Dan Ariely for the Holidays

No this isn't another plug for Dan's book or about his most recent post on gift giving. It is a plug to see Mr. Ariely in person. Except instead of a lecture hall, it will be at a comedy theater. That's right, behavioral economist,  author, and blogger Dan Ariely will be the special guest monologist December 17th for DSI's flagship show, Mister Diplomat. Improv. Economics. Me. What more could you ask for?

Economics of Social Safety Nets

Food stamps, unemployment, Emergency Rooms, Medicaid, disability checks are just a few of the social safety nets that most industrial countries have. They exist to ensure the "least of these" have some basic living standard provided by the government. Many economists, myself included, complain about the inefficiencies these incentives can create. But what if instead of government distortion of the free market, this is just a correction of it. What if the welfare state is genetic insurance?:

Back before you were born--in fact, before you were even conceived--nobody knew you were going to develop into the sort of sophisticated individual who reads Slate. For all anyone knew, you might have been born without enough skills to boot up a computer--or to earn a decent living.

If your unborn soul could have bought an insurance contract, then you'd probably have snapped up some kind of "skill insurance" in which everybody pays premiums, and those who land in the shallow end of the gene pool split the pot.

If this did exist, just how much insurance (or how much safety net) would there be? You'd have to know the risk of being poor and the difference between the rich and the poor. Once you know that, then you know what percentage of the population should be getting assistance:

If you take the insurance metaphor seriously, then 23 percent of the population--the 23 percent with the fewest skills--should be permanently unemployed and on welfare.

Based on those numbers the welfare state should be bigger. That is, unless, you take into account the inefficiencies created:

Factor that into the equation, redo the calculations, and you end up concluding that the fraction of the population on welfare should be just 0.6 percent--in other words, practically zero.

Economics of Native American Stereotypes

In honor of my full stomach from two Thanksgiving dinners (two more to go tomorrow) I ask this question: What factor determines how historically authentic Native American tribes portray themselves? You might think it's how much time they spend with other tribes. It's actually the opposite, it's the tourists:

The framing analysis found that nearly 4 out of 10 tribes with casinos represent their own identities using the historic relic frame—primarily relying on the exotic Other, such as tepees and stoic chiefs in headdresses, locked in the past. In contrast, only 1 in 10 of the tribes without casinos communicates the same identity, instead being more likely to display a voiced participant frame of modern images and assertions of sovereignty and resistance.

Happy (Economics of) Thanksgiving

Worthwhile Sentences on Political Commentary

From moderate David Brooks: "Democratic victories are always ascribed to hope; Republican ones to rage."

From the Economic Logician: "Many see the Great Recession, as it is now called, as a dual crisis: an economic crisis and a crisis of economics, and more specifically macroeconomics."

From Professor of Shakespeare Peter Saccio: "Shakespeare and Sarah Palin have two things in common. One, they both tend to make up words. Two, half the country can't understand what the other half of the country thinks is so great about them."

From the Seattle Times: "There are no small-government disciples in massive oil spills."

From New York Magazine: "If you can't beat it, the thinking goes, yell at it."

Collusion in the Classroom

Recently due to a field trip, my AP Microeconomics class was cut down to just a handful. So instead of treading forward without most of the class, I decided to introduce the perfect board game, Settlers of Catan. It shows first hand some important economic principles: changes in price due to scarcity, gains from trade, and as I found out, how to collude. The first time I played with the students I won. Not necessarily a huge feat since none of them had played before and I've certainly spent enough time playing online. However they called for a rematch and I was happy to oblige them one day after school. Again I took an early lead and was close to wrapping up my second victory.

Near the end of the game I got distracted by a phone call from a friend of a friend asking about the Clemson economics program. Suddenly, one of my students came from behind to win the game. So suddenly in fact that I suspected a little foul play. After packing up the game the students let me in on their plan. I'll paraphrase their excited words. "Mr. Brookie we worked together! I traded what she wanted, we put the robber on you, AND we gave her our bonus points! We did that thing you talked about in class. We colluded!" As the regulator, it was important for me to not to get distracted. Then again, at least I know they're learning.

Difference Between Humans and Animals, Part XIII

Last time I highlighted something humans can't do. Well here's awesome stuff from us humans:



Here's earlier parts one, two, three, four, five, six, seven, eight, nine, ten, eleven, and twelve.

Science of the Gold Standard

President Harry Truman once asked why you would ever want "a system in which you pay people to dig things out of the ground and then bury them in the ground again?" NPR's Planet Money asked a similar question in a recent podcast in which they give an element by element breakdown of why gold has been used for thousands for years as the medium exchange all over the world. For obvious reasons the unit of exchange shouldn't be a gas, corrode, explode, too rare, or kill you. Those simple requirements eliminate 116 of the 118 elements, leaving just platinum and gold. And unless you have a furnace that can heat up to 3,000 degrees, you can't melt platinum. So out of all the elements, gold is the clearly the best to use as a standard. Well, that is, except for trust.

