I despise the institution of tipping for service.  There’s no practical way to escape it (obviously no decent person will stiff a waiter in the service of a principle), it’s degrading to people who are no more “servants” to me in a restaurant than I am to my students, the “expected” tip has been increasing as a percentage of the tab for no reason (because its a percentage, inflation is automatically covered already), and in some contexts (like New York garages and apartment houses) it’s only slightly above extortion.  Furthermore, it’s an invitation to tax evasion.

Here’s the beginning of a worthy trend: some high-end restaurants here are just putting a stop to it, and apparently to everyone’s approval.  Now we just need to increase the menu prices 20% and have done with the whole mess.  I like charging extra for checked bags on an airplane; why should people without bags pay to schlep mine across the country?  But having dinner put on your table is not an optional part of dining in a sit-down restaurant.  Roll it all up together and have done with it; let management manage things like salaries, training, and working hours.

Nudgefail: The Case of Organ Donation

Behavioral economics is cool science with numerous applications. The concept of nudges, for example requiring newly hired workers to sign a form to stop automatic retirement contributions rather than having to sign a form to start them, is certainly useful in many contexts. But as I write in Washington Post’s Wonkblog, it can’t solve some problems, including the shortage of organ donations, which leaves over 120,000 Americans on the waiting list:

One commonly proposed solution to the organ shortage derives from behavioral economic “nudge” principles. Rather than requiring Americans to complete paperwork in order to opt-in to donation at death, the country could shift to the European model of presuming that donation at death was acceptable. But Tom Mone, chief executive of OneLegacy, the nation’s largest organ and tissue recovery organization, points out that “The recovery rate for deceased donors in the United States is actually better than that of European nations with presumed consent laws. The United States rigorously follows individual donor registrations whereas presumed consent countries actually defer to family objections.”

What this means on the ground, as Tom explained to me and our audience at a recent Stanford Health Policy Forum, is that when European health professionals show up to harvest organs from a newly dead individual, that person’s family often says “no way”, nudges be damned. The state could legally take the person’s organs by force of course, but unsurprisingly it does not. In contrast, in the US opt-in model, both families and the state respect the deceased donor’s wishes because they know they were the result of a proactive decision rather than a bureaucratically-designed nudge. More simply, an active choice has legitimacy that a nudged choice does not

Hundreds of thousands march for Pigou

There were lots of great signs at the People’s Climate March yesterday. But for RBC readers, I’ll showcase this one:

Sign from the People's Climate March, New York, September 21, 2014: Pay to use my air as your sewer: Carbon Tax I don’t know who’s responsible for popularizing the term “carbon pollution.” But it’s the rare political catchphrase that’s both tremendously effective and perfectly accurate. There was plenty of idealism (and of course a bit of wackiness) at the march. But at root, the core message is Micro 101:

Negative externalities should be taxed. And as a—poor, but politically necessary—second choice, they should be regulated.

Mr Smith goes to Katoro

Mark rightly gives points to Gordon Brown for providing arguments for Scotland to stay in the Union (as it in the end chose to do) based on principle and sentiment, not merely interest. Contrast the absence of Tony Blair, junketing with Davos Man (or worse) and Menton Girl  somewhere sunnier than Scotland. Brown’s argument was based on shared battlefields and domestic glories like the NHS rather than Hume and Hutton. But it was fair of Mark to say that it reflected the cosmopolitan, outward-looking values of the Scottish Enlightenment. Its leading lights, apart from Burns, were SFIK all Unionists and anti-Jacobites. The mathematician Colin McLaurin actually supervised, though unsuccessfully, the defence of Edinburgh against the Jacobite army rampaging its way south. The Scots’ combination of physical courage, industry, and respect for learning have made the world their oyster.

So here’s a small salute to the whole gang, represented by Adam Smith, Professor of Moral Philosophy at Glasgow University. (Scotland had four universities by 1600 to England’s two). His best known sentence must be this, from Book I, Chapter 2 of The Wealth of Nations:

It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.

(The website is libertarian. They might try reading a bit more of him; he isn’t Rand at all.)

Perfectly illustrating the point, here’s very nice and cheering photograph of Mr. Edward Buta’s flourishing solar shop in Katoro, Tanzania (pop. 11,925). (H/t Tim McDonnell at Mother Jones.)

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Bravehearts and canny widows

Whichever way the Scots vote on Thursday – and at the moment it’s too close to call – the old Union is dead. Even if the Noes win, a constitutional settlement that is supported by only 51% of the people of one of the component countries of the United Kingdom is only surviving on life support.

