30 Nov 2015

Monday funnies

When your dealer tries to be cool (via inter webs, obvs):

Economics of cheating in athletics

Paul writes*

Cynical observers were quick to dismiss the latest revelations in athletics’ doping scandal. It was just another episode in the history of a field of sports riddled by cheating. However, athletics fans were shocked nonetheless when the World Anti-Doping Agency (WADA) dropped a bombshell [pdf] on the sport on November 9th. The report confirmed what the German channel ARD had reported as early as last December. However, it went beyond that by unveiling state-organized scheme last seen when Russia’s athletes were competing with a hammer and sickle on their chest. Even Russian WADA officials and individuals in the IAAF leadership have been implicated. As the allegations against Liliya Shobukhova - a marathon runner - show, professional athletics is a money-game in which stringent rules and the enforcement thereof are essential (as I will explain below). The athlete reportedly paid €450,000 to Russia’s national athletics organization to destroy positive test results. This particular allegation shows that in highly individualized and competitive sports the earnings from sponsors or prize money are extremely unevenly distributed. Many nationally successful athletes even in wealthy countries such as the Netherlands, Germany or Britain cannot live off of their professional career and work or study on the side. Meanwhile, the most successful runners receive over €100,000 merely for showing up to certain events. This increases the incentive to use doping as a method to get ahead. Where seconds or even split-seconds decide the difference between a six-figure pay-off and no pay-off athletes will consider every option to improve.

The recent Russian doping scandal reminded me of a simple concept in microeconomics: the Prisoner’s Dilemma. If you need a quick refresher Wikipedia explains the game quite well. Versions of the prisoner’s dilemma can help us explain why sports such as athletics are prone to individual or even state-organized doping.

Let’s first presume there would be no WADA and no rules against doping. The following scheme may illustrate the dynamic of two athletes with similar talent:

Now as we can see the logical outcome of this very simplified example is that both athletes cheat. If they don’t the other one will because of the high payoff of finishing among the first which in turn secures sponsorships, invitational races and so on. However, to avoid this from happening, the International Olympic Committee established rules against cheating and put schemes into place to enforce them. This is the tricky part. The WADA delegates this enforcement to national and regional subsidiaries within the countries. To some degree the rigor with which cheaters are pursued depends on national ability or willingness to do so.

In a perfect world where cheaters are caught and competition is decided by performance we would have the following matrix:

As the example of Russia’s scandal shows, a dishonest athletics organization can skew the results in favor of its own athletes. All of a sudden Athlete A does not play by the same rules any more as does Athlete B. As country A does not enforce its anti-doping rules but country B does so perfectly, we end up with a matrix that looks something like this:

As every cheater in country B is caught (a very optimistic assumption) athlete B has no reason to cheat. If he does he will be suspended from competitions and might lose sponsorships. However, athlete A has huge incentive to cheat as he is much more likely to win if his opponents do not cheat. Even if they do, their getting caught will make sure that athlete A takes home the prize.

As the reality is much closer to the third table (with some or many cheating) than to the second table (no cheating) some have called for allowing doping for all to end up with table 1. Can you think of economic reasons not to do so?

Bottom line: where doping controls are delegated to the national level dishonest countries have an incentive to cheat as they will perform better than those who enforce doping tests vigorously. Our game theory example suggests to enforce the rules on all equally or to do away with rules in general. Only then would we be certain that sports are fair. Or would we…?

* Please comment on these posts from my microeconomics students, to help them with unclear analysis, other perspectives, data sources, etc.

Law of Unintended Consequences: Why Raising the Youth Minimum Wage is Not Beneficial to All

Simon writes*

The Dutch labour union FNV, together with some of its political allies, argue in favour of abolishing the youth minimum wage (YMW). The YMW applies to employees who are between 15 and 23 years old, and increases from 30% of the general minimum wage (GMW) at age 15, to 85% of GMW at age 22. According to the labour union, the YMW is unfair because it is too low compared to the costs of living, and because it is lower than the YMW in neighbouring countries. Furthermore, it would be unfair to be considered an adult from age 18 in aspects such as voting, drinking and driving, but not in terms of minimum wage.

Notwithstanding above arguments, the YMW has two important benefits that should be considered. First and foremost is the positive effect of YMW on youth employment. Research has found that the employment effect of a minimum wage is small when the minimum wage is comparatively low. However, if the minimum wage is relatively high, this has harmful effects on employment. The YMW is low both in absolute and relative terms compared to other countries. This is important for young employees, because almost by definition they have little education and work experience, and are therefore relatively unproductive. But because they are also much cheaper than their more productive older counterparts, they still have a chance on the labour market. The Netherlands Bureau for Economic Policy Analysis (CPB) reports that the low levels of youth unemployment in the Netherlands compared to other developed countries is probably linked to the relatively low YMW. Another advantage of the YMW is that it stimulates young people to continue education. After all, the relative gains of working fulltime are lower and therefore it is more attractive to study.

Abolishing the YMW would effectively mean replacing the YMW with the Dutch GMW, which is among the highest in Europe. Whereas the employment effect were small in the case of a low minimum wage, a relative high minimum wage is likely to have negative effects on employment. Therefore the CPB warns that a significant increase of YMW will increase youth unemployment in the Netherlands. Furthermore, the positive ‘education-effect’ will be gone, or potentially even reversed as it is more rewarding to have a job. Another unintended consequence of abolishing the YMW is the increase in government expenditure on social welfare. Even if levels of employment would remain constant, government expenditure would increase, because the height of certain benefits (e.g. the benefit for handicapped young people) is connected to the YMW. This would lead to either increased taxes, higher budget deficit or to austerity measures.

Bottom line: Abolishing the YMW would be good for young people that already have secured a job, for their wage would increase significantly. However, for those currently looking for a job and for those with temporal contracts, abolishing the YMW could prove much less beneficial, since youth unemployment is likely to rise and those employees that suddenly become much more expensive might not get their contracts renewed. Abolishing YMW would also increase government expenditure.

* Please comment on these posts from my microeconomics / growth & development economics students, to help them with unclear analysis, other perspectives, data sources, etc.

Who's going to pay for my pension?

Steven writes*

The German population is growing older. The peak of the people born during the babyboom after the Second World War are aged today around 52. This means that they will start to enjoy their pension in 13 years from now. As the number of retired people increases, the number of younger working people decreases due to a decline in fertility and mortality or expressed otherwise: less children that live longer. In Germany the public retirement policy requires the working class to pay premiums for those who are retired. If this [pay as you go, as in the US] system is to continue the younger individuals will have to pay more and more premiums to finance the pensions. This puts a high pressure on the system as it requires the solidarity of the younger generation for the older generation. Generational solidarity is under pressure. The question: ” Who is going to pay for my pension when I am 65 (or maybe 70)?” is heard more and more.

The more this question is asked, the more insecure individuals feel and as human beings have a desire to reduce uncertainty and avoid (financial) pain, they try to solve this. The people already retired will build up more reserves, just in case pensions are reduced. The younger working people just want to make sure they will have funds available when they retire will also put money aside.

Money that will not be spent in the economy reducing the growth rate of that same economy providing the wealth to the nation. In the graph this effect is very clear: Where in the major western countries like the UK, the US and Japan the personal savings rate is falling up to the economic crisis of 2008. In Germany it is growing from 2000 onwards. The year 2000/2001 is not a coincidence as in this period the political discussion about the funding of the pension system was very actual leading to the introduction of the “Riester Rente” in 2002.

