Archive for the ‘economics’ Category

A Wall Street Journal article derisively titled “Are You Smarter Than a Fifth Grader?” has been making rounds of the blogosphere lately, with its premise that, based on a 2008 survey of economic knowledge, the left wing would flunk Economics 101. Supposedly, the left fumbles the most basic economic concepts.

Well, I am a Chomsky-reading, bleeding-heart leftist, and an economics major. I’ve never received a grade lower than an A in any economics course. So I feel I’m in a unique position to offer criticism from the left.

Firstly–and this is a criticism I have for economics in general–I disagree with the notion of breaking complex political issues down to simple cost-benefit calculations. Any policy assessment should be considered in the context of our values as a society. For example: it’s true that taxation is distortionary and may create disincentives toward work. For Chicago school economists, this in itself is a crime. However, in a broader social context, our society has chosen to value a more even wealth distribution and greater social services. We have made a trade-off, valuing social equality slightly more than economic efficiency.

So, it upsets me when survey respondents are deemed “unenlightened” for not playing along with the cost-benefit analysis of complex issues presented in a single sentence. The answer format of “strongly agree/agree/unsure/disagree/strongly disagree” is extremely shallow for those that see a more human element in those issues, who would prefer to answer, “Yes, but…” In other words, the bleeding-heart liberals.

Daniel Klein kindly supplies all eight of the questions that were asked in his survey and his idea of what constitutes an “unenlightened” answer; all the better to provide all the “Yes, but…” responses that I, if I had been a participant, would have liked to respond with.

1. Restrictions on housing development make housing less affordable. (unenlightened answer: disagree)

It’s true. If urban areas aren’t allowed to sprawl forever, housing will be more scarce and thus more expensive. This concept is extremely well understood in my hometown of Vancouver, Canada, where height and sprawl limits have made Vancouver the most “severely unaffordable” housing market in Anglophone countries, according to a recent study by the Frontier Centre for Public Policy in Winnipeg.

However, Vancouver is also a darling of international urban design circles for its sustainable and varied infrastructure. It is consistently ranked among the top five most liveable cities in the world, partly for its preservation of green spaces in the city at the expense of housing development. The survey statement is a very loaded question. The answer is yes, restrictions on housing development make housing less affordable, but I feel that it’s unfair to leave it at that.

Yes, but, restrictions on housing development have consequences beyond housing prices, like the nurturing of a more pleasant and sustainable urban infrastructure and a greater quality of life for a city’s residents. To end simply with the assertion that it makes housing less affordable is to leave out the real story.

2. Mandatory licensing of professional services increases the prices of those services. (unenlightened answer: disagree)

Yes, it does. But it also increases the quality and reliability of professional services, and any good economist should know that a good and reliable service is more valuable than a mediocre or uncertain level of service. One can receive a lower quality service at a lower price, or a higher quality service at a higher price; they move together. Furthermore, it is well-established in economics that consumers prefer certainty over uncertainty, and that customers will pay a premium to make an uncertain situation less risky; this is the basis for the insurance industry. By forcing professionals to obtain licenses, it reduces the risk to consumers of hiring someone substandard.

This question is misleading and poorly phrased from an economic point of view. Consumers are not paying higher prices for the same services; consumers are paying higher prices for higher-quality services with an increased assurance of hiring someone competent. It is not the same product.

3. Overall, the standard of living is higher today than it was 30 years ago. (unenlightened answer: disagree)

This one I will give to the authors; in general, standards of living around the world have risen in the last 30 years. There are a few arguments to the contrary with some countries (Chad, Sudan, etc) facing deep civil war and others that have been particularly exploited, but overall it’s hard to deny that living standards have risen.

4. Rent control leads to housing shortages (unenlightened answer: disagree).

Yes. Every economics textbook and its mother points to rent control in New York City to demonstrate the effects of a price ceiling on supply. The argument is that at a lower-than-market price, more units of housing will be demanded than supplied, mutually-beneficial transactions will be prevented, and there will be a housing shortage. People who want housing will not be able to find it.

While the above is true, I think that it understates the alternative: the equilibrium rental rate pricing many potential consumers out of the market entirely. This is another serious problem facing my local housing market here in Vancouver, where the market price leaves many on the streets. Rent control or not, many people will find themselves outside the housing market. The question is whether we would prefer to cheap but high-in-demand housing, inefficient by economic standards, or expensive and efficient housing. Either way, some potential consumers are left out.

