December 28, 2006
Moving to Opportunity
Today's Wall Street Journal has an article ("How Much Does a Neighborhood Affect the Poor?," available here -- the last in an impressive and informative series on poverty) describing the results of an experiment designed to alleviate poverty. Beginning in 1994 and operating in five large cities under the federal government's auspices, the experiment, called "Moving to Opportunity," sought to identify the effects of living in a poor neighborhood in sustaining poverty. The experiment consisted of randomly selecting some residents of a poor neighborhood to move to lower-poverty neighborhoods and then comparing what happened to those who moved with what happened to those who remained behind.
The results are somewhat surprising. First, there appears to have been no statistically significant difference between the average family earnings of those families who moved to low-poverty areas and those who remained in poor areas. "Earnings of families who relocated .. averaged just $9,376 in 2001, a half-decade after they moved. That's just 3 percent higher than the $9,108 of those in the control group [who did not move]."
Second, there was a statistically significant and positive effect on the mental health of those who moved to low-poverty areas. Depression among those who had moved was almost 8 percentage points lower (18.5 percent of those who moved had had periods of depression, while 26.3 percent of those who remained had had them).
Third, young women who moved did significantly better than those who did not, but young men who moved did not do as well as those who remained. "83 percent of [the young women] who relocated to low-poverty neighborhoods graduated from high school or were still in school five years after the move, compared with 71 percent in the control group. Alcohol use was lower. Arrest rates were lower. And mental-health measures improved." But for teenage boys the relocation did not seem to make their lives better. For example, "[f]or property crimes, there were 58 arrests for every 100 boys who moved to low-poverty neighborhoods, compared with 22 arrests for every 100 boys in the control group."
Jeffrey Kling of the Brookings Institution and others have written scholarly articles, which you may access at Kling's website here, about this experiment.
December 23, 2006
Economics of Christmas
When I was a graduate student in economics, I remember how powerfully I was struck by the demonstration that someone would be made better off by giving them the dollar equivalent of a gift rather than that gift. I made the mistake of showing my father the wisdom of giving someone $50 rather a gift that cost $50. He was as forcefully struck by the showing as I had been. So, every birthday and Christmas thereafter, we all got cash, no presents.
Today's Wall Street Journal has a wonderful short article -- "How Christmas Brings Out the Grinch in Economists," available here -- that summarizes the cash-is-better-than-a-present view. The sub-headline is "Holiday is Highly Inefficient, Some Dismal Scientists Say; Analyzing the In-Law Effect." Christmas is a bonanza for the economy. "The National Retail Federation forecasts that U.S. consumers will plunk down about $457 billion this holiday season, or about $4,000 a household." But this lumping of huge amounts of spending might better serve the economy if it were spread more evenly through the year. The holiday rush makes for logistical problems of shipping, storing, displaying, advertising, and planning that may raise costs in a, perhaps, inefficient way.
The Journal, in its economic forecasting survey conducted this month, asked 51 economists to speculate on what would happen if Christmas did not exist as a holiday. 45 percent said, "Consumption would remain the same; people would spend more on other holidays[, such as birthdays]." 27 percent said, "Consumption would decline, [and] saving would increase." 16 percent said, "Consumption would remain the same; people would spend more on themselves." And 12 percent said other things would happen.
And then there is the fact that a lot of the ties, shoes, pants, hats, and whatchamacallits that people receive are not valued very highly by the receivers. This is the so-called "deadweight loss of Christmas," to quote the title of a famous article on the subject by Professor Joel Waldfogel of the University of Pennsylvania. (See "The Deadweight Loss of Christmas," 83 Am. Econ. Rev.1328 (1993) and several articles later in that decade commenting on Waldfogel's classic article.) Waldfogel estimates that if people bought presents this year only for themselves, they would be $10 billion better off than they are under the present rules of engagement. To quote the Wall Street Journal story, "He derives the number from a study in which he asked college students to place a value on things they bought on their own and on the gifts they received for Christmas. On average, they valued their own purchases 18 percent more highly than the gifts." Among those who give gifts, in-laws are, as a group, the least successful gift-givers: "Recipients tended to value their gifts about 40 percent less than they did their own purchases."
Economists note that this lost value can be partially recouped by re-gifting (I wouldn't know anything about that) or by selling one's gifts on eBay (nor that).
One way of avoiding the in-law effect or bad matching is to give gift cards. The National Retail Federation estimates that $25 billion will be spent on those cards this season and that that amount is $6 billion greater than the amount spent last year.
