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Brooks Wilson's Economics Blog: April 2012

Wednesday, April 25, 2012

Susan Sarandon

In Capitalism and Freedom, Milton Freidman penned the then controversial but now status quo thought on the relationship between economic freedom and political power.

Viewed as a means to the end of political freedom, economic arrangements are important because of their effect on the concentration or dispersion of power. The kind of economic organization that provides economic freedom directly, namely competitive capitalism, also promotes political freedom because it separates economic power from political power and in this way enables the one to offset the other.

Competitive capitalism may have created a third power, celebrity.  People with high profiles that evolves into public fascination gain celebrity status.  Michael Jordan has it, Karl Malone who had more points, more rebounds and almost as many assists did not.  Barak Obama has it and Mitt Romney does not.

Susan Sarandon has managed to turn her celebrity into political power and has brought attention to many causes she has supported over the years, but that celebrity has hit a political wall.  A friend of democrats and the left, she claims that she has been subject to government surveillance and that she has been a denied clearance to visit the White House.  I will assume that the her claims are true. 

Celebrity does not usually translate to expertise and my libertarian leanings often put me on different sides of causes that she has supported but I am mystified as to the threat she posses to the government.  As Voltaire taught, “I may not agree with what you say, but I will defend to the death your right to say it.”

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Tuesday, April 17, 2012

Jay on Cohabitation

Meg Jay’s article on cohabitation (“The Downside of Cohabiting Before Marriage”) is a great illustration of the use of the scientific process.  I believe that reading and understanding it is a good investment of time and effort, particularly for a young person considering cohabitation.  Jay begins with an observation.  Beginning in 1960, there has been a tremendous increase in cohabitation.  Currently, 7.5 million people live together without marriage and half of all marriages will be preceded by cohabitation. 

An observation is followed by questioning and measurement.  A survey of young adults found that two thirds believed that cohabitating before marriage was a good way to reduce the probability of divorce.  This belief is contradicted by experience as measured by research.  Cohabitating prior to a commitment to marry increases the probability of divorce.

A hypothesis is formed to explain the higher divorce rate of cohabitors: the population of cohabitors was different than the population as a whole; they were less bound by social norms and therefore both more likely to cohabitate and divorce. As cohabitation became the norm and the result that divorce rates among cohabitors remained higher, other hypotheses were needed.  One was that cohabitation itself introduced risk to a marriage following cohabitation. 

Jay describes the new hypothesis.

Moving from dating to sleeping over to sleeping over a lot to cohabitation can be a gradual slope, one not marked by rings or ceremonies or sometimes even a conversation {This is called sliding into cohabitation]. Couples bypass talking about why they want to live together and what it will mean.

WHEN researchers ask cohabitors these questions, partners often have different, unspoken — even unconscious — agendas. Women are more likely to view cohabitation as a step toward marriage, while men are more likely to see it as a way to test a relationship or postpone commitment, and this gender asymmetry is associated with negative interactions and lower levels of commitment even after the relationship progresses to marriage. One thing men and women do agree on, however, is that their standards for a live-in partner are lower than they are for a spouse.

Sliding into cohabitation wouldn’t be a problem if sliding out were as easy. But it isn’t. Too often, young adults enter into what they imagine will be low-cost, low-risk living situations only to find themselves unable to get out months, even years, later. It’s like signing up for a credit card with 0 percent interest. At the end of 12 months when the interest goes up to 23 percent you feel stuck because your balance is too high to pay off. In fact, cohabitation can be exactly like that. In behavioral economics, it’s called consumer lock-in.

Lock-in is the decreased likelihood to search for, or change to, another option once an investment in something has been made. The greater the setup costs, the less likely we are to move to another, even better, situation, especially when faced with switching costs, or the time, money and effort it requires to make a change.

I might add that I am more likely to like any research that picks up an idea used by economists. 

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Monday, April 16, 2012

Florida and Welfare Reform

Florida passed a law requiring applicants for welfare to take a drug test.  Applicants pay for the test but those who pass are reimbursed by the state.  Applicants found using drugs would be ineligible for welfare for a year although the children of the drug users would still be eligible through a third party.  Since the state began testing in July, 96% of the applicants were drug free.  Another 2% were disqualified for using drugs and the remaining 2% were not completing the application process for unknown reasons. 