5. A company with the largest market share is a monopoly. (unenlightened answer: agree)

This question is very fuzzy in terms of its accuracy; either answer has legitimate justifications. A monopoly is usually thought of as a firm that occupies an entire market–in other words, they are the only producer supplying a particular good. The strictest economic definition characterizes it as such. In practice, what we refer to as “monopolies” in the real world are very rarely absolute. More liberal (pun intended) and just as legitimate definitions within economics characterize a monopoly market as a market in which one particular firm holds significant market power to set higher prices, arising in markets with little substantial competition. In economic theory, only a company that is the sole supplier of a good can be a monopoly; in practice, one particular firm with substantial market power can form an effective monopoly.

6. Third World workers working for American companies overseas are being exploited. (unenlightened answer: agree)

I’m not sure what definition of “exploited” the survey authors are using, but I find this assertion just shocking in its lack of empathy. Supporters of sweatshops argue that child labour is unavoidable in countries with populations so poor that children must work or their families will starve; that they are popular in poor communities because they offer higher wages than other options; that we can’t expect the labour standards of industrialized countries to apply to poorer countries quite yet.

I have many concerns about the ethics of paying a child $0.15 cents an hour to produce t-shirts that sell for $30 in developed countries. Surely there is room for a higher wage in that mark-up, at least enough to reduce a working day from 12 to 6 or 8 hours, or for investment in humanitarian aid and social programs that help families avoid depending on their childrens’ wages.

How is it not exploitation to not only expect long hours at low pay, but without the freedom to form unions, in ill-ventilated factories, and without access to clean water at work? Or with chained fire exits that have already led to several deaths? Or workers that are physically abused by their superiors? Or being forced to work mandatory 19-hour shifts?

Anyone who seriously argues that overseas workers for American factories are not being exploited is either ignorant or in denial, or has a serious flaw in their definition of exploitation.

7. Free trade leads to unemployment. (unenlightened answer: agree)

Economists will argue to death that free trade will lead to the loss of jobs that weren’t efficient anyway and will be more than redeemed by the creation of newer, better (more efficient) jobs in other industries. I am extremely skeptical.

NAFTA, for instance, has been devastating for poor Mexican farmers, who find their products priced out of the market by a flood of cheap imports from the heavily subsidized agricultural industry in the United States. Furthermore, many of the jobs in heavy industry created to balance the loss in agriculture have since been lost to China, where wages and production costs are even lower. Furthermore, some evidence points to a lowering of real wages and greater income inequality in Mexico since NAFTA. Overall, job creation estimates were exaggerated and job loss estimates were understated.

8. Minimum wage laws raise unemployment. (unenlightened answer: disagree)

Yes. In contrast to the issue of rent control, which forms a price ceiling, economists argue that the minimum wage forms a price floor, at which there will be a surplus of labour. More people will want to work at minimum wage than employers are willing to hire, and as the cost of hiring a worker increases (minimum wage goes up), employers will hire even less. It sounds very reasonable in theory.

Real-world measurements of this effect are split. Some studies show a minor effect of a decrease in employment with an increase in the minimum wage. Others argue that the overall effect of a substantial increase in the minimum wage forms a net force that is overwhelmingly positive. Recently, there has been strong consensus by many economists that a higher minimum wage does more good than harm for lower-income workers.

If I had been given this survey, I don’t know what I would have scored. I am familiar with the economic concepts behind all of these questions and how they work; working from what is technically correct at the conceptual level, I suspect that I would have correctly answered every question except numbers six and seven, on which I refuse to relent.

Yes, it’s true, most of the answers that the author gives to those questions are “correct” in the economic sense. But I, like many on the left, have difficulty circling “Agree” to an assertion that housing restrictions raise prices and leaving it at that. We are too busy thinking about everything else: “I agree that the statement is technically accurate, but I feel that it misrepresents the issue by reducing it to efficiency and there is so much more to the case at hand.” As an economics major and a leftist, I understand these concepts and how they work, and I have made a value judgement, a trade-off–that social equality means more to me than efficiency.

Is that unenlightened?

