Firefighting and Immigration?
By Chris | February 26, 2008
I’ve been reading up on the economics of fighting wildfires in the West. As an undergraduate, I had a few friends who fought wildfires during the summer. Most of them worked for the U.S. Forest Service, but one was employed by a private company which received government contracts. The use of private contractors has become more prevalent over the last decade. Contractors offer public firefighting agencies increased firefighting power during busy seasons. Insurance companies also hire them to protect valuable homes. And, to my surprise, these companies hire lots of immigrants. From the a 2006 New York Times article:
As many as half of the roughly 5,000 private firefighters based in the Pacific Northwest and contracted by state and federal governments to fight forest fires are immigrants, mostly from Mexico. And an untold number of them are working here illegally.
Some fire company owners estimate that 10 percent of the firefighting crews are illegal immigrants; government officials will not even hazard a guess.
The private contract crews can be dispatched anywhere in the country through the National Interagency Fire Center in Boise, Idaho — and in recent years have fought fires from Montana to Utah and Colorado, as well as Washington and Oregon — anywhere that fires get too big or too numerous for local entities to handle.
Topics: Economics, Immigration, Markets, Outsourcing | No Comments »
My Arms Hurt
By Chris | February 22, 2008
The other day I lifted weights for the first time in months. There are some tangible benefits to larger muscles. I would enjoy being able to dunk a basketball with authority. And, stronger arms would have been useful when I removed my refrigerator yesterday. However, if we are honest, looking good drives most people’s desires to tear their muscles and stress their bodies. Or perhaps more accurately, to look better than their competitors in the marriage/dating market. Working out gives me an edge over other guys, but my gain is their loss. On average, everyone wastes time and energy at the gym and ends up no better off relative to everyone else. There are definitely some positive externalities to consider. However, lifting weights seems to be a prime example of a positional good where, as I can attest, the cost is quite high.
Topics: College, Economics | 1 Comment »
College Hoops and the Endowment Effect
By Chris | February 21, 2008
My university has a good basketball team that has been consistently ranked this season. A few weeks ago we played our arch-rival at home. Student tickets were only available in season packages at the beginning of the fall semester. If you didn’t have season tickets and wanted to go to the big game, you had to cough up $100 to buy a ticket on the secondary market. The day of the game students lined up outside the basketball arena in the wee hours of the morning. Everyone was wearing school colors and discussing the likelihood of upsetting one of the best teams in the country.
In my Macroeconomics class I asked my friend Josh:
“Are you going to the game?”
He replied:
“No, tickets are too expensive. But, if I had a ticket, you know I would be there.”
I tried to explain to him that his statement revealed inconsistent preferences. If he valued the ticket more than 100 dollars he should buy a ticket and go to the game. Conversely, if the game wasn’t worth 100 dollars, he should sell a ticket if he found one lying on the ground. Class started before he had a chance to defend himself. It is possible that finding a ticket would increase his income to the point where his preferences would change. But, that is unlikely. A hundred dollars is only a small portion of an average student’s wealth. And, if he truly was broke, the prospect of selling a 100 dollar ticket to pay for food and clothing should be all the more attractive. It seems Josh would be more likely to keep a ticket if he already owned it. This is called the endowment effect by economists. I can’t criticize Josh’s apparent irrationality, I find the endowment effect influences my behavior as well.
I am just over 2 years younger than my brother. Growing up, we would often receive very similar presents from relatives and family friends. I might get a soccer ball and my brother would get a basketball. We might be given two different models of Nerf guns. I quickly learned to prefer the gift I received, even if it may not have been my first choice. It was a defense mechanism. Conceding that my brother had the better present was psychologically costly. It was admitting defeat in the competition for our friend’s and family’s affections. Similarly, when I bought my Ford Explorer, I felt the need to justify my decision. My brother poked fun at me when my Explorer had mechanical problems and criticized it’s poor gas mileage. I pointed out the futility of his high fuel efficiency when his Camry slammed into a deer and quit running. To this day, it is difficult to frankly evaluate the prudence of major decisions, from my car to my college choices. I’m too emotionally invested in my decisions. This isn’t limited to petty brotherly competition. You’ll find the same tendencies if you ask someone about their career choice. It seems that people have a preference for the things they own and the decisions they’ve made. This may complicate economic models, but it’s not necessarily a bad thing. Being content with what you have is a big part of happiness.