In one of the comments on Waldfogel's article, Jason Shogren of the University of Wyoming and John List of the University of Chicago tried to get at the value that gift recipients place on the non-pecuniary aspect of the gifts they receive: "the tie may be ugly, but it came from Mom, and that's worth a lot." List and Shogren "created an auction in which they offered students money for their Christmas presents, asking them to split their price into material and sentimental value. The result: On average, sentimental value accounted for about half the total. That more than offsets Mr. Waldfogel's estimate of deadweight loss, suggesting that Christmas gift-giving might not be such a bad thing when all factors are taken account of."
December 16, 2006
For approximately the last forty years there has been a relatively constant percentage of the American population counted as poor -- ranging between 12 and 14 percent. The poverty rate last year (2005) was 12.6 percent, having risen every year since the decade began. The federal government defined poverty last year to be an income of less than $15,577 for a family of three.
A question whose answer invariably draws puzzled looks from the audience is this: "Under what modern U.S. President was the poverty rate the lowest?" Nixon. But it wasn't a significantly lower percentage -- roughly 11.5 percent -- than the relatively constant percentage noted above. (And I think that it true that the poverty rate fell to almost the same rate during President Clinton's last term. I'll check.) And although the nature of poverty has changed substantially during the forty years that the rate has remained constant -- mainly from being a lifelong or long-term phenomenon to being an episodic one, one aspect of poverty that most of us would confidently have predicted is that it is principally an urban phenomenon.
A new study from Alan Berube of the Brookings Institution tells us that this latter prediction is no longer true. According to a story in the December 7, 2006, Wall Street Journal, "[t]he suburban poor outnumbered their inner-city counterparts for the first time last year, with more than 12 million suburban residents living in poverty." Additionally, "[t]he poverty rate in large cities (18.8 percent) is still higher than it is in the suburbs (9.4 percent). But the overall number of people living in poverty is higher in the suburbs in part because of population growth." "Cleveland was the city with the highest poverty rate last year, at 32.4 percent, while San Jose had the lowest, at 9.7 percent. Suburban McAllen, Texas, at the southern tip of the state, was the suburb with the highest poverty rate last year, at 43.9 percent, while suburban Des Moines, Iowa, had the lowest rate at 3.7 percent."
December 14, 2006
On October 30 Sir Nicholas Stern (who happened to be one of my tutors at Oxford many years ago and is a marvelously accomplished economist and a great guy) published, at the behest of the British Government, the Stern Review on the Economics of Climate Change. (That report is available at the HM Treasury site here. There is an Executive Summary available at that site. The full report is over 700 pages long.) Let me begin my brief summary of the Review by confessing that I believe that global warming is an extremely serious problem, that it presents significant -- possibly insurmountable -- collective action problems, and that because of those problems, it strikes me as highly unlikely that anything will be done about the issue until there is a palpable crisis (rather than mere warnings in academic work, however well done).
The Stern Review finds that global temperatures are, for identifiable reasons, rising relatively rapidly, and that if left unchecked, those rising temperatures could cause very large economic damages in the future. The Review estimates that the damages could amount to future reductions of 20 percent of global production. Dealing with global warming later will have far higher costs that dealing with it soon. Sir Nicholas recommends setting aside 1 percent of global output beginning today to avoid the larger later costs.
The Economist magazine criticized some of the Stern Review but also found much of it to be helpful. See their coverage here, here, and here.
Professor Hal Varian's "Economic Scene" column today in The New York Times Business section is a brief but trenchant critique of the Stern Review. He mentions a critique by Professor Sir Partha Dasgupta of the University of Cambridge (available here and only nine pages) but focuses on the critique by Professor William Nordhaus of Yale (available here and only 21 pages). Both critiques make the same general point -- namely, that Sir Nicholas has found such large damages from global warming by using an inappropriate social rate of discount. The "social discount rate" is the rate of interest at which to discount (or divide) future social values so as to convert them into current social values, presumably in dollars or some other currency. In our personal lives we should (or do, there's some controversy about this) discount future values into present values so as to make rational and reasonable decisions about the allocation of time and effort as between the present and the future. For example, if the current annual rate of interest is 5 percent, then $100 loaned to someone for a year will result in the lender's receiving $105 one year later. So, in a sense $100 today is worth $105 one year from today (when the rate of interest is 5 percent). Just as we discount future personal values, one suspects that we ought to discount future social values. But at what discount rate?