The German Government provided tax relieve for people who were putting money aside for their pension, exactly for the reason mentioned above to be less dependent on the social security system and have more personal control. Clear enough that the increased savings by the individual Germans could not be spent in the economy thereby reducing the economic growth.

Bottom Line: Intergenerational solidarity is great but it is better to have more control with regards to your pension. We just trust ourselves more than others and as a precaution we will build in security regarding our pension when taking the demographic development into account. A pity for consumption today, but better to have some funds of your own when retiring. Also here the “better safe than sorry” applies even if it is at the cost of personal consumption today.

* Please comment on these posts from my microeconomics students, to help them with unclear analysis, other perspectives, data sources, etc.

28 Nov 2015

Sugar? Yes, sugar is killing you.

I just watched That Sugar Film, an Australian documentary in the tradition of "Supersize me" (McDonalds will kill you) and "Superhigh me" (marijuana will not).

[I just saw that this film is coming to theatres in Jan 2016; I saw a festival copy]

In the film, Damon eats 40 teaspoons (160g) of sugar a day, the average for an Australian. He doesn't ingest sugar via sweets, soda or ice cream, but via "healthy foods" like yogurt, granola, juice (oh the juice!), and so on.

The results after 60 days are startling: he gains 8kg (on 75 kg start), moves from a healthy liver to a "fatty" liver, and exhibits the highs and lows of a pre-diabetic.

This film captures the "new knowledge" that sugar -- not fat -- is probably responsible for the epidemic of obesity, diabetes, etc.

The conventional wisdom of "fat makes you fat" is wrong. The idea that "all calories are the same" (a favourite of the sugar industry, which uses science and lobbying in exactly the same way as tobacco companies) is wrong.

Sugar is rare in nature, so our bodies are not evolved to cope with it compared to fat and protein. Thus, when we eat sugar, we get a rush of energy. Our livers release insulin to tell cells to mop up the sugar, stop burning fat, and (this is the killer) convert excess sugar into fat that will be stored in our livers, guts (men) or rumps (women). It's those rushes that leave us depleted after the high as well as lacking energy (because it's getting stored rather than used).

By coincidence, The Economist has articles on sugar's bad influence on health this week (soda and tax it). For more information, check with government health sites: USA, Canada, UK, and Australia. (There are MANY sugar industry sites with "health" information. Don't believe them.)

Should the government tax sugar? Yes, if you think that "sin taxes" are appropriate as a means of reducing harm to citizens and public health costs. Diabetes and obesity cost Americans $245 and $150 billion, respectively, per year in direct and indirect costs (that's $1300/person!)

Bottom Line: I give this file FIVE stars for its entertaining (sometimes terrifying) glimpse of the harms we risk from sugar. Sure, have some in small doses (fruit, milk) but not in large or concentrated doses, e.g., juices, sweetened products (pasta sauce!), Vitamin Water, etc. Home cooking can avoid many of these problems. Coca cola, Pepsi and Mountain Dew (27 tsp in one bottle!)? You're better off without those.

27 Nov 2015

Friday party!

Run! Swim!

View post on imgur.com

Carbon market mechanisms matter for Paris COP

Liza (email) graduated from LUC last year (she's now at Edinburgh University). I asked her to write a little about her bachelor thesis since her topic is so relevant to the upcoming climate talks in Paris. -- David

The table below summarizes four case studies discussed in my bachelor thesis “Market mechanisms for greenhouse gas emission control: carbon tax vs. cap-and-trade”. Market mechanisms for GHG emission control are currently not widely used, but they hold great potential.

In the literature, there are various arguments for preferring either a carbon tax or a cap-and-trade scheme, but they usually boil down to the tons of CO2 reduced and the revenue produced. Cap-and-trade is usually preferred because CO2 emission reductions can be set as the aim, while a carbon tax is preferred because it will raise higher (and predictable) revenues. From the table above it can observed that cap-and-trade schemes reduce more tons of CO2 per year, while carbon tax schemes have higher annual revenues. These observations correspond to the arguments that are found in the literature, meaning that to an extent practice does follow theory. However, the success or failure of a particular market mechanism cannot be attributed to only these two factors. For example, Australian carbon tax raised high revenue and reduced CO2 emissions, but it was revoked due to a lack of political support for the scheme.*

NB: Alberta's proposed carbon tax might raise the price of gasoline by 5 cents. Current prices are CA$88 cents/litre (US$2.48/gallon)

Furthermore, the use of revenue is very important for the success of a market mechanism, particularly for carbon taxes. The Australian tax was revenue positive, which meant that the revenue raised went into the national budget from where it was very hard to follow spending. The BC tax on the other hand, was revenue neutral. The revenue was used to reduce other taxes on citizens and corporations. Cap-and-trade schemes also often fund sustainability projects. Citizens tend to support market mechanisms that recycle revenue into sustainable development, thereby strengthening political will to keep the mechanisms going.

Businesses don’t like cap-and-trade schemes because under them, the price they pay for carbon is uncertain and their ability to plan long-term is hampered. In order to get businesses on board with cap-and-trade schemes, governments often give away initial permits for free. Both the EU’s ETS and California’s cap-and-trade schemes had this feature. Free permits may raise business compliance, but they also mean lower initial revenues. Free permits have to end at some point, of course, if one wants businesses (or consumers) to face price incentives to lower their emissions.

When a market mechanism is introduced as a policy, it usually already has a long-term plan of how the policy will work and how it aims to affect emissions; this is done with trajectories. Both EU ETS and British Columbia have trajectories – the former with how the cap decreases over time and the latter with how the tax grows over time. Trajectories can give a sense of security to those worried about impacts over several years. However, their correct establishment can be very tricky, particularly when it comes to carbon dioxide, because there is much scientific uncertainty about the “tipping point of emissions” and there is no consensus on who is responsible for the impact of emissions (and how much).

When it comes to worldwide cooperation for GHG control, it is not a question of which nations emit because they all do. The question is – how high are the emissions relative to each other and with regards to the potential threshold of devastating consequences. If only a number of countries act to control their carbon emissions, and these countries are not the big emitters, then the effect on the global carbon emissions will be very small. Also, if only a few countries establish market mechanisms for carbon emission control, there is always the potential for “leaks”. This is to say that businesses will try moving their activities to countries that do not regulate carbon emissions – lowering their emissions on paper (in the regulated nation) but not globally. For this reason, it is advised that if market mechanisms are to be used, they have to be created everywhere worldwide. And depending on which market mechanism is used the price or the cap has to be synchronized around the world. This will limit the number of “leaks” in the different systems and potential spillovers will be avoided.

The synchronization of the price/cap does not mean that the different systems need to be linked in a global market. Taxes might be easier to impose on a national level, without connecting as it ensures that the revenue raised is used locally (and revenue neutrality can be ensured). Cap-and-trade systems on the other hand, could be linked together. This is already happening by California’s scheme being linked with Quebec’s; and it is likely that more cap-and-trade systems will be linked together later on.

Which system should a country choose? A carbon tax “bites” (generates revenue) immediately and can be enforced a lot more quickly (as seen in the table above). Cap and trade (assuming a low enough cap) makes it easier to harvest “low hanging fruit” at a low business and political cost. The choice is not as important as making a choice, as the first priority is to get nations around the world to impose some downward pressure on carbon emissions.

