the near future, is not unusually high by historical or international standards.

The looming problem with fiscal policy is the longer-term outlook, which will unfold over the next several decades as the baby-boom generation retires and starts collecting Social Security and Medicare. At that point, this series will start rising rapidly unless taxes are raised or spending is reduced compared with benefits promised under current law.

OPEC for Spuds

A reader alerts me to a textbook example of a cartel:

It took farmer Merrill Hanny three days to bury $100,000 worth of his perfectly good potatoes. He remembers how they crunched beneath his tractor as he plowed over his muddy field in the spring of last year.

Mr. Hanny destroyed part of his crop at the behest of the United Potato Growers of America, a fledgling group of regional farming cooperatives. The group aspires to be to potatoes what OPEC is to oil by carefully managing supply to keep demand high and constant, resulting in a more stable return for farmers.

The new organization has been a boon to Mr. Hanny, 53 years old, and other farmers who for years have watched potato overproduction push down prices and mash profits. "For the first time, I feel in control of my destiny," says Mr. Hanny, who is married and has seven children....

In the past year, United Potato helped erase 6.8 million hundred-pound potato sacks from the U.S. and Canadian markets -- the equivalent of about 1.3 billion medium orders of french fries at McDonald's. For farmers, their open-market returns surged to $10.04 per hundred pounds, up 48.5% from last year....

The spud cartel's manipulation of supply is perfectly legal. Orange, dairy and other farmers have employed similar co-ops as market stabilizers since 1922, when the Capper-Volstead Act exempted farmers from federal antitrust laws, permitting them to share prices and orchestrate supply.

From the Wall Street Journal two days ago. As a matter of public policy, it is hard to see any good reason to allow this cartel while outlawing most others.

But I must admit that it is hard for me to separate my objective analysis as an economist from my love of hash browns. So I have two reasons to object to this particular cartel.

Update: A comment draws attention to an odd phrase in the article: "managing supply to keep demand high and constant." This makes no sense if the words are interpreted as we use them in economics textbooks. Managing supply does not affect the demand curve. By "demand," the author probably meant "consumer expenditure," which in turn equals producer revenue.

Economics Nobel Prize Pool

Think you know who's going to win the Nobel prize in economics? Have a dollar you can afford to lose? If you answered "yes" to both questions, then contact Harvard grad student John Friedman.

Best line I heard today

"In Washington, the truth is just another special interest, and one that is not particularly well financed."

Attributed to Mike Mussa.

Update: A reader sends me the reference: Mussa, AER, May 1993.

In October, the worldwide hunt continues

After an exciting month in New-York, I plan a not too bad month of October. First, Paris Women SS07 Fashion Week from next Sunday. Obviously great. And then from October 18 to 22, I'll be in Iceland for Airwaves. A festival "in the tradition of cutting-edge music, all night parties and general debauchery". I look forward to capture the weird aestethic of the local kids. Some of my photographs will be published in WAD Magazine (special North, December). For those who haven't seen all the NY pictures, here they are. For those who were missing the Paris style, it comes back online tomorrow.

I need to calm down

It really pisses me off when people confuse correlation with causation. Here is what I just read in the Harvard University Gazette:

Researchers at Johns Hopkins School of Medicine tracked 1,055 medical students for 36 years. Compared with cooler heads, the hotheads were six times more likely to suffer heart attacks by age 55 and three times more likely to develop any form of heart or blood vessel disease.

The conclusion is clear: Anger is bad for you at any age.

No, the conclusion from the fact given is not at all clear. People who get mad more easily do so for a reason--a more stressful job, bad genes, or some other mysterious factor X. Maybe it is the X factor, rather than the anger itself, that is bad for you. Maybe reducing anger without changing X won't change health outcomes at all.

I am going to call the author and give him a piece of my mind. Just as soon as this pain in my chest goes away.

the last NY Fashion Week pictures, 9/14-17/06

Who invented supply and demand?

A blog reader emails me:

Hi-

I'm a devoted reader of your blog, and I use your textbook with the Boston Public School seniors whom I teach in Brighton. They love your book. Thanks for doing it!

Today in class, they asked two great questions that I couldn't answer, so I turn to...