Emptying the Bottle: Late-November '10 Links

Here is a list of the worthwhile sites I've Bookmarked recently:

• Looks like the Republicans are adding free trade to their fear list (earlier).
• Cartoonizing lectures in real-time. I want this for my lectures (earlier).
• Reporter turned blogger turns back (earlier).
• Defense of payday lending [video] (earlier).
• Augmented reality greeting cards and business cards [videos].
• Controversial TSA security looks better when you look at airplane terrorism before 9/11.
• Congressmen refuse to be on Appropriations Committee. Bad news for debt. (earlier-er).
• Question and answer about quantitative easing.
• Those who make a living off corporate sponsorships should buy disgrace insurance.
• From me: New (Smaller) Take on a Classic Gag from the Mister Diplomat blog.

As always, feel free to email me anything interesting you come across.

Pre-Paying Volunteers or Economists

About a month ago I got a letter in my box at school asking me to take a survey. It was from the Educational Research Associates. I hadn't heard of them, but on the web their name was regularly associated with "individualized instruction". The idea seems to be a push away from lecture oriented learning and towards alternative instructional methods (audio, video, computer-assisted instruction) freeing the teacher to focus on individuals needs. Though that idea seems very appealing to someone who uses the crude method of talking fast to get through the vast amount of information required for most subjects, it wasn't the most interesting part of the letter. This was:

That's the letter and one dollar. At the very bottom of the letter you can read why they attached a dollar. It was to encourage, or should I say guilt, me into taking the survey. Before I tell you whether I took it or not, let me share some research:

The students made 50 decisions about giving. In some cases students started with $10, and for each dollar they gave up, their (anonymous) partner in the game would get, say, $5. In this case, giving was "cheap." In others, giving was expensive (each dollar given up yielded only 20 cents for the partner).

Someone who gives a lot when it's cheap and keeps most of the pie for himself when giving is expensive focuses on efficiency: He's making sure the maximum amount is paid out to him and his partner combined. Someone who keeps 80% of the pie when it would be cheap to give is more focused on equality. Someone who always keeps everything, regardless of the price of giving, is just plain selfish, the very embodiment of the rational, self-interested Homo economicus.

It turns out that exposure to economics makes a big difference in how students split the pie, in terms of both efficiency and outright selfishness. Students assigned to classes taught by economists were more likely to give a lot when it was cheap to do so. But they were also much more likely to take the whole pie for themselves.

Here's some more:

A substantial body of research suggests that economists are less generous than other professionals and that economics students are less generous than other students. We address this question using administrative data on donations to social programs by students at the University of Washington. Our data set allows us to track student donations and economics training over time in order to distinguish selection effects from indoctrination effects. We find that economics majors are less likely to donate than other students and that there is an indoctrination effect for non-majors but not for majors.

There some evidence that this may be a selection effect, but I'm skeptical. Tim Harford does a decent job defending economists, but I'm not sure it will convince everyone. So back to the original question, what do you think, did the $1 bribe work? Or did I take the money and run? The latter. I didn't take the survey. Here's a couple reasons why: 1) I spent the money on "generous jeans Friday", which donates the money to needy students for graduation robes, field trip fees, etc. Perhaps that was enough to silence my conscience. 2) Maybe the bribe itself kept me from completing it. Like my previous post on paying donors to give blood, maybe the low price made me think my input wasn't that valuable. 3) Maybe I'm just not your normal teacher.  When I went to look at the site just now all I saw was this message:

Thank you for accessing the World Geography Survey. We have had an overwhelming response and the field time is now closed. We hope you will consider participating in the future.

Thank you for your interest.

Apparently the average teacher hasn't taken enough economics. Or maybe I've taken too much.

I Fixed the Deficit!

Even though it seems most Americans don't care about the deficit, I've talked plenty about it. How our government's debt is the fault of every president of the last 80 years and how it  may be a small problem now, but could turn into a big problem if nothing is done. I mostly proposed more immigration and economic growth as the main ways to ensure fiscal stability. However, the New York Times recently created a Budget Puzzle interactive graphic that lets you cut or tax (you have to do both) what you'd like in order to balance the budget in 2015 and 2030. I tried it out and was surprised how easy it was.

The federal budget was balanced by only increasing the Social Security retirement and Medicare eligibility age to 68, reducing the tax break for employer-provided health insurance, capping Medicare growth starting in 2013, enact medical malpractice reform, cut troops in Iraq and Afghanistan in half by 2013, reduce the size of the other  military to pre-Iraq level, eliminating loopholes in the income tax, ending farm subsidies, measuring inflation more accurately, and returning the estate tax to Clinton-era levels (although I also cut foreign aid and eliminated earmarks just for the fun of it). I didn't even have to change the Bush tax-cuts or payroll tax. I even refrained from the personally preferred carbon tax. Here's a link to exactly what I did. Now go and try it yourself, especially if you're a member of Congress.