Bottom line: The theoretical character of a carbon tax or cap and trade will not determine if it succeeds as much as implementation and use of revenues. I therefore have hope that the delegates meeting in Paris can find ways to implement market mechanisms that will reduce carbon emissions within domestic political constraints.

* On Australia’s failed tax scheme: Prime Minister’s in Australia change more often than Defense Against the Dark Arts professors at Hogwarts, and the last change happened back in September. While the ruling party did not change, the new PM has promised to revisit (and potentially change) Australia’s climate policies; however, it is unclear what exactly this means and if it will include the renewal of the carbon tax. Greens have recently conducted some modeling, to provide data in support of the carbon tax. They find that re-instating the carbon tax will produce just as much revenue as changing the GST, while costing households a lot less. If the main concern of the Australian government is to increase their budget while making sure that the general population can afford it, it appears that re-introducing the carbon tax would be the way to go.

26 Nov 2015

Globalization, growth and adverse health outcomes in sub-Saharan Africa

Dilara writes*

In the 1980´s economic globalization has been largely taken up by international monetary organizations like the IMF to the newly independent states in the post colonial ear in the form of trade liberalization, growth and poverty reduction programs. These programs were often set out as conditional loans to be given to developing countries with the terms of a restructuring in domestic policies particularly on the grounds of domestic economy. The loan programs also known as structural adjustment (SALs) are applied when cuts in government spending, privatization of government enterprises, and promotion of free trade, foreign investment and ownership were introduced. Since 1985, application of conditional loans has increased and had varied impacts on the economies of some of the states. A very common critique towards the SAL/SAPs has ben its limitations to civil well-being Zimbabwe for example, experienced a radical growth in the mid 1980s and was used an an example of successful implementation of SALs by the IMF.

Despite Zimbabwe’s financial leap, social sectors like health and education deteriorated, mostly due to cuts in government spending between 1991-1996. With the introduction of the cost-sharing system, healthcare expenditure increase and limited proper access for low-income populations. This impact was not only limited to Zimbabwe´s case but also to counties like Tanzania where healthcare turned into a commodity rather than a right [pdf]. The crippling of the healthcare and education systems was problematic especially because caused stagnations in state development. One could argue that implementation of Structural Adjustment Loans/Programs were driven by economic growth but lowered the social well-being which had an adverse outcome on the overall development of the state.

Bottom Line: While SAL/SAPs were aimed to promote economic globalisation in developing countries through liberalised, trade and conditional loans to reduce poverty, it crippled healthcare systems through cuts in government spending. This had an adverse effect on the well-being of the civil society.

* Please comment on these posts from my microeconomics / growth & development economics students, to help them with unclear analysis, other perspectives, data sources, etc.

Wrong Questions. Wrong Answers. Wrong Policies.

Samuel writes*

In 2009, Joseph Stiglitz, Amartya Sen and a team of economists established that we need to measure ‘quality of life,’ given the limitations of measures such as GDP and HDI. ‘Quality of life’ should be partially subjective. They suggested that surveys are conducted, focusing on people’s evaluations of their life, and their prevailing emotions. Ideally, after aggregating with other approaches, they would end up with a number: your ‘quality of life.’ We can use an example to investigate their approach.

Take a ‘strict’ Buddhist village in Myanmar. The village could be based around a temple. The village would only trade where necessary and could strive towards self-sufficiency, consuming only basic foods. Due to many monks, unemployment would be very high. Villagers would also need to travel for education or health services. We would conclude that the village’s GDP/capita is exceptionally low, due to lack of production. IHDI would be low due to lack of education opportunities and health provisions. Here, Stiglitz et al.’s ‘quality of life measure’ should extrapolate on what GDP overlooks.

Say, hypothetically, villagers are asked ‘how would you evaluate your personal achievements,’ with the options ‘v. high, high, moderately, low, v. low.’ A Buddhist could be more inclined to answer low, due to ontological disagreements with ‘personal’ achievements. The same findings could exist for relationships and occupations. Buddhist villagers could also, due to a low intensity lifestyle, be much less likely to experience very positive emotions. Due to low life evaluations, simplistic goods and a lack of positive emotions, we would conclude that the village had an exceptionally low quality of life. The village would be in dire need of development.

However, a contextual analysis of the village, investigating both the discourse and culture, could show contentedness. More importantly, it could show different development needs, such as better transport to hospitals in other villages, which would potentially not affect ‘quality of life’ responses. The problem is not, necessarily, that Stiglitz et al. picked the wrong measure for quality of life; the problem is broader. Through quantitative research, we cannot understand development. Development needs rich contextual understanding, and this cannot be either numerically coded or aggregated. When we aggregate and code, we lose valuable information about what development is, what it means to different communities and how aid can be provided. Stiglitz et al. establish that the subjective dimension is important, but they use closed-ended questions; only open-ended questions could have provided us with useful information about the village.

Quantitative measures are attractive for policymakers for the same reason that they are flawed: they make the complex, simplistic. And, potentially, global development is not a simplistic, aggregate-able concept. It may be time to consider more mainstream macro-qualitative research, at least in the form of triangulation, in development studies.

Bottom Line: We are trying to condense and simplify development for policymakers. However, in most cases development is not simple, nor can it be aggregated. Oversimplification results in improper measures and improper measures result in striving for the wrong goals, with the wrong policies.
* Please comment on these posts from my microeconomics / growth & development economics students, to help them with unclear analysis, other perspectives, data sources, etc.

Beyond Capitalism: A Natural Progression?

Brian writes*

There is no doubt that the natural progression of Economic evolution has led us through varying orders. As Friedrich Hayek asserted in his work “Law, Legislation And Liberty”, our social structures or any structure above “the simplest atoms” is the result of an evolutionary process. This includes economic thought and structures. (Hayek 1973, 158) Capitalism is a jungle of competition. Full of rent-seekers that are defined as money-makers achieving their gains through political connections. A fairly common occurrence. (economist.com 2014)

Perhaps this is not an inherently negative manifestation of human civilization. Instead, it is simply a beacon of our current economic and social order that serves us in a capacity most befitting the natural progression of events and culture leading to here and now. (Hayek 1973, pg. 158) Douglass North corroborates the idea of this natural progression through his proposal of three social orders undergone (still being unraveled in some) by most national social orders. The first of which is referred to as the primitive social order in which we tended to our caves, sharpened stones and bashed each other’s skulls in for personal gain. (North 2006, pg. 4) The second of which commonly referred to as the “Limited Access Order” or “Natural State” includes the privileged rights of some to resources, often dominated by elites whom are incentivized to maintain order to keep this income flowing. There are many states still dwelling here. (North 2006, pg. 29) Finally, there is the order experienced by most of the Western world. This is the structure in which competition instead of elitist rents are used to maintain social order. Of-course open access societies are still inhabited with rent-seeking behavior. Just less of it. (North 2006, pg. 36-37) This evolution of human economic orders is of great intrigue. But, perhaps the real question of today should be the search for where we are headed. Are we evolving to inhabit our fourth economic order? Are we already questing to transcend the open access order marked by our capitalist drive for competitive dominance? Is there a last chopper out of Saigon?