Cameron, Miliband and Clegg, in a last-ditch attempt to save the Union, have jointly offered a major constitutional change with more devolution. Tinkering with a constitution is like removing one strut from the Eiffel Tower, you can’t stop with one piece. Why should Scottish Westminster MPs vote on English income tax? Before you know it, you are revising the entire structure.

That in fact is my eccentric reason for hoping for a No vote. It would force a proper constitutional house-cleaning in the United Kingdom. There would be a good chance of getting rid of the mumbo-jumbo about Crown privilege behind which unaccountable agencies like GCHG can shelter. The museum-piece House of Lords could be replaced by a Council of Nations like the German Bundesrat, with blocking powers on matters affecting the autonomous sphere of Scotland, Wales and Northern Ireland. The catalogue of human rights in the Human Rights Act could be raised, as everywhere else in the civilised world, to its proper level as a constitutional, not merely legislative, guarantee.

George Monbiot, the always interesting and often infuriating Guardian pundit, argues the other way. He thinks that Westminster is so corrupt and plutocratic that the Scots need independence to have a chance of clean democracy. Besides, he hopes that the shock and example would trigger an English movement for real constitutional reform.

Whatever, the impact on England has approximately zero weight in the decision of the Scots. The nationalists have, it is now clear, not done their homework on the economic impacts, especially the currency question. That’s being charitable. See Mark Carney, Paul Krugman, and Simon Wren-Lewis on this. The No campaign, led by the former Chancellor of the Exchequer Alistair Darling, has concentrated on the large economic risks. True enough, but by abandoning the terrain of emotional identification to the Yes side, they have defined the choice as one between the reckless courage of Wallace and the dour calculation of the Duke of Queensberry in 1707. Not surprisingly, men favour Yes and women No.

But what flag-waving appeal could have worked? Part of the deal for the Scots in 1707, after the failure of their own colonial venture in Darien, was to join in England’s imperial and commercial expansion, for glory and profit. They were not cheated on this. Scots played a quite disproportionate part in the British Empire, from its trading-houses to its battlefields. Glasgow became the shipbuilder to Empire. Hong Kong was created by Scots. But that’s gone now. Cameron can still offer occasional battles to the shrunken Scottish regiments; his oath of vengeance on ISIS was not just theatre. But generally, Britain is now just another peaceful European welfare state, cultivating its gardens like Candide. There is no wider vision or ambition to stir Unionist blood, not even building Europe, an unpopular project. So why can’t Scotland be its own cosy welfare state like Denmark or Slovenia? Catalans and Basques are asking the same question, with potentially graver consequences for Spain.

Update 17 September
At LGM, Dave Brockington (an American political scientist working in England) suggests that polls understate the likely No vote, and predicts a fairly comfortable unionist win. The key argument is that the 14% Don’t Knows are likely to break heavily No. It’s not as if they don’t know what the issues are, and if they still have not been convinced by the case for independence, it would be logical for them to support the status quo.

Not invented here

I was just informed, on a public affairs listserv, of this project, aimed at making didactic material in this extremely important field available to students at something like marginal cost.  Hooray for them: the textbook market needs loosening up in many ways. You have to sign up to look inside, but it’s free.  I checked out the second chapter and had a kind of ambivalent reaction. On the one hand, it took what looks to me like a good approach to the material, making the law of demand shed light on a question students could be expected to find considerable on its own terms (why is the West so much richer than everywhere else?).  On the other hand, having asked that question and presenting some different theories about the answer, the chapter does not discuss, nor mention in the “further readings” section, Jared Diamond’s Guns, Germs and Steel,  just books by economists. This is really mystifying to me; I really thought almost every literate person knew this book, certainly anyone who is going to set hand to keyboard about differential national prosperity.
I have been here before, and more than once.  Every discipline has its blind spots, but there seems to be something about economists as a group, even though I have nothing but love and affection for my economist friends and colleagues, and gratitude for all the good stuff I have learned from them.  I can’t count the times, for example, that I’ve asked a young economist, who just presented a paper with a cool regression from actual data showing that government agencies don’t do nearly enough of A to accomplish B, “that’s really interesting! Why do the people in these agencies say they don’t do A?” and triggered a complete deer-in-the-headlights freeze. “You mean, like, ask them?”  How could that poor student’s thesis advisor not have ever told him, “part of being a responsible scholar in our business is to pick up the phone and talk to the people who do what you are studying: lucky you, the entomologists can’t do that!”  A few years ago I gave a talk to a large hall full of cultural and arts economists, and had to do some fast course adjustment when I discovered that no more than two or three were aware of Lawrence Lessig’s work on copyright and digital media. I’m sorry, but in that field, that is like not knowing how to read. The problem, I realized (and yes, I did ask them afterwards) is that Lessig is a law professor, not an economist. (Diamond is an ornithologist and physiologist).