Read Full Post »

I was really disappointed when – on Blog Action Day of all days – real life once again disrupted my usual posting schedule.  It has been a really crazy couple of days, so my entry is a depressing three days late, but I have been determined to post something about it anyway.

The official statistics from Blog Action Day have been released.  I encourage you to look at their full report – it’s very inspiring!

At the end of the day…

20,603 blogs had participated.
23,327 posts about the environment had been made as a result.
The posts reached an estimated RSS readership of 14,631,038 subscribers.

You can see the rest on their site.

I thought for a long time about what I should say about the environment in this post, and decided on something that Wikipedia apparently likes to call “environmental vegetarianism”.  It matters a lot to me, personally, because I consider myself one of those environmental vegetarians.  It wasn’t the reason why I first became a vegetarian, but since then, it’s become my most important motivation for remaining a vegetarian.

Most people don’t usually associate vegetarianism with being good for the environment – if the two are ever associated at all, it’s because of the stereotype of environmentalists as tree-hugging, animal-loving vegetarian hippies.  The truth is that not all vegetarians are in it for the animals, or even the ideology against eating meat.  Some people become vegetarians for the health benefits, religious reasons, economic reasons, ideologies against how animals are raised in farms, and, yes, concerns about the environment.  The latter will be my focus.

Here are just three environmental reasons to go vegetarian, or at least reduce the amount of meat in your diet:

1. Reduced consumption of fossil fuels and reduced greenhouse emissions.
Animal agriculture produces a shocking amount of greenhouse gases.  It’s been estimated to account for 17-20% of methane emissions worldwide, and ten times more fossil fuel is required to produce one calorie of animal protein than one calorie of plant protein.  Think of all the energy needed to build animal farms, raise the animals, all the pollution put out by the machines, and the emissions made from trucking their food supply and the livestock themselves from location to location.  According to this article, the energy that goes into producing a single hamburger could drive a small car twenty miles.  A 2006 study from the University of Chicago showed that the average American with an omnivorous diet caused the emissions of 1485 kg more carbon dioxide than their vegetarian counterparts.  Driving a hybrid car supposedly reduces your emissions by just over a ton – so going vegetarian or vegan is actually better for the environment, and tens of thousands of dollars cheaper!

2. More efficient distribution of land and food resources.
It’s no secret that the world has a resource distribution problem (what is that statistic people are always throwing around – the wealthiest 10% of people own 90% of the world’s resources or something?), but how much of that is due to meat production for first-world countries is disgusting.  This site claims that 44% of the world’s grain production goes towards feeding livestock.  The Wikipedia article gives more local statistics: 90% of soy production, 80% of corn production, and 70% of grain production goes to livestock in the US.  This is more of an ethical issue than an environmental one: how much of the food that goes to feed our future hamburgers could go to feed the millions in the world that are starving?

Land use and distribution is another concern of animal agriculture.  Animal agriculture, not logging, is the number one cause of deforestation in the world.  According a study by the UN’s Food and Agriculture Organization, agriculture accounts for 90% of deforestation – this vegetarian site gives only 70%.  Either way, that is certainly not good for the environment.  This article claims that 55 square feet of rainforest is destroyed for every hamburger that is imported from Central/South America.  Consider the dark side of McDonald’s claims of however many billion they’ve served.

3. More efficient use of drinking water.

Think about how much of the world’s water is drinkable (3%) and how many people in the world don’t have access to clean drinking water (27%), and then know that producing 1kg of animal protein uses about a hundred times more water than producing 1kg of plant protein.  On this site, which seems to be full of interesting examples, they say that the amount of water needed to produce one hamburger could supply enough water for you to have a “luxurious” shower every day for two and a half weeks.  That’s a lot of clean water wasted – and I won’t even get into the chemicals and waste products of animal agriculture that pollute the water supply every day.  To paraphrase all the articles on the subject: it’s just not good for the environment.

Since humans can clearly live a healthy (sometimes healthier) life without needing to eat meat, why are we wasting so much on animal agriculture?  What do we get out of it – a nice taste?  Cheap, questionably-produced fast food?  Nutrients that we can now get elsewhere?  If you live in the West, it’s easier than ever to become a vegetarian.  The more I talk to older vegetarians, the more I realize how spoiled the vegetarians of today are.  If you’re so inclined, you can replace every meat item in your diet with a vegetarian substitute that is almost indistinguishable from the real thing, if you know where to look.