Here's where the problem arises. There is a serious argument to be made that the social discount rate is zero. That argument takes its force from the contention that one should not give future generations less moral weight or significance than the current generation (as would seem to be implied by a positive social discount rate). The Stern Review comes close to adopting that position by assuming that the appropriate social discount rate is 0.1 percent per year (set equal to the Committee's estimate of the probability of the extinction of the human race through some exogenous event, such as an asteroid collision). But there is also serious commentary in favor of a positive social discount rate, generally following the analogy to individual decisionmaking over time, in that where there is a choice to be made between action today and action tomorrow, rational and reasonable comparison and decisionmaking requires converting future values into present values. Professors Nordhaus and Dasgupta adopt this alternative view of the appropriate social discount rate.
Both Professor Nordhaus and Professor Dasgupta use a social rate of discount equal to 3 percent per year (declining, in Professor Nordhaus' calculations, to 1 percent per year over the next 300 years). This positive rate implies giving the costs of global warming to future generations less weight than those same costs would inflict on the current generation. So, when those future costs are discounted to present values, the result is a lower current estimate of the costs of global warming than results from using Sir Nicholas' 0.1 percent per year discount rate. And those resulting lower current costs of global warming result in lower current policy correctives (such as a carbon emissions tax) than the Stern Review recommends.
Note that the debate is not about whether to take global warming seriously or whether to take corrective action today. All three -- Sir Nicholas Stern, Professor Nordhaus, and Professor Dasgupta -- argue in favor of immediate correctives to lower the social costs of global warming. Rather, the debate regards only the extent of the correctives.
December 10, 2006
Great Ideas of 2006
The New York Times Magazine today (December 10) has a feature article surveying 74 interesting ideas from 2006. One of them --ultimately not implemented -- was designed to encourage more voting: everyone who voted in Arizona was entered in a lottery whose winner would receive $1 million. The articles are very short and arranged alphabetically.
December 4, 2006
Judge Posner and Second Life
I have a dear friend to whom I mentioned several months ago the remarkable developments going on in cyberspace. I cited the rise of on-line virtual reality worlds, such as that in Second Life (see here), and I've been sending him links to newspaper stories about the phenomenon on a regular basis.
Second Life has been growing extremely rapidly and even attracting the attention of law schools (such as the Berkman Center at Harvard, which has set up a site in Second Life) and of distinguished law scholars, such as Professor Charles Nesson. I have pointed out to my friend the large sums of real money that are involved, the fact that Reuters now has a full-time reporter stationed in Second Life, and that there are some people who make a comfortable living buying and selling goods and services in the game. (Interested readers should go to www.ssrn.com and download two articles by Greg Lastowka and Dan Hunter, "The Laws of the Virtual Worlds" and "Virtual Crime.")
Now comes word that Judge Richard A. Posner, in the form of his avatar, will appear in Second Life this Thursday, December 7, from 6 pm PST, to be interviewed about his new book, Not a Suicide Pact: The Constitution in a Time of National Emergency. New World Notes, which is a blog about events in Second life, has the story here. You will need to sign up to reserve a spot in the "Center Auditorium in Kula."
"Cognitive dissonance" refers to the practice of resolving a conflict between our observations about the world and our beliefs about the world. The usual interpretation is that we resolve that conflict in favor of our beliefs. That is, we do not alter our beliefs to fit new observations about the world.
Leon Festinger, a professor of psychology at Stanford, developed the notion and study of cognitive dissonance in the late 1950s. In today's Wall Street Journal Cynthia Crossen has a wonderful column about Festinger and cognitive dissonance, available here. The column contains a marvelous story about a 1950s cult centered in Chicago and led by Marion Keech. (Professor Festinger had two infiltrators in the group, something that would surely not pass muster under current IRB understandings.) Mrs. Keech and her followers believed that she was receiving transmissions from a planet called "Clarion" and that those transmissions were telling her that the Earth was to end on a date certain through a worldwide flood. The inhabitants of Clarion informed Ms. Keech that they would send a spaceship at midnight on the cataclysmic day to pick her and her followers up and carry them to safety. So, the faithful gave away most of their possessions and gathered on the appointed day and waited for the arrival of the spaceship. Midnight came and went. No spaceship. At 4:15 am Ms Keech reported a new transmission --this time apparently from God -- informing her that the faithfulness of her and her followers had so impressed Him that He had decided not to unleash the flood.
One might have thought that this experience would have caused some of the faithful to question their beliefs. Quite to the contrary. Almost all the faithful fit the observations into their beliefs (as vindication of their beliefs) and returned to their proselytizing efforts with a new energy.
I can't help but contrast the notion of cognitive dissonance with this marvelous quotation from John Maynard Keynes, who had been chided for changing his position on some important issue: "When my information change, I change my opinion. What do you do, Sir?"