As Yogi Berra said, “a fella can see a lot by just looking.” As he meant, “…and miss a lot by not looking.” When your data and standard methodology doesn’t give you p<.10 confidence that something is a certain way, what do you do…jump out the window? send society to an astrologer for an answer?  You need to get out more, folks. Be like Tom Schelling and Bob Frank: knowing all kinds of different stuff doesn’t seem to have dumbed them down any. And by the way, the most-cited paper ever published in Econometrica was by a pair of psychologists.


Annals of Commerce: seatbacks and clueless executives

I think we are now up to three flights diverted because of tiffs between passengers over reclining seats.  Discussion, in the air and in print, has mostly been in assertive mode: “I paid for this seat and you have no right to recline into it!/I paid for this seat including the  space above your knees; the button is on my armrest!” It goes downhill from there. Ronald Coase is famous for demonstrating that when parties claiming the same resource can negotiate, there’s no efficiency loss by unambiguously assigning the resource to one or the other. What matters for GDP is that either the farmer or the cowboy has the rights, and that they both know which.

He’s not as famous, but should be, for showing that there are a lot more cases where the parties can’t make deals, and government needs to consider, at least in addition to tradition, political power, and the like, ‘who will best use the resource?’.  Government here is the airline company, within some FAA constraints (like ‘no seats that recline into an exit row’), and it seems to me the rules are pretty clear: the ‘seat’ we are renting you is a trapezoidal solid that goes under the one in front and above the one behind you.  United, at least, says it forbids the use of the anti-recline device that has triggered the latest dustups. But it’s not clear that they have the managerial capacity to motivate underpaid, overworked flight attendants supervising a coach section full of angry, surly passengers to implement the policy, and it’s crystal clear that they don’t understand that when passengers start duking it out with each other because the airline has put them in an impossible position, it don’t do the stockholders no good.  It’s very expensive to divert a flight, and probably expensive to deliver a load of furious passengers who had a scary, miserable trip.

The rules worked reasonably well until the seats got so close together that some other stuff that used to be part of the deal disappeared, like the ability to use a laptop on the tray table, or travel with actual knees, when the seat in front came down (did you say “cross your legs?” What are you, some kind of nut?). The big problem here is not an angels-on-a-pinhead pilpul exercise in moral philosophy, it’s that airline company management is a dysfunctional culture mismatched to a competitive environment and to the predictable, known capacities of the customers it sells to, possibly crippled by a general IQ deficiency. Continue Reading…

The Golden Gate Suicide Barrier Makes Economic as Well as Moral Sense

Because September is Suicide Prevention Month, I have written a piece for Washington Post’s Wonkblog describing the evidence supporting the likely benefits of the $76 million suicide prevention nets that will be installed on the Golden Gate Bridge. This was a compassionate policy decision by the Bridge District Board, who were responding to the agony of many grieving families. At the same time, it was economically defensible by any reasonable standard.

Willingness to pay analysis of lifesaving policies strikes many people, including me, as a bit cold around the heart. But it is also informative for weighing public policy choices because we will never have enough money to pay for every conceivable life-saving option. Was the suicide barrier a good investment from that viewpoint?

Austin Frakt has helpfully flagged a a new review in Health Economics of willingness to pay studies supports $98,879 as a reasonable estimate of how much people will pay for an added year of life. Keeping to round numbers for simplicity, let’s call that 100k and also make the reasonable (indeed conservative) round number assumption that, because suicide is most common among the late middle aged population, the average person who takes their own life would otherwise live another 20 years. That gives a back of the envelope assessment that it’s reasonable to pay at least $2 million to avert the typical suicide.

Based on research in this area, the nets on the Golden Gate Bridge can be expected to prevent (i.e., not just shift to another location) a suicide a month, which works out to a $24 million dollar return per year. Note that this estimate is even more conservative than it seems because the Bridge attracts more young adult suicides than do other means of suicide (i.e., they will live more than 20 more years), and, because there is clearly added value in averting the emotional suffering by the loved ones of people who jump from the Bridge.

Again rounding to keep the math simple, this means the investment in the suicide barrier pays for itself in a little over three years and then yields a massive return on investment forever after (If one assumed a million dollars of maintenance a year on the suicide prevention nets after they were installed, their annual economic return would be 2400%). That’s a spectacular return on investment relative to most investments we make in the mental health field.