Even just reducing the amount of meat in one’s diet can have a positive effect on the environment.  It may not seem like reducing it by say, 10%, could do much to save the environment, but what if ten people did the same thing?  That’s 1485 kg less carbon dioxide emitted right there.  But what if it was twenty people?  Fifty?  A small city’s worth of people?  The whole US – reducing by just 10%?  What if some reduced it further and stamped it out of their diet altogether?

I don’t need a calculator to tell you that that’s a whole lot of carbon, rainforest, and water saved.

Read Full Post »

In light of current events, I’ve decided to briefly postpone my focus on the topics I mentioned earlier to address Friday’s big announcement. By this I mean, of course, the “Climate Change 2007” release from the Intergovernmental Panel on Climate Change that states that human emissions are definitely, beyond reasonable doubt, causing global warming. Not much of a surprise, given the amount of media attention that global warming has been receiving in the last couple of years, but from the looks of things, this has been a real wake-up call for a lot of people (and governments).

This release is going to be very hard to ignore, and I say that because I’m looking at a two-page spread in my local paper, The Vancouver Sun, that screams “DOOMSDAY”. Behold the fatalistic headlines: “[Prime Minister Stephen] Harper changes tune on climate change, says ‘science is clear’,” “Canadians face ethical dilemma,” “Emissions tax is the only solution, energy expert says,” and “B.C. can expect floods and drought,” accompanied by a list of similarly fatalistic quotes from world leaders down the side of the left page and impressive diagrams.

Now, there’s something I find very upsetting on this two-page spread, and it isn’t the fact that Canada’s Prime Minister had gone from calling Kyoto a “socialist scheme” to throwing in his full support towards the protocol. What really upset me was the article titled, “Canadians face ethical dilemma.” The content of the article was absolutely ludicrous. It started out with this: “As scientists forecast a hotter future of storms, droughts and rising oceans, the only climate questions left are moral: have Canadians [and Americans] the moral right to drive a car to work? To keep homes toasty in January? To trim lawns with power machinery?”

Let me make my response to this “ethical dilemma” very clear: THAT IS NOT THE ETHICAL DILEMMA.

…if the governments of both countries do things right.

Consider the much-loved SUV. Consider also that the typical SUV driver is a relatively wealthy urban- or suburban-dweller, and that 98% of SUV owners have not and will never drive offroad. SUVs are criticised – fairly so – for fuel inefficiency. Being classified as a light truck, SUVs are held to less restrictive efficiency standards than regular cars. To answer the first question raised by the article, do Canadians (and Americans) have the right to drive to work? Absolutely. Do they have the right to drive to work in a gas-guzzling, offroad “light truck” that they are statistically likely to never drive offroad? Absolutely NOT. Owning an SUV for safety reasons? Over at the Freakonomics blog, authors Levitt and Dubner state (among other things) that people drive more carefully when they are more at risk, and more recklessly when they perceive a lesser risk. It’s basic risk psychology. So, if SUV drivers are feeling more protected, they are theoretically driving more recklessly; it does not necessarily lower their risk of getting in an accident. And unintentionally reckless SUV drivers presents another huge risk: the people in smaller, more fuel efficient cars that would never survive an impact with such a vehicle. Malcolm Gladwell has a spectacular essay on other false factors of the perceived “safety” of SUVs on his website.

What should be done about this? Well, since ~98% of SUV owners will never use them for their intended purpose, maybe the government should support more disincentives toward selling or owning one. SUVs are not needed in urban environments (and are more dangerous there to other drivers), and that provides a starting point; there should be a strict and strictly enforced limit on SUV sales within a certain radius of urban and suburban areas. SUVs may be extremely popular, but the sales can be greatly altered by a number of small things: how many are displayed at lots, the price of the vehicle and cost of maintaining it, the persuasion of salesmen, etc. Collect escalating tax penalties from car companies that produce SUVs as a disincentive to making them in the first place. There are so many things that can be done in that one area.