Topics: Economics | 3 Comments »
Are Payday Loans Repugnant?
By Chris | February 18, 2008
I didn’t get my first credit card until I was 22 years old. Up until that point, I had no need for one. I had adequate savings and paid for most of my expenses with scholarship money and part-time jobs. However, when my savings dwindled I wanted some credit in case of emergency. It was surprisingly difficult to get a credit card. I had moved 3 times in the last year and had no credit history. I endured rejection after rejection until Bank of America gave me the opportunity to pay a 70 dollar annual fee for the privilege of paying them interest. I was thrilled.
So, I can understand why the payday loan industry thrives. There aren’t a lot of other options for low income people with poor credit. In my hometown of 50,000 people, there were no fewer than 11 payday loan companies on the main strip. If you can’t find one locally, you can even get an online payday loan. Most companies offer first time lenders a free 2-week loan. Subsequent loans are offered at a flat fee of anywhere from 15-30 dollars per 100 dollars borrowed. Critics blast the industry for its “predatory” lending practices. The United States government prevents lenders from charging members of the military more than 36% APR, effectively making payday loans to those in the military illegal.
I think it is sad that many people in America live paycheck to paycheck. But, I don’t blame the payday loan industry. The homogeneous nature of loans, the shear number of lenders, and non-existent barriers to entry in the industry make it a textbook competitive market. Fees are so high because the loans are incredibly risky. Borrowers are required to have a job and an identity, but not much else. Most loans aren’t backed by any collateral.
Muhammad Yunus won the Nobel Peace prize for lending small amounts of money to the world’s poor. Microfinance APR’s range from 30-70 percent (military personnel need not apply). Microfinance interest rates are high by our standards, but the alternative is much worse for entrepreneurs in desperate need of capital. Of course, Microfinance is not analogous to payday loans. Payday loans are very short term. They don’t fund business ventures, but alleviate the pains of liquidity crunches for poor Americans. It is not appropriate to blast the industry for annual percentage rates that hover around 500%; people aren’t taking these loans out for a year. No one complains about the 2000% APR on an ATM fee. When people pay 60 bucks for a 300 dollar advance, they aren’t buying a loan. They are paying 60 bucks to avoid the shame and consequences of defaulting on immediate financial obligations.
Most payday borrowers aren’t financially responsible. But their financial woes did not begin when they got their first payday advance. In a world where families are broken, children don’t get an education and there is enormous social pressure to look successful, people will mismanage their money. Payday loans are viewed with repugnance because they remind us of the sad state of those struggling financially. Eliminating these unpleasant signs might make us a feel a little better, but it will only remove the least unpleasant alternative for those those in the worst financial shape.
While reading up about this post I came across two interesting pieces of research:
Strategic Pricing of Payday Loans (Examines whether regulatory price ceilings facilitate implicit collusion)
Defining and Detecting Payday Lending (Examines whether lending is predatory)
Topics: Economics, Markets, Political Science | No Comments »
Happy Valentine’s Day
By Chris | February 14, 2008
I’m not really qualified to be giving Valentine’s Day advice. But, you should check out self-described aspiring economist Glen Weyl’s Valentine’s Day guide to going to the movies.
Valentine’s Day reminds me of how important signaling is in our relationships with one another. We put such an emphasis on picking the right gift or finding the perfect words in order signal that we really know and care about the people closest to us. But, to paraphrase a quote attributed to Robin Hanson, “Isn’t it enough to love someone. Why should I have to signal that I love them?”
So don’t stress if your Valentine’s Day plans flop or your gift fails to impress. They are only signals. And cheap, fallible ones at that.
Topics: Advice, College, Economics | No Comments »
Two Books Worth Reading
By Chris | February 12, 2008
The Logic of Life, Tim Harford: Harford uses rationality to explain everything from the Cold War to increased divorce rates. If you read many economics blogs, you will undoubtedly be familiar with some of the academic work he references. Nevertheless, what the book lacks in novelty is more than compensated by Harford’s articulate writing. And, most readers will find plenty of new and intriguing ideas. I found his chapter on high CEO pay and his analysis of rational racism particularly interesting. The book also helped me understand why I’m such a poor poker player. The Logic of Life is definitely an entertaining and thought-provoking read.