Question 1. Who invented the supply and demand graph? (I said Heilbroner. Is that right?) 1B. What is there to read about the history of the graph itself? That is, when was it created? By whom? Was it adopted immediately? etc.

Question 2. Why is quantity on the X axis? Shouldn't it be on the Y axis?

Thanks again for all you do,

[name withheld]
Public School Econ teacher

The model dates long before Heilbroner. Here is the answer according to Wikipedia:

the partial equilibrium supply and demand economic model [was] originally developed by Antoine Augustin Cournot (published in a book in 1838) and thirty years later broadly publicized by Alfred Marshall.

That sounds right to me. I should note that Marshall's 1890 text was the standard for its day. You can find Marshall online, but unfortunately the online version omits the footnotes. In quickly looking through the copy I have on my shelf, I found supply-and-demand graphs in footnotes, but none in the main text. You can, however, read the discussion of supply and demand in Book V.

On the axis question: The instructor is right that, given the way we now teach supply and demand, it makes more sense to have price on the horizontal axis. The price is viewed as the variable that determines quantity supplied and quantity demanded, and we usually put the dependent variable (which here is quantity) on the vertical axis.

So why is it switched? Here is a guess. The early economists may have been imagining that, in the very short run, a given quantity of goods was supplied to the market (an agricultural harvest, for example). The supply curve is then vertical, and the price adjusts to ensure that quantity demanded equals this exogenous quantity supplied. So, in this very short run, the price seems more like the dependent variable. Now, however, the choice of axes is based more on historical convention than logic.

I am not an historian of economic thought, so these answers may be off base. But I am sure the commenters will correct me if I am mistaken.

Update: A comment directs us to a good article on the topic from the Richmond Fed.

Update 2: My Harvard colleague Robert Barro emails me his insights on the matter:

As I recall, Hicks in Value and Capital thought in terms of demand price and supply price. The demand price is how much a person was willing to pay for an additional unit of goods (starting from some initial quantity, Q). The supply price is how much a producer would have to be paid to provide an additional unit of goods. This construction--which I think comes from Marshall--makes it natural to have P on the vertical axis and Q on the horizontal.

Leonhardt on Cutler and Health Care

In today's NY Times, David Leonhardt highlights the work of Harvard health economics guru David Cutler. The bottom line:

an affluent society should devote an ever-growing share of its resources to the health of its citizens.

Cutler will be giving an ec 10 lecture later this semester.

Kremer on Immigration

My Harvard colleague Michael Kremer defends immigration. Here is a brief description of his new paper:

Immigrant workers serving as nannies, caretakers and housecleaners may be helping to improve conditions for native workers. A new paper, co-authored by a Harvard professor and a recent PhD graduate, concludes that the growing trend of immigrant household laborers is having the effect of raising salaries for native low-skilled workers, and reducing wage inequalities between workers overall.

The working paper titled �The Globalization of Household Production,� challenges many existing theories about the economic impacts of immigration. Co-authors Michael Kremer and Stanley Watt examine how immigrant household workers are affecting other labor trends, and how those trends are affecting the overall economy.

The authors document the rising numbers of women who are increasingly crossing international borders to work as private household workers. In Singapore and Hong Kong, for instance, foreign workers in private households comprise around 7% of the total labor force or more. The percentages are even higher in some �new rich� gulf countries.

Kremer and Watt argue that as more immigrant women serve in household positions, more high-skilled native women are therefore available to join the labor market, driving down relative wages among high-skilled workers and reducing the disparity in wages between low- and high-skilled workers. In addition, Kremer and Watt contend that as more native women return to the workforce, they contribute more tax dollars to the general coffers. This provides �a fiscal benefit for the population, even without considering the taxes paid by the migrants themselves,� they write. Assuming immigration levels of 7% of the total labor force, relative wages of native low-skilled workers are increased by 3.9%, and native welfare overall is increased by 1.2%, they claim.

Congratulations, Phill

President Bush today announced the nomination of Phillip Swagel to be Assistant Secretary of Treasury for Economic Policy. A graduate of Princeton and the Harvard PhD program in economics, Phill was my chief of staff at the CEA and, most recently, a coauthor of mine on papers on antidumping and outsourcing.

A great choice for an important job.

more NY Fashion Week pictures... 9/8-13/06