Also on the subject of cars, bringing back those sleek, electric ones would be a pretty good idea about now. I can’t stress this enough: good electric cars exist. Lots of them. There was an amazing movie called “Who Killed the Electric Car?” about this very fact, and it continues to stand against criticism. It’s been a few months since I saw it, but I believe that the agreed-upon statistic was that the car would satisfy the daily transportation demands of about 95% of American drivers. The drivers who had managed to obtain electric cars loved them. Unfortunately, for a number of unethical reasons (among them the projected $2 trillion of oil still to be mined), the electric car projects were scrapped and the cars were recalled and crushed.

Now, there‘s your ethical dilemma. Car companies can still make billions off of gas-guzzling SUVs, and oil companies still have an estimated $2 trillion dollars of oil to mine. SUVs are not needed by 98% of their owners, and we have the technology necessary to make fossil fuel-dependent cars a thing of the past altogether. Here’s the ethical dilemma: should oil and car companies give up more than $2 trillion in profits to bring us to zero vehicle emissions total?

Ethically speaking, yes. Economically speaking… no, but possibly not for much longer. Oil and gas-dependent car sales are a huge chunk of the economy. Replacing all of our current technology with alternative fuels will cost a lot of money, and generate a lot of waste (unwanted cars don’t just go away). It will cost us, and it will cost us big. But again, if the government does things right, we shouldn’t have to go broke. Cuts in the right places, and the right allocation of tax dollars should start right away. I happen to know that Prime Minister Stephen Harper’s fancy jet costs $9,000 an hour to fly – and that comes out of the taxpayer’s wallet. I don’t know how much per hour it costs to run Air Force One, but I expect that it’s a similar (if not greater) figure. Here’s a good financial plan for the government: cut back on the frills, and we might do fine.

Or maybe the $1.2 trillion going towards the war in Iraq could be going somewhere more useful. Just a suggestion.

My point is this: we have both the technology and the funds (cleverly disguised in expensive wars and government frills) to solve our emissions problem. But we aren’t… yet. And that’s our ethical dilemma. The article in the Sun raised some “ethical” questions; here are mine. Should we take away the rights of every Canadian and American to drive to work, or take away the rights of urban- and suburban-dwellers to own an unnecessary SUV? Should we take away the rights of Canadians to drive and heat their homes during the winter, or ask Stephen Harper to give up his $9,000-an-hour jet? Should we start producing purely zero-emissions vehicles, or let oil companies collect their $2 trillion in profit? These are my ethical questions, and these are the ethical dilemmas we need to be worrying about.

But it all comes down to one question, the most important of all, which is: will we press our leaders to actually do these things?

(Tags: , , , , , , )

Read Full Post »

Once of the criticisms I often find in reviews of Thomas Sowell’s Basic Economics–and believe me, most of them do mention this–is that it’s too ‘conservative’, and not in a blatantly obvious way. The reviews seemed to note that the pro-right views were more… subtle. Nevertheless, in my reading this morning, I came across this statement, clearly in support of the right/capitalist view:

“The amount of such highly localized information [regarding gas sales in the area], known to thousands of individual filling station owners scattered across the United States, is too enormous to be transmitted to some central point and then be digested in time to lead to government allocations of fuel with the same efficiency as a price-coordinated market can acheive.” (Sowell, Basic Economics. 2000.)

Clearly, a blow aimed at socialism. However wrong it may seem for myself, a fifteen-year-old dabbler, to argue the claims of a seventy-something economics professor, I have to object. Two things: 1) There is a way to transmit that enormous amount of information: it’s called the Internet. With live-updating and more system compatibility in today’s network, thousands of localized computers could be almost seamlessly channeled into the computers of a company headquarters for data-filtering. 2) The idea of democratic socialism accommodates for that large amount of information received (after filtering). One of the big ideas pushed forth by socialism is that the government needs to be much larger to provide more services and act more democratically. True, the government cannot deal with this sort of a system as it exists, but the larger government proposed by socialists possibly could.

I may not be right in saying that, of course, because I suffer from that idealistic “if the world changed completely to suit this new system, it would be perfect” view that seems to plague philosophers (especially the politically-minded ones). I just wanted to point out that it may have been inconvenient to relay information to government branches in the past, but the internet and live connectivity have completely changed that. If someone can tell you how to unbug your Microsoft Word from India at virtually no cost, certainly a socialist government is now plausible–at least more than it used to be.