The human species is one of perpetual advancement, change and evolution. It is said that we are on the verge of becoming a type 1 civilization in accordance with the Kardashev scale. This would indicate a great leap in scientifically founded technological advancement. Especially centered around sustainable and renewable energy resources. (Wikipedia.com) Perhaps not an indicator of a change in economic ordering in and of its self, but a definite reinforcement of the idea of a perpetual evolution in the development of new systems and better orders for the sake of our survival and advancement. A recent Time article referenced the increasing trend of Artificial Intelligence and technology that is consuming our jobs. Predicting that this is a trend that will continue into the foreseeable future. As this AI improves, prices will be driven down and a wider range of people will have access to products and services. At the same time, new jobs will continue to unravel. (Time.com) It is high time we considered how technological evolution will shape and change humanity’s economic orders as they stand. One of these potential order evolutions has been proposed by a concept dubbed The Venus Project. This proposes the possibility of a resource-based economy in which resources would be considered “the common heritage of all inhabitants”. Though an unfeasible alternative at first glance considering the basic concept of scarcity. It is an economic system entirely reliant on a high level of technological advancement as humanity’s savior. An advancement we are experiencing now. (Thevenusproject.com) Perhaps this order is one of many possible future progressions in economic evolution.

Bottom Line: In a world still riddled with violence, scarcity, rent-seeking and a host of inefficiencies and shortcomings… perhaps it is high time we consider where we are going instead of what is trapping us in an order that is arguably nearing a date for withdrawal of our occupation.

* Please comment on these posts from my growth & development economics students, to help them with unclear analysis, other perspectives, data sources, etc.

  • "Kardashev Scale." Wikipedia. Wikimedia Foundation. Web. 2 Nov. 2015.
  • North, Douglass, John Joseph Wallis, and Barry Weingast. "A Conceptual Framework for Interpreting Recorded Human History." National Bureau of Economic Research (2006): 1-80. Print.
  • "Resource Based Economy - The Venus Project." The Venus Project. Web. 2 Nov. 2015.
  • "Capitalism in America." The Economist. The Economist Newspaper, 27 June 2015. Web. 16 Nov. 2015
  • Hayek, Friedrich A. Von. Law, Legislation and Liberty: A New Statement of the Liberal Principles of Justice and Political Economy. Chicago, Ill.: U of Chicago, 1973. Print.
  • "Robots Will Take Our Jobs-But We Will Adapt." Time. Time, 15 Sept. 2015. Web. 16 Nov. 2015.
  • "Welcome to the Jungle." Nation States. 11 Aug. 2014. Web. 16 Nov. 2015.

25 Nov 2015

Why is popcorn sold at the price of gold at movie theatres (and how the obvious answer is inaccurate)

Juliana writes*

Cinemas make 85% profits on overpriced soda, candy and popcorn. Some Americans consider cinema popcorn as the biggest rip-off, since it is on average sold for nine times its cost of production. In fact, in recent events, a citizen from Michigan, even sued a cinema owner for overcharging spectators 5$ for a portion of popcorn. Since then, numerous theater directors and economists have argued that it was simply the result of microeconomic tendencies and that it’s entirely right to sell overpriced popcorn. The question is, can such prices be justified? Why is popcorn so expensive at the movie theater? And how come some clients are still willing to buy popcorn from these stands?

The obvious answer is: popcorn is abnormally expensive in movie theaters, because once inside, the owner has a monopoly. This allows him to decide on the prices he wants to sell his products (price maker) rather than adapting to the market (price taker) simply because he has no competition. Therefore if he wants to charge a bag of popcorn or nachos for 10$ and finds a client, he can sell it for 10$.

Still, there are no too strong incentives that justifies buying popcorn at exorbitant prices. So what is it? The first explanation is price discrimination. Expensive popcorn finds costumers because ‘popcorn lovers’ are actually willing to pay popcorn (whatever the price) because they esteem it will improve their time at the theater. Spectators come to the cinema because of the reasonable or low price of the tickets but ‘popcorn lovers’ increase their entertainment by consuming costly popcorn. “Popcorn lovers value the trip to the theatre more than other people and thus, via the popcorn pricing strategy, they pay a higher price.” (Richard B. McKenzie)

The second explanation is that movie theaters make up for their loss in revenues with the sales of secondary products. Indeed, up to 70% of the ticket price geos to cinema studios. And in order to be able to project their movies (since they have such high demands) have strict requirements which forces the owner to project their movies a certain numbers of time over a certain period, even when the number of spectators is negligible. The forced projections are non rentable (costs of exploitation) which means that the cinema owner is losing money. Instead of raising their prices, which isn’t appealing and uncompetitive, they raise the price of popcorn and emphasizes on advertisements that make it seem that popcorn is inseparable from cinema experience.

Bottom line: Spectators make extensive complains about the exorbitant prices of popcorn at movie theaters. However, owners manage to keep these prices high not only because they have a monopole within the movie theater but also because the 'popcorn lovers' still are willing to pay the price. There are victims of psychologic and economic phenomena they are unconscious about.

* Please comment on these posts from my microeconomics students, to help them with unclear analysis, other perspectives, data sources, etc.

Using private blockchains to minimise infrastructure costs

Erkki writes*

Blockchain technology was introduced some years ago as the technical cornerstone of Bitcoin. The idea behind the blockchain is to publicly record and verify transactions and balances in the Bitcoin network - a kind of public ledger if you will (more in the Bitcoin whitepaper [pdf]). Since its beginning the cryptocurrency scene has offered a steady flow of new and innovative fintech solutions. Some of these have used the Bitcoin blockchain as their base and build services on top of that. However, despite of being an immense technical innovation, Bitcoin suffers from a number of serious technical and security issues. Hence, a large number of software professionals, and hobbyists, have taken up the task of building new and improved blockchains. Originally these second generation blockchains were used to create a kind of ‘Bitcoin 2.0’ - a better version of a decentralized, and trustless, public cryptocurrency.

Private blockchains have a similar technological base as public ones. The difference is that they are only available privately. This means that anyone can implement their own currency for their organizations as a means of value transfer and data storage. These innovations have not gone unnoticed in financial institutions and industrial conglomerates which are now developing their own blockchain solutions. To further elaborate how it all works lets take a look at Mijn, a project that offers private blockchain solutions to institutions.

Mijn is based on a (public) second generation cryptocurrency called NEM. It offers multiple services on top of the NEM blockchain, from which the most important ones will be discussed next. Besides of offering a private currency, its users can create custom assets that can be linked to company equity, inventory, customer loyalty points, and many other things. To complement the assets and the currency, one can create smart contracts that can be used to automatically manage information and agreements directly on the Mijn Blockchain. Security-wise it comes with significant improvements because of its base on NEM (see NEM Technical Reference [pdf]. Some of these features include multi-signature accounts and restricted access to determined nodes - features that are imperative to hierarchically structured institutions. No doubt these improvements are technically impressive, but how can they be used to reduce infrastructure costs?

The peer-to-peer network model of Mijn offers significant improvements on traditional infrastructure. The blockchain operates in a way that it can be kept up with normal consumer hardware, reducing the hardware costs. For the same reason there are no reasons for backups or data redundancy because everything is already backed up in a distributed way. The maintenance and development of the system is also relatively simple because it is done through a simple JSON API letting the developers work on their preferable language. Ultimately, this leads to a zero-downtime system that is resistant against network failures and malicious attacks.

Bottom Line: The distributed networks of private blockchains offer new possibilities and reduce costs when it comes to structuring an organisation’s IT networks.