The Myth of the Rational Voter, Bryan Caplan: A common economic view of democracy is that it fails because people are rationally ignorant and self-interested voters produce bad policies. Caplan shatters both of these fallacies. He argues that because the marginal impact of a single vote is almost zero, people vote to indulge their biases and satisfy their consciouses. Biases common among voters include anti-market bias, anti-foreign bias, make-work bias, and pessimistic bias. Caplan’s impeccable logic backed by strong empirical support transformed my view of democracy. I was put-off by his unnecessary disparaging remarks about religious beliefs, but still thoroughly enjoyed this fascinating read.
Topics: Book Reviews, Economics | No Comments »
On Marriage and Scarcity
By Chris | February 11, 2008
I’ve been thinking about marriage a lot lately. Maybe, it’s because my brother is in a serious relationship where marriage is a very real possibility (my mom is sure pushing for it). Maybe, I’m kind of a sap and think about my future plans more than most guys. I’m sure part of it involves seeing more of more college friends tying the knot. I used to subconsciously worry when I saw a potential mate of high quality leave “the market”. Would there be a sufficient pool of candidates left when I was ready to get married? But, after reading this article (HT Tyler Cowen) and The Logic of Life, I’ve realized I was wrong. I was looking only at one side of this two-sided market. Every marriage of my peers is taking a prospect off the market, but it’s also eliminating one of my competitors. If there are more women than men in my niche of the marriage market, then each marriage actually strengthens my bargaining position. It’s like exchanging pawns when you are ahead in chess. I particularly like Tim Harford’s illustration of a Marriage Supermarket where 20 identical men and 19 identical women bargain to split 100 dollars in potential benefits from marriage.
From The Logic of Life, page 69:
You might think that the slight scarcity of men would cause the women some modest inconvenience, but in fact even this tiny imbalance ends up being very bad news for the women and very good news for the remaining men. Scarcity is power, and more power than you might have thought.
Here’s why. One woman is going to go home with neither a spouse nor a check from the cashier. That’s bad news for her. What is less immediately obvious is that the women who do get a spouse are also going to be worse off—and their loss is the men’s gain. Remember that a couple gets to split a hundred dollars when they show up at a checkout; assume that the nineteen couples have provisionally agreed on a fifty-fifty split.
Th odd woman out, contemplating going home empty-handed will make the obviously rational decision to muscle in on an existing pairing…The bids will fall until the woman who faces leaving alone is offering to walk through the checkout with some lucky guy and accept just one cent as the price of doing so. He’ll get $99.99; her one-cent profit is better than nothing at all.
We are now left with 19 men and 18 women. The same process occurs all over again. By the end, every man gets $99.99 and every women, except the single one, receives a mere penny.
These concepts weren’t intuitively obvious to me. Of course, the real world is much more complicated than Tim Harford’s model. And, Harford prefaced the example above with, “There is, obviously, a lot more to love, dating, and marriage than rational choice theory…” Yet, as an aspiring economist, it’s nice to know that in this critical market, scarcity isn’t working against me.
Topics: Blogosphere, Economics, Markets | 4 Comments »
Do Airlines Care too Much About Safety?
By Chris | February 10, 2008
Recently, my Uncle and his family flew to Idaho to visit for for the weekend. They switched planes in Salt Lake City and were half-way to Idaho Falls before their plane was turned around at about 9:00 p.m. Rain was freezing on the runway in Idaho Falls and it was deemed too dangerous for the plane to land. The airline gave the passengers vouchers for discounted hotel rooms and asked them to come back the next day. My determined Uncle badgered the ticket agent until she gave him what amounted to a 60 dollar gift card for airport food vendors. However, both legally and under company policy, the airline is under no obligation to compensate travelers when delays are caused by inclement weather. Is that a good policy? I drove to the airport that night and the roads weren’t particularly slick. While I’m not an aeronautics expert, the plane likely would have been able to land safely. If planes crash, the airline is legally liable for damages. If planes don’t reach their intended destination, the airline isn’t liable for any of the associated costs. This provides an incentive for the airline to be far too risk averse. My Uncle and his family ended up renting a car and driving for four hours on snowy roads in the wee hours of the morning. Was this alternative safer than landing on the runway? Did the danger of landing outweigh the costs born by the passengers left stranded? I don’t know. The airline didn’t care.