This leads me to an interesting question: as the world becomes more seamlessly integrated via live internet connectivity, does socialism really become more plausible, and if it does, is this the way the world might eventually start to shift? That’s what the dystopian authors from the 50’s seemed to predict, but they weren’t living in the world of constant connection that we do now. Books like The World is Flat (Thomas Friedman) seem to reassure that capitalism will ultimately prevail, but I have to wonder: if socialism becomes more plausible, will it become more attractive?

Not to say that I’m fully in favor of socialism (slightly inclined that way, maybe, but not in really in support of it), but the idea of its plausibility possibly correlating with its attractiveness is worth thinking about. Socialism is one of those ideas I’m a bit iffy about, because I love the idea politically, but it’s not as economically or socially sustainable as would make me comfortable. That, and 99% of dystopian literature uses a form of hyper-socialism as the evil government. Name me a single piece of dystopian literature that uses a form of hyper-capitalism as the big, bad institution and I’ll put everything aside to read it. Where would socialism ultimately lead us? Not a clue; and that’s the problem.

(Tags: , , , )

Read Full Post »

Recently, in Vancouver, we’ve had quite a bit of trouble with our water supply: the three reservoirs serving the region were all heavily contaminated after a week-long storm. Thankfully, the reservoir serving my suburban neighbourhood was cleared within a day, but the main city was under a “boiled or bottled” advisory for two weeks (Vancouver’s tap water during this period was brown). Due to government and company caps, the price of bottled water was not allowed to increase according to its new supply and demand during this period. It was the perfect opportunity to study economic price theory in in action. As author Thomas Sowell puts it in my current reading material, Basic Economics: “Nothing shows the role of price fluctuations… like the absence of such price fluctuations.”

The situation in Vancouver sounded like an example right out of the book itself. The local reservoirs had been contaminated with dangerous levels of clay, residents were told to drink boiled or bottled water, and no one knew exactly how long the warning would last. This last part was key. The night the advisory was announced, shoppers began lining up at about two in the morning outside Costco for its ten o’clock opening. The pandemonium that followed the store’s opening was so tremendous it got a mention on the front page of The Vancouver Sun. In less than five minutes, Costco’s entire stock of bottled water was gone, and there were fights breaking out everywhere.

I didn’t think to save the article, so this isn’t confirmed, but I seem to recall that the major problem at the time was that whoever reached the bottled water first grabbed as much as they could carry, since they were so cheap and no one knew how long the advisory would be in effect. This is where price theory comes in. According to basic economic principles, the price of bottled water at Costco should have skyrocketed due to the sudden demand–but it didn’t, due to company restrictions (acting in reasonable social interests–if water was suddenly $10 a bottle, people would freak out), and therein lies the problem.

Consider this: what if the price of bottled water at Costco had skyrocketed to some wild price, like $10 a bottle? Would people have gone and grabbed three dozen bottles then? The official advisory, put out by the radio and newspapers, urged residents to drink their water “boiled or bottled.” If the price had skyrocketed, it’s likely that more people would have opted to boil their tap water instead of buy the obscenely-priced bottled water. Even if they had chosen to buy, they wouldn’t have done it in as large quantities as they would have at the cheaper prices. Whereas an individual may have bought three dozen bottles at $.50 or $1 each, they may only buy one dozen at $5 or $10 each, leaving more water for other people to claim. Escalating prices in a crisis aren’t intended to rob people blind; whether the customers realize it or not, the rising prices force them to share resources when there isn’t enough to go around. It keeps the balance, so no one leaves the store with three dozen bottles while someone else leaves with nothing.

By the way, as noted by Sowell, the high prices of hotel rooms after a crisis like a hurricane or earthquake are also an example of this forced generosity. By raising the prices of a hotel room to meet the sudden demand, the hotel forces many people to find roommates and families to rent single rooms to save money–effectively distributing their resource, shelter, among people who might have taken an entire room to themselves at normal prices. Privacy and space are sacrificed, but more people have a roof over their heads because of the higher cost of the rooms.

Anyone reading this with a background in economics would roll their eyes at these most basic ideas, I’m sure, but as a newbie to the field, I find it exciting to see the theories I read about in a book come to life in the “real world.” Of course, this is economics, so every principle acts in the real world, but seeing a theory I’ve been reading about take action around me is still very cool.

Price theory: forcing generosity, whenever you want it, and then some.

(Tags: , , , )

Read Full Post »