* Please comment on these posts from my microeconomics students, to help them with unclear analysis, other perspectives, data sources, etc.

Social Influences on Decision Making

Lisa writes*

In the 1950’s Solomon Asch conducted a series of experiments to demonstrate the power of conformity in groups. A group of participants were placed in a room together where they were shown a line; they then had to match this line to one of the three other lines presented to them. Each participant, in turn, would then verbally announce which was the matching line. However, all but one of the participants were in on the experiment – they were told how they should respond. The idea was to see whether the participant, who was not in on the act, would change his or her answer to conform to the rest of the group’s responses. The results showed that participants would change their answer in order to conform to the incorrect group answer approximately 1/3 of the time.

So why do people discredit the evidence at hand? 1) If everyone else is saying an answer that seems to be wrong then they may have more information than me about the task at hand. 2) I do not want to face disapproval from the group so I will conform to what everyone else is saying.

These findings have been used in the fields of behavioral economics and microeconomics to analyze how individuals can be influenced or “nudged” into making certain or better economic decisions.

Officials in Minnesota orchestrated an experiment in order to change individual behavior on tax compliance. Taxpayers were given four different types of information when completing tax forms:
  1. Their tax would be going towards education, police protection or fire protection.
  2. They were threatened with the risks of punishment for noncompliance.
  3. They were given information on how to get help with completing tax forms.
  4. They were told “90% of Minnesotans already complied, in full, with their obligations under tax law”.
Remarkably the last of these interferences had the most profound impact on tax compliance. Knowing that most people complied with the tax law influenced these taxpayers’ decision-making in order to conform with the majority of the population.

In addition, such “following the herd” behavior can have a profound impact on the economy. It is believed to have “played a key role in producing the recent speculative boom and resulting financial crisis of 2008”. Robert Schiller emphasizes the role of such behavior in volatile markets. A speculative bubble, he explains, is "a situation in which news of price increases spurs investor enthusiasm, which spreads by psychological contagion from person to person, in the process amplifying stories that might justify the price increase." Public knowledge begins to spiral, demand rises and market prices start to escalate. Eventually the bubble pops.

Bottom Line: People tend to make decisions that align with what everyone around them is doing. On the positive side: policy makers can use such knowledge to nudge people into making better economic choices. On the negative side: such behavior can cause speculative fervor that overshadows any economic fundamentals.

* Please comment on these posts from my microeconomics students, to help them with unclear analysis, other perspectives, data sources, etc.

24 Nov 2015

A brief review of the new CAP reform in Germany

Cajus writes*

The idea of distributing money to poorer people to help them improve their standard of living has been proven to be a successful way to fight poverty. The organisation “GiveDirectly” claims on their webpage that they have increased earnings by 34%, assets by 58% and defeated 42% of hunger by applying this method in Kenya.

Also the EU seems to have gotten caught up on this Idea recently. The Common Agricultural Policy was introduced in 1962 to help European farmers sustain their business. This was important to secure food production and especially in this time as due to other new economic possibilities (industrialisation as a driver for example), being a farmer doesn't seem attractive for most people. (Witzke; Noleppa, 2007) The CAP has since its creation been revised many times. It is often argued, that the CAP is rather unsuccessful, especially compared to the money invested (40% of the EU budget). The EU increased incentives for higher food production, which led to a overproduction of food in the 1970-80s. Therefore, the CAP shifted from market to producer support, where price support is replaced with direct aid payments, similar to the aid payments by GiveDirectly. The European Commission claims [pdf] that this led to an “increased emphasis on food quality, protecting traditional and regional foods and caring for the environment.”

In Germany this method keeps many farmers in business. The revenue of most farmers in Germany consists of such aid payments by more then 50%. Therefore, this system does not punish inefficient farms. Also, this method leads to inequality of benefits received under German farmers and creates unnecessary incentives. Aid received correlates with farm size, while smaller farms gain less benefits, larger farms gain more. This seems reasonable as incorporated farms (and therefore larger) tend to have lower profits.

A slightly newer adjustment of the CAP introduces a budged limit to direct payments. This budged limit is at €300,000. Since smaller farms receive less benefits, this will not have an effect on smaller farms, but larger incorporated farms will partially suffer and possibly forced out of business.It creates an incentive to split up larger farms into smaller farms. (Witzke; Noleppa, 2007)

Bottom Line: Using direct payments to help farmers in Germany has its ups and downs. On the one hand, it secures food production and local farmers, but on the other it promotes an unnecessary shift from incorporated farms into smaller farms. Also it does not incentivise farmers to be productive. Since more then 50% of German farmers revenue comes from the CAP, actual performance does not make a big difference in total revenue for farmers. Therefore, this method needs adjustment to create incentives for farmers to be productive, as well as giving them an economic surplus. This surplus however may also be created in other ways such as cheaper land for example. Higher food prices in Germany would also be an option, especially as inflation German food inflation rates are the lowest in Europe. However, to prevent overproduction as already occurred during 1970-80s due to high incentives to be productive, a limit of food production for each farm maybe helpful to allocate production efficiently.

* Please comment on these posts from my growth & development economics students, to help them with unclear analysis, other perspectives, data sources, etc.

India’s Microcredit System: A Failed Experiment?

Robin writes*

Microcredit, or the practice of extending small loans to the worlds poorest, has long been hailed as a powerful tool in the fight against poverty, even earning its founder Mohammed Yunus a Nobel Prize in 2006. Although when done right, this business model can indeed be implemented successfully, microcredit has become the subject of much criticism lately. Some of India’s microcredit providers, for example, have been behaving like loan sharks, providing loans regardless of what people plan to do with them, charging exorbitant interest rates, and using increasingly coercive tactics to collect loan payments. As a result, many of India’s poorest citizens are left with debt they will most likely never be able to pay off. There are even accounts of suicide linked to the vicious cycle of debt that microcredit schemes have incited. The entire system almost collapsed in 2010, when growing dissatisfaction led borrowers to collectively default on their loan payments. Microcredits were meant to eliminate scenarios like this one, leaving us with the question: ‘What went wrong?’

Yunus himself attributes some of the issues to a ‘mission drift’ Microcredit organizations were originally envisioned to be small, non-profit and community based, but are increasingly becoming large, for-profit companies. For-profit microcredit companies are problematic in many ways, not the least of which is that they raise their funds in international markets that are often volatile and then transfer the risks to the poor in the form of high interest rates. With this profit-maximizing strategy comes a lack of interest in the educational aspect of microcredit schemes that has made them so successful in many instances. Entrepreneurial education is a vital part of ensuring that loans generate viable livelihoods for their borrowers. The original group lending method used by Grameen Bank in Bangladesh, for example, put lenders into small groups, gave them training and encouraged peer-monitoring to help ensure that the loans were being used responsibly. This created ‘social capital’ (as well as physical capital) that India’s current predatory lenders do not (Halder and Stieglitz [pdf]).

Government regulations may provide a solution. At least one Indian state has implemented legislation that restricts the number of lenders that borrowers can lend from and recommendations have been made to put a cap on interest rates and regulate what kinds of companies can call themselves microfinance organizations. While these measures may be helpful to reduce predatory lending disguised as microfinancing, there is also a risk that restricting the activities of legal companies will drive borrowers into the hands of the very loan sharks that microcredits were supposed to displace. This is, arguably, even more problematic because loan sharks are infinitely harder to control.