Based on these numbers, Catherine Whittenburg (“Welfare drug-testing yields 2% positive results”) calculates the cost of testing versus the estimated savings in welfare payments to taxpayers. 
Cost of the tests averages about $30. Assuming that 1,000 to 1,500 applicants take the test every month, the state will owe about $28,800-$43,200 monthly in reimbursements to those who test drug-free.
That compares with roughly $32,200-$48,200 the state may save on one month's worth of rejected applicants.
The savings assume that 20 to 30 people -- 2 percent of 1,000 to 1,500 tested -- fail the drug test every month. On average, a welfare recipient costs the state $134 in monthly benefits, which the rejected applicants won't get, saving the state $2,680-$3,350 per month.
But since one failed test disqualifies an applicant for a full year's worth of benefits, the state could save $32,200-$48,200 annually on the applicants rejected in a single month.
Net savings to the state -- $3,400 to $8,200 annually on one month's worth of rejected applicants. Over 12 months, the money saved on all rejected applicants would add up to $40,800-$98,400 for the cash assistance program that state analysts have predicted will cost $178 million this fiscal year.
I like Whettenburg’s “back of the envelope” calculations and I have some thoughts but reach no conclusions.  Utilitarians and libertarians might find the savings insufficient to justify the cost in terms of return on dollars invested or government intrusion in private lives but I doubt that typical taxpayers would come to the same conclusion based on classroom experiences.  While covering the composition of federal, state, and local budgets in class, students frequently suggest that tax payers could save billions of dollars by eliminating welfare fraud. One time this happened, I decided that it was a good time to bring up the principle of tradeoffs. Fraud can be eliminated but at a cost. I took an informal survey of students and found that they view welfare fraud as being so morally reprehensible that they would increase payments for enforcement even if the cost of enforcement exceeded the reduction in welfare due to fraud. I repeated the survey in several other classes and found the same result. 

The reported statistics may miss important costs and benefits.  Potential applicants who use drugs will self-select out.  Why put up the money for the test if you are not going to pass?  The number of applicants should decline.  These non-applicants still need money.  Some will engage in or increase their participation in prostitution, illegal drug sales, and other criminal activity to support their drug use.  While a taxpayer may dismiss the cost of drug use on the user, it is more difficult to ignore the impact on the users’ children and the victims of their crime.  Other non-applicants might give up drugs to qualify for government assistance. 
Many economists have found that taxpayers in ethnically diverse communities are less willing to pay welfare than taxpayers in homogenous communities.  Raghuram Rajan summarizes this view in “Fault Lines” (page 95).
We should also not minimize the importance of population heterogeneity.  “There but for the grace of God go I” offers a powerful rationale for social insurance.  People are more willing to be taxed to benefit others if they believe that the benefits go largely to people like themselves, and not disproportionately to groups they do not identify with.  This may also explain why Americans give generously to charities: they have more control over who the beneficiaries are.  Politicians who want to derail benefits legislation have often been quick to raise the specter of hard-earned taxpayer money going to the undeserving, irresponsible, and lazy, and such demagoguery is especially potent when the bogeymen look and behave differently from their constituents.
By demonstrating that welfare recipients are not drug users, taxpayers in heterogeneous communities may ironically be more willing to fund welfare programs.  Requiring welfare applicants to pass a drug test will create many interesting questions for economists to answer in their research. 

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Monday, April 2, 2012

The Health of Manufacturing in the United States

Many Americans believe that our manufacturing sector has all but disappeared.  The graph shows that the belief is wrong.  The horizontal axis measures time from 1992 to February 2012.  The left vertical axis measures manufacturing in dollars and the right, as an index in which the January, 1992 level of manufacturing equals 100.  Other than periods of recession, manufacturing has grown. 
Steve Chapman (“Manufacturing an Economic Myth”) does a good job explaining the myth that our manufacturing sector is in decline. 
The first is that it's not declining in the ways that matter. Compared to1990, the total value of U.S. manufacturing output, adjusted for inflation, was up by 75 percent in 2010 -- despite a drop caused by the Great Recession.
It has declined as a share of gross domestic product only because other industries have expanded even more rapidly. Economist Mark J. Perry of the University of Michigan-Flint points out that in 2009, the total value of America's manufacturing output was nearly 46 percent greater than China's. Over the past two decades, our share of the world's manufacturing has been pretty stable.
The decline in the number of manufacturing jobs is taken as evidence that the sector is sick or uncompetitive or the victim of unfair trade practices. In reality, the change indicates sound health. Our manufacturing workers have become so much more productive that they can churn out more goods with a far smaller workforce.
I recommend the entire article.

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