Another way to appreciate the value of installing the nets, highlighted by Liza Gross, is to compare them to other decisions made regarding the bridge. From that vantage point, the virtue of the decision to install nets is even more obvious:

[The Bridge district] approved toll funds for a $26.5 million median to separate opposing lanes of traffic to prevent head-on collisions. Since 1970, 16 people have died when cars veered into oncoming traffic. Over the same period, more than 70 times as many — at least 1,129 people — have leapt to their deaths.

Ending the Euro: An Impermissible Discussion?

The Eurozone remains an economic basket case, creating neither jobs nor economic growth. The Eurocracy is now abuzz with more policy proposals that will allegedly save the common currency. To this outside observer, the most remarkable aspect of each subsequent round of Europanic is how few policy insiders are willing to revisit the fundamental premise that Europe needs this floundering banknote at all.

Economists have noted that from its conception the Euro was deeply flawed. Giancarlo Corsetti argues that the Eurozone does not actually protect against the “original sin” of borrowing in a foreign currency while ability to pay is in a domestic currency. NYT columnist Paul Krugman puts it more sardonically:

the euro was best understood as a plot by Italian technocrats to get themselves German central bankers.

This was not, it turns out, a good idea.

I am not an economist, but my own discipline of psychology would support another fundamental critique of the Eurozone: it falsely assumes that re-arranging the consequences of and responsibilities for financial decisions would not affect subsequent financial decisions by participants (be they individuals, businesses, elected officials or bankers).

Not incidentally, European economies can prosper without the Euro. Eurozone non-members Sweden, The Czech Republic and The United Kingdom currently have employment and growth levels that put the Eurozone to shame.

But if you talk to many Europeans policy elites and chattering class members, to even broach the possibility of ending the Euro is apostasy. Part of this reaction stems from the usual culprits when a big government program is not working: Sunk costs, inertia and insiders not wanting to lose power and face. But if you dig not far below that, you often find intense emotion that comes from the memory of Europe’s traumatic 20th century.

If I put my Euro-devoted friends’ concerns into a few sentences it would go something like this: “Never again must Europe be divided. History teaches us that ever-greater European unity is all that stands between us and the rise of right-wing populist movements and war.” The more candid ones would add “Restraining Germany’s desire to control Europe is critical for peace”.

We should learn from history, including its horrors, but this argument doesn’t hold together. First, far-right populist political parties are doing well across the Eurozone, and the Euro’s economic squeeze is part of the fuel that feeds them. Second, abandoning the Euro would still leave intact the European Union, which ties together its member states in many profound ways that increase interchange, understanding and the prospects of enduring piece. Third, Europe attained over a half century of peace before the Euro was created. Last, in terms of fear of German domination, could anyone in Italy or Spain or Greece give a speech with a straight face arguing that the Euro is lessening German influence in those countries?

I have neither sufficient knowledge nor expertise to be certain that the Euro should be abandoned. But I am quite sure that reflexive, strident refusal to even allow that option to be seriously discussed is a disservice to the continent’s interests.

Ruling Against the NCAA

A federal judge ruled against the NCAA in the so-called Ed O’Bannon case, opening the way for players to share in licensing revenue (the use of their image and likeness on TV, etc) above the cost of attending college (what can be covered by a scholarship). The most consequential points:

In a 99-page opinion, U.S. District Judge Claudia Wilken issued an injunction that will prevent the NCAA “from enforcing any rules or bylaws that would prohibit its member schools and conferences from offering their FBS football or Division I basketball recruits a limited share of the revenues generated from the use of their names, images and likenesses in addition to a full grant-in-aid.” Wilken said the injunction will not prevent the NCAA from implementing rules capping the amount of money that may be paid to college athletes while they are enrolled in school, but the NCAA will not be allowed to set the cap below the cost of attendance. (my emphasis)


The injunction will also prohibit the NCAA from “enforcing any rules to prevent its member schools and conferences from offering to deposit a limited share of licensing revenue in trust for their FBS football and Division I basketball recruits, payable when they leave school or their eligibility expires,” Wilken wrote. Her injunction will allow the NCAA to set a cap on the trust fund at less than $5,000 in 2014 dollars for every year an athlete remains academically eligible to compete. The money would be payable to athletes upon expiration of their athletic eligibility or graduation, whichever comes first. She ruled schools could offer lower amounts of compensation if they want, but they can’t “unlawfully conspire with each other in setting these amounts.”

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