Bottom Line: Cleaning up the microfinance industry must, therefore, be accompanied by a strategy to combat harmful unofficial lending practices, or ideally eliminate the need for them. There is a delicate balancing act to be observed.

* Please comment on these posts from my growth & development economics students, to help them with unclear analysis, other perspectives, data sources, etc.

Common Core Standards

Jan writes*

The Iowa caucus is around the corner and things are heating up in the [US presidential] primary campaigns. Everything is on the table and the campaign teams makes sure nothing is forgotten. Education is not an exception especially since the “Common Core Standards” are under heavy scrutiny of the GOP candidates.

The Common Core State Standards (CCS) Initiative is an educational initiative that details what students should know in English language and mathematics at the end of each grade. Started in 2007, it was a bipartisan initiative and by 2010, Common Core Standards had been adopted by 45 states. Republican and Democratic states alike, adopted the standard and the initiative has grown ever since.

In 2015, the CCS have reached new areas. As of May 2015, 13 states introduced standards in the subject of science. Now kids in California, Kentucky or Vermont must know about climate change in order to graduate. As expected, this has angered right wing candidates and campaigners alike. They speak of indoctrination, a word that many find too strong, but is there a real reason to worry about centralizing the nation's curricula through common standards?

Any mechanism of centralizing school curricula is a double edged sword. On the one hand, CCS can combat the differences in quality of education of certain states compared to others but on the other it cuts the ability of teachers and schools to adapt to their students and their local realities. Indoctrination is perhaps an overreaction but school dropout might be a real concern.

Many stories of students that disengage because they are frustrated with what they are taught are coming out through the conservative news apparatus. A common claim is that the format of standardized questions is confusing to some. Also, teachers are forced to teach things they might not be fully comfortable with teaching. These arguments are often made by ill-informed journalists or based on the misunderstanding of the CCS, according to its defenders, and as such should not weigh in the debate. But the fear of the republicans are not completely misfounded.

The common core standards initiative started by focusing only on math and English language. Standards in these two subject by themselves are a centralization so light that it can barely incapacitate teachers or frustrate students. However, the initiative seems to be growing to other fields like science. If the common core standards prove to have positive feedback and grow throughout the whole curriculum, the centralization might become dangerous.

Bottom Line: The trade-off between egalitarian education for all and specialized education for most is one without a clear answer. We simply do not know at what point standardizing stops being beneficial and starts being dangerous. Heavily centralized educational systems like the Spanish show some of the highest dropout rates, but it seems clear that the completely decentralized situation in the U.S. is also detrimental. Studies are already showing that the CCS have beneficial results in some states. There is no real threat to the CCS, as still today, republicans that are not running for office still support them. The public scrutiny they undergo today might be ill-informed and misguided but nonetheless important for the future of American education.

* Please comment on these posts from my microeconomics / growth & development economics students, to help them with unclear analysis, other perspectives, data sources, etc.

23 Nov 2015

What do university fees represent?

Feri writes*

In this blog, I will explain the possibility of an impending student debt crisis in the United States and its similarities to the 2008 mortgage crisis. Furthermore, I believe that plans to ease student debt and make universities tuition free that have been adopted by democratic candidates for president Hillary Clinton and Bernie Sanders could be very harmful.

The general idea is to make the top 1% wealthiest Americans pay for everybody else's education. This plan is badly researched as the math doesn’t simply does not add up. This is largely due to the common misconception that there is this source of taxable money that is being hoarded by the wealthiest of Americans and that once it is taxed it would create a stream of new income for the government. This notion has been disproved by the Laffer Curve.

Tackling the $1.2 trillion student debt crisis and the 7 million debtors in default in the US is essential. The idea to forgive the debt and to provide low-interest government-insured loans is only going to benefit private universities. This easy money will cause a wave of big borrowing and a resulting inflation of tuitions that will quickly swallow up the money these government programs would require. I believe the student debt bubble that has already been formed could burst if either of these popular plans are implemented.

In the 2008 housing bubble, we saw similar policies which proved to be very harmful. The government provided easy money leading up to the bubble: people who otherwise wouldn’t have been eligible for a mortgage were given the cheap debt they desired. Soon, housing prices rose due to an increase in demand. The bubble burst when it became clear people were not able to repay their debt and many defaulted and the debt became worthless. Exactly this could repeat itself with the student crisis.

What the "New College Compact," idea assumes is that by making it easy to go to university and burden students with a lower cost they will eventually get a high paying job and it will be easy for them to pay the loans back. What is not taken into account is that this will also lead to oversaturation of college graduates and the government has exhausted businesses with new taxes and regulations, as a result companies stops creating more high paying jobs. Meaning those graduates will get low paying jobs and won’t be able to pay back, leaving us with $1.2 trillion written off,  $350 million spent on this new plan plus the new loans that will not be paid. What is the possible outcome of this?

Boom. The bubble bursts.

We can still prevent this problem of the tuition bubble growing and bursting with, for example, a $15,000 voucher plan that will create competition between universities, which would not be able to  raise the price of education because the voucher would be valid in any state. This way universities will not waste money but will try to increase the quality of education. Students would graduate with little or no debt. This will allow for university graduates to have a purchasing power much sooner than before and help the economy grow (the money, for example, you need to move from home or create startups).

Competition will also get rid of only for-profit universities who have very low standards. This will also make great community colleges much more desired and appreciated. This idea is supported by numerous people such as economist Milton Friedman and Mark Cuban.

Bottom Line: Making tuition easy to afford, community colleges free and forgive past student loans may sound great and beneficial for students their parents and eventually the economy, but in reality, it will be much more beneficial for universities that will raise tuition while producing more graduates chasing lower paying jobs with more debt. Instead of making it easier to spend money on something and reduce completion, create more competition to improve quality at lower prices.

* Please comment on these posts from my microeconomics students, to help them with unclear analysis, other perspectives, data sources, etc.

Tipping: Perfect Market Efficiency or Lazy Employers?

Olivia writes:*

In the Netherlands, I have often faced a moral dilemma when it came to paying the bill in restaurants. How do I tip? Back in Austria, it was straightforward: You just round up the number on the bottom of the bill, maybe add another Euro or two. But living in the Netherlands has made me used to paying by debit card – which makes the whole tipping procedure slightly tricky. Do I cross out the number on the bill and write down a new amount? Leave coins on the table? Or neither? Over time and by observing how my Dutch friends solve this dilemma, I got used to the latter option: I do not tip any more. Realizing this change in my behavior, I began wondering about apparently (one of economists' favorite topics): why do people tip in the first place? Explanations range from increasing market efficiency to the satisfying feeling of having done something good – but what I am interested in are the economic incentives for a better service based on tipping. Ignoring the studies that find that tipping is based on many other factors than the quality of service (check out Michael Lynn's research here if you are interested), what do these incentives theoretically mean for the parties involved?

The Customer

As the customer, I am the person to reward good service with a higher tip. At the cost of some extra-Euros, I (hopefully) benefit from better service. However, for a single customer it does not seem rational to give a tip: by the time you do, the service has already been performed and unless you are a frequent at the given bar, you are not likely to suffer from any future consequences. However, disappearance of tips on a larger scale could mean worse service for everyone. If there is no expectation of a reward anyways, why should the waiter or waitress bother to make a customer extra-happy?