Topics: Economics | No Comments »
Links: Immigration, Taxes, and Coffee
By Chris | February 9, 2008
Gary Becker proposes that immigrants should be allowed to buy their amnesty.
Mike Moffatt on why the poor pay the highest marginal tax rates.
The American reports on the rise of Starbucks and it’s impact on American culture.
Topics: Economics | No Comments »
The Insufficiency of Efficiency
By Chris | February 8, 2008
I recently came across the book No One Makes You Shop at Wal-Mart, by Tom Slee. I didn’t purchase it, but read the first chapter which is available for free at Slee’s website. Slee’s title is a bit misleading. He argues that while no one makes you shop at Wal-Mart, it is very possible that everyone’s individual choice to do so can lead to an inefficient outcome. Because individuals don’t internalize the external benefits of a vibrant downtown and a variety of grocery stores, everyone’s individual decision to shop at Wal-Mart could conceivably make everyone worse off. He models an imaginary world where identical “Jacks” living in the imaginary town of Whimsley shop at Wal-Mart and are ultimately worse off because of it.
People who believe firmly in the virtues of individual choice will assert that Jack must be happier now than he used to be, because he has exercised his freedom of choice. If he didn’t like Wal-Mart he would not have shopped there. If he valued the lively downtown so much, he would have shopped there to save it. They will assert that, as a consumer, Jack is sovereign and the market always gives him what he wants. Yet in this story there is no individual choice that Jack could have made that would have improved his outcome. Even if Jack had chosen to continue shopping downtown, his minuscule individual contribution to the revenue of the downtown stores would not have stopped their closing.
Basically, Slee argues that our decisions are tangled with others and often devolve into prisoner dilemmas; we could achieve more efficient outcomes by working cooperatively. I take issue with Slee on a number of claims including “…that a system of private enterprise and free markets is particularly likely to produce such poor results on a regular basis.” However, I won’t critique Slee here. Alex Tabarrok, has read the entire book, and does a nice job reviewing it.
No One Makes you Shop at Wal-Mart got me thinking about the holy grail that efficiency enjoys in the field of economics. Ignoring the very real problem of government failure, when is it appropriate for the government to use coercion in the name of efficiency? In Slee’s imaginary town of Whimsley, everyone has exactly the same preferences and the case for government intervention is strong. Keeping Wal-Mart out of town would make everyone better off, and would be Pareto efficient. However, in the real world people have heterogeneous preferences, and they are difficult to know. Surveys are notoriously inaccurate. Externalities are ubiquitous, and more often then not its hard to tell even if they are positive or negative.
For example, externalities plague social interactions. When someone considers moving, he considers the cost of losing his friends, but he doesn’t internalize the impact his absence will have on them. A close-knit group of young professionals might be collectively better off staying in their current location, but each individual is too eager to abandon the group when a lucrative job offer comes along. This dilemma is made worse because an individual considering staying put, has no guarantee that his friends will stick around. Friendship, the source of so much happiness and meaning in our lives, is plagued by externalities. And yet, the idea that the government should somehow step in to correct this failure would repulse all but the strictest totalitarian. We place enormous value in the freedom to choose and leave our friends. Social norms have developed to limit the failures of the friendship market. People invest more time in people they think are likely to stick around. Friends can cooperate and make commitments to mitigate some of these problems. Moreover, we would hope that true friends internalize the costs imposed on those they truly care about. Ultimately though, we value the freedom to do as we wish.
Freedom and efficiency often go hand-in-hand. The invisible hand of the market usually makes society better off. When it doesn’t, efficiency sometimes requires us to suspend individual liberty. For example, most people consider it prudent to act collectively to build roads. However, freedom has its own intrinsic value. A system of free choice might occasionally take away a close friend, or put the downtown grocery store out of business. But, would we really prefer to have a group of bureaucrats dictate where we shop and who we associate with?
Topics: Book Reviews, Economics, Markets, Political Science | 14 Comments »
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