The Waiter or Waitress

If tips are given as incentives, the quality of restaurant-service logically should decrease when costumers stop to give tips. From my two-country-comparison of Austria and the Netherlands, I have not observed any of the like – the service in both countries shows that there is a lot of variation between waiters and waitresses, which does not seem to be related to the habit of (non-) tipping in either country. Why would that be? Regardless of the whole waiter/waitress-customer-interaction, every waiter and waitress is still employed by the restaurant owner. Like in any other job, the main incentive to perform well is to not get fired. Tipping is in that case not part of the story.

The Restaurant Owner

From the restaurant owner's perspective, tipping is great. When one of his or her employees complains about their low wage, (s)he can simply refer to tips: “if you perform better, you get more tips” – tipping is used as a bonus paid by another party, the costumers. The restaurant owner thereby not only outsources part of the costs, but also the monitoring. Instead of checking each waiter's and waitress's performance in order to then warn or punish them, the costumer takes this role for the restaurant owner. “The market of good service and costumer tips is perfectly efficient,” the restaurant owner would argue. My conclusion on the other hand is that the restaurant owner is too lazy to deal with monitoring and providing other incentives.

Bottom Line:  Customer service would be just as fine without tipping, but restaurant owners would have to monitor their employees' performance better and consider other incentives for the waiters and waitresses to perform well.

* Please comment on these posts from my microeconomics students, to help them with unclear analysis, other perspectives, data sources, etc.

20 Nov 2015

The Popcorn Business of Pathé

Rosanna writes*

In the Netherlands, movie theater chain Pathé offers its clients the ability to get a movie subscription. Pay 19 euros a month and you get unlimited access to any movie in every Pathé movie theater in the Netherlands with your personal ‘Pathé Unlimited’ card. Additionally, you get a 10 percent discount at the concession stand. As movie tickets cost (over) 10 euros at Pathé, this is appealing for everyone who goes to the movies more than once a month (which is the reason I got one). Pathé, on the other hand, increasingly misses out on revenue as people make more and more use of their card, it seems. But do they really?

Movie theaters only get to keep a small amount about 20 percent of the ticket sales revenue: the other part goes to the movie studios. This means that movie theaters need another source of income to stay in business. Many people like having a snack when watching a movie. As bringing in own food and drinks is not allowed, people would have to buy those at the theater. This means that there are no substitutes for snacks at the movies. Therefore, the demand for snacks at the movies is relatively inelastic and as a result, prices are often extremely high at Pathé, a medium sized popcorn costs 4 euros compared to 60 cents for a similar amount at the supermarket. And unlike movie tickets, all revenue from concessions goes to the theaters.

However, even though the demand for snacks at the movies is relatively inelastic, the very high price might cause one to think twice about really needing a snack. This might be different when one has the Pathé Unlimited card. What struck me about my own behavior is that I easily spend 3.60 (4 euros minus 10 percent) on a bucket of popcorn, because it feels as if I already saved 10 euros for the ticket. What I tend to forget is that without the card, I may not even have gone to the movies, which would have saved me those 3.60 euros. Additionally, the 10 percent discount makes it even more appealing to buy a snack. And this seems exactly what Pathé aims for.

In order to explore this, I looked back at my own expenditures at the movie theater during the last month. I went to the movies 4 times, and in total I spent 14.40 euros on snacks (discount included). I have the Pathé Unlimited card, so this means that I paid 19 euros. I went to the movies 4 times, thus 2.1 out of 4 times I went to the movies for free. Pathé gets around 20 percent of this amount: 0.2*19 euros=3.80 euros. Additionally, I spent 14.40 euros on snacks. Therefore, in total, Pathé got approximately 3.80+14.40=18.20 euros. Without the Pathé Unlimited card, I would have spent 4*10 euros=40 euros on movie tickets if I had gone 4 times. Pathé gets around 20 percent, which is 0.2*40=8 euros. Because I would have had to pay for the tickets, I probably would not have bought any snacks.

In conclusion, Pathé got approximately 18.20 euros because I have a Pathé Unlimited card. If I did not have the card, they would have gotten 8 euros, given that I would have gone 4 times (it would be even less if I had gone fewer times). This means Pathé is better off. And because Pathé’s revenue mostly comes from concessions, the more one uses their Pathé Unlimited card the more revenue Pathé gets. And additionally, I am also better off, as I spent 19+14.40=33.40 euros in total instead of the 40 euros I would have spent without the card.

Bottom line: Expectedly, the Pathé Unlimited card is beneficial for both Pathé and the customer. Unexpectedly, however, the more someone goes to the movies with this card, the more beneficial it is for Pathé.

* Please comment on these posts from my microeconomics / growth & development economics students, to help them with unclear analysis, other perspectives, data sources, etc.

In the shadow: The unintended consequences of abolishing the minimum youth wage in the Netherlands

Cox writes*

Recently, the minimum youth wage in the Netherlands has come under public scrutiny. Calls for abolishing the youth wage are omnipresent among the youth, political parties and various unions. The Netherlands is one of the four countries in the European Union that has a lower, age specific minimum wage for the youth from the age of 15 till 22. The Bijenkorf and the municipalities of The Hague and Heerlen have already taken initiatives to abolish the minimum wage for workers older than 18 years. I will look at these consequences.

Those in favor of abolishing lower wages for 18+ workers give three main arguments. First, they argue that there should be equality among employees fulfilling the same tasks. Secondly, they argue that the current minimum wage is too low for the youth above 18 to be able to financially support themselves. Finally, they argue that there is age discrimination. For example, at the Albert Heijn, mostly younger people are employed because they are cheaper.

However, I think that abolishing this minimum wage will also have a set of unintended consequences which may actually outweigh the benefits. Due to the different minimum wages per age every age group has a different supply and demand curve. The merger of the 18-22 year-old work force with the older workforce (in terms of equal wage floors) means:
  1. The demand for 18-22 year olds will decrease due to an increase in the wage of an employee.
  2. The supply 18-22 year olds will increase due to the attraction of the higher wage.
Thus, 18-22 year old unemployment will most likely rise due to the fact that the youth are less productive; they are after all less experienced.

Second, higher minimum wages may lead students to drop out of school, lowering quality in the  Dutch knowledge economy  and increasing competition on the labor market.

Third, age discrimination will remain. The preference for under-18s will now be even stronger... assuming they can do the jobs.

Empirically, abolishing youth minimum wages in both New Zealand [pdf] and Canada has led to an increase in youth unemployment and is likely to have the same impact in the Netherlands according to the Dutch Bureau for Economic Policy Analysis [Dutch PDF]

Bottom line: Abolishing the youth minimum wage will increase unemployment among 18-22 year olds because they have to compete with more experienced workers; more youth will try to work rather than study; and age discrimination (in favor of even younger workers!) will be even more intense.

* Please comment on these posts from my microeconomics students, to help them with unclear analysis, other perspectives, data sources, etc.

Money and Altruism: Does it hurt us or help us?

Josh writes*

It’s been a common conception through recent history that cumulatively, money influences us to the point that when money is involved, our empathy is reduced, and to a large extent that appears to be the case.

An intriguing article from CPACanada discusses the ways in which money can negatively affect our personality and the way we interact with others, specifically that it reduces our empathy. This might not make sense according to the primordial economic view on altruism: gaining satisfaction or happiness from benefiting other people. Under this logic, people should be giving more as they earn more because they increasingly have greater economic security (pending strategic financial planning) and a larger surplus that can be spent on helping the unfortunate.

The answer could be seen as thus- despite increasing incomes, as goods across nearly all markets have wide price-ranges, the marginal cost of giving up an expensive car over a regular car can be portrayed as greater than the benefit of giving more money to a charity because 1) you don’t necessarily see where your money is going and so you don’t trust the middle man (NGO) entrusted to handle it, and 2) the chance to show off your expensive car to others is highlighted by the fact that “exclusive” consumer goods are excludable, whereas altruism may now be considered an expected value to be held by post-modern democracies.

As money is only a means to acquiring goods, and is not a good in itself, we may be able to understand why patterns of altruism appear to be more logical with the absence of money. This is not to say that from a behaviouralist perspective, money cannot be seen as a method of acquiring value from other people, but rather that as a phenomenon, people often seek money for the sake of seeking money, and without it people may begin to remember that “the only possible value of money is other people.” When a value of money isn’t quoted alongside somebody’s time spent volunteering, that person won’t be as likely to compare the value of his time to some market baseline and thus feel that he is being underpaid. Instead the reliance to measure the value of some altruistic act then falls upon social values, which say that it is acceptable to be self-interested when it is done by helping another person.

Bottom Line: This argument isn’t trying to suggest that rich people can’t be altruistic, but is suggesting that altruism is more possible when the focus isn’t on the potential cost-benefit analyses between caring for others and consumer goods, but is instead on the group benefit that can be derived from individual support for one another.

* Please comment on these posts from my microeconomics economics students, to help them with unclear analysis, other perspectives, data sources, etc.

Friday party!


View post on imgur.com

19 Nov 2015

Development Aid: A puppeteering game?

Alicia writes*

For centuries, less-developed countries have bowed at the feet of their more economically developed counterparts and begged for aid, but this often comes with strings attached. When the recipient country solely relies on the donor country for goods and services related to aid-financed projects, and when grants are given only after the recipient country meets the conditions set by the donor, this is referred to as tied aid. The most archaic form of this transaction is known as, performance-based aid. This term is straight forward, whereby the recipient of this aid is based on the extent to which they are capable of meeting the conditions. This type of aid is an incentive for the host country to make political and economic reforms that not only benefit their country but the donor country as well.

The main problem with performance-based aid is that it ignores the sovereignty of the decision making processes within the host countries. By agreeing to this type of aid the recipient country may be ‘selling its soul’ without even knowing it. The conditions set by donor countries have the ability to expand over the hosts’ investment policies, trade regulations and government structure- core elements which define a nation. Additionally, tied aid can sink the recipient country further into debt and/or force them to adapt inappropriate technologies and infrastructure that may not be conducive to their environmental, social or economic needs. Although less economically developed countries may be trying their best to advance by relying on tied aid, it is perhaps impossible to grow and develop sustainably with another country pulling the strings.

Bottom Line: The desperation of blindly accepted aid can undermine the self-determination of developing countries and instead has the potential to turn them into puppets of their donor countries.

* Please comment on these posts from my growth & development economics students, to help them with unclear analysis, other perspectives, data sources, etc.

Brazil’s Social Policy Trade-off

Monica writes*

Brazil’s latest social policy ‘La Bolsa Família’ aims at combating poverty and inequality in the country. In 2003 the poorest 60% accounted for merely 4% of the wealth (World Bank 2013). Since ten years, the policy has tried to combat this problem by offering conditional cash transfers (CCT). The CCT offer an extra income to families so they, in turn, send their children to school and health care visits. However, since the demand of these social services has increased, the supply side has decreased in quality.

Economic Growth
The CCT promotes economic inclusion. It empowers the poorest section of society. It ensures a steady monthly income, which provides for basic human needs and stimulates the nation’s economic growth. The government has stipulated a return of 1.78 reais to the economy for every 1 reais spent. The Guardian states the program is responsible for 33% in the reduction of extreme poverty from 8.8% to 3.6% between 2002 and 2012.

However, the Economic Commission for Latin America and the Caribbean argues that the reduction of extreme poverty is only short-term. Despite lifting households out of extreme poverty it does not address economic inequality. The safety net is generating immense inefficiency and dependency for older people to reductions in incentives to improve people’s skills and employability.

The program does have the long-term goal of improving the lives of future generations. The requirements have resulted in a reduction of school dropouts and an increase of school attendance. The Guardian states La Bolsa Família has also reduced malnutrition and infant mortality rates. The poorest region in Brazil has scored higher in the Human Development Index (HDI).

Despite an increase of school attendance and healthcare visits, the program has diverted the focus of development from quality to quantity. The table shows that as the spending in social assistance programs increases, the spending on social services decreases. This means that the quality of the education system and healthcare has decreased respectively. This has been evident in the OECD report (2009) that Brazilian students had one of the lowest performing results in school.

Bottom line: La Bolsa Familía has reduced extreme poverty of many households in Brazil. However, the incentive to increase school attendance and the use of healthcare services has undermined the quality of these services respectively. In reality, this is only undermining the process of sustainable poverty alleviation.

* Please comment on these posts from my growth & development economics students, to help them with unclear analysis, other perspectives, data sources, etc.

Measuring Policy Success: Latvia's Recovery from the Financial Crisis

Olivia writes*

Scholars and politicians have criticized the widespread use of and goal-setting through a country's GDP, yet it still happens. One such example is the case of Latvia's recovery after the financial crisis of 2008: while Latvia is hailed as a success, the economic growth does not tell the whole story, and other indicators are often overlooked in the discussion. I want to add some nuances to the discussion of Latvia's austerity measures in this blogpost – but let's start at the beginning.

When its economy was hit severely by the 2008 financial crash, Latvia turned to the IMF and the European Union for support. Latvia agreed to austerity measures – mainly fiscal policies, cutting down on social benefits and reducing the size of the public sector – to bring its economy back on track. When GDP soon started to grow again, Latvia was hailed as a success: it provided proof that the widely criticized austerity could work (see graph below).

Data from World Bank

However, looking at Latvia's GDP cannot be enough to mark it as an example of austerity success. Critics of the success-story have raised two main concerns. First, comparing the economic indicators beyond country level shed a different light on Latvia. For example, Mark Adomanis compares Latvia to its neighbor Russia – and typical economic indicators like GDP and unemployment show that actually Russia has performed better than Latvia since the economic crisis. This should already raise concern about the media's definition of success, but there is another interesting point in Latvia's story: the population.

Data from World Bank

Latvians have been leaving their country. While several critics pointed this out, the overall population decrease might not be related to the crisis specifically: the world bank data above shows that the trend started before 2008. The economy and the austerity measures are most likely not the reason why the population is declining overall. Yet a part of the trend was set off in 2008: the decline in labor force (see graph below). While after the economic crisis, GDP has grown again, unemployment rates have improved, and so on, the labor force has consistently decreased. These data give reason to think beyond economic growth when measuring policy success: the decline in labor force does not only distort widely used data (such as the percentage of unemployed people or GDP per capita), but adds another dimension to the effects of Latvia's austerity policies. Latvia should only be hailed as success, when the population trends agree with this statement.

Data from World Bank

Bottom Line: When discussing the success of austerity measures, economic growth might be the goal - but policies should not be hailed as success when some indicators tell a different story.

* Please comment on these posts from my growth & development economics students, to help them with unclear analysis, other perspectives, data sources, etc.