The Undercover Economist Part 11

Chapter 2

I worked out the premium on Fair Trade coffee using the Cafedirect website, http://www.cafedirect.co.uk/fairtrade/gold_prices.php. The exact premium depends on the type of beans and on the world price. (Cafedirect guarantees a minimum price, so when the world price is particularly low the premium rises.) For more discussion of the fair trade coffee market, see Tim Harford, "Fair Trade Coffee has a Commercial Blend," Financial Times, September 12, 2003, 15.

For more on Amazon.com's "money on" vouchers see "Keeping the customer satisfied," The Economist, July 14, 2001.

Hal Varian is always insightful on the subject of price targeting. The model of price targeting through periodic sales is detailed in Hal. R. Varian, "A Model of Sales," American Economic Review 70, no. 4 (September 1980): 65159. Varian's textbook, Intermediate Microeconomics, 4th ed. (New York: W. W. Norton, 1997) covers the subject extensively, including the quotation about French railroads, which comes from Emile Dupuit, an eighteenth-century French economist, translated by R. B. Ekelund, "Price Discrimination and Product Differentiation in Economic Theory: An Early a.n.a.lysis," Quarterly Journal of Economics 84 (1970): 26878. The amazing stories of price discrimination in hi-tech goods are from Hal Varian and Carl Shapiro, Information Rules (Cambridge, MA: Harvard Business School Press, 1999), 59.

I learned why popcorn costs so much at the movies by reading Steven Landsburg's Armchair Economist (New York: Free Press, 1993), and why wine costs so much at restaurants in discussion with my former colleague Bill Sjostrom.

Chapter 3

Discussions of Was.h.i.+ngton DC's baseball stadium are not in short supply, but see for example: "Was.h.i.+ngton DC asks for private stadium funding," Sports Ill.u.s.trated, December 23, 2004, http://sportsill.u.s.trated.cnn.com/2004/baseball/ mlb/12/23/roundup.thursday.ap/; "Baseball's coming back to Was.h.i.+ngton," Was.h.i.+ngton Post, September 30, 2004, http://www.was.h.i.+ngtonpost.com/wp-dyn/ articles/A60095-2004Sep29.html; and Dennis Coates, "The DC Baseball Stadium Sideshow," Was.h.i.+ngton Post, November 7, 2004, http://www.cato.org/dailys/1112-04.html.

The Wilt Chamberlain example is from Robert Nozick's Anarchy, State and Utopia (Oxford: Basil Blackwell, 1974).

Other sources for statistics: Rockefeller being the only man to pay the top rate of tax, from Cato Policy a.n.a.lysis no. 192, http://www.cato.org/pubs/pas/pa-192.html.

The number of deaths of the elderly due to cold, from Age Concern, press release, March 7, 2003.

Chapter 4

Many of the statistics on the costs of congestion and pollution, especially in the United Kingdom, are David Maddison, David Pearce et al., Blueprint 5: The True Costs of Road Transport (London: Earthscan Publications, 1996).

The impact of environmental taxes on different groups in Britain, such as the poor or rural residents, is discussed in Blueprint 5 with figures from Johnson et al.; "The Distributional Consequences of Environmental Taxes," Inst.i.tute for Fiscal Studies Commentary 23 (1990): 55; and S. Smith, "The Distributional Consequences of Taxes on Energy and the Carbon Content of Fuels," European Economy Special Edition (1992). A separate, more recent, study focused on London is Ian Crawford's The Distributional Effects of the Proposed London Congestion Charging Scheme (briefing note, no 11, Inst.i.tute for Fiscal Studies, Oct. 2000), http://www.ifs.org.uk/consume/gla.pdf. Distributional consequences in the United States are explored by Howard Chernick and Andrew Reschovsky, "Who Pays the Gasoline Tax," in the National Tax Journal 50, no. 2 (June 1997): 23359. More recent data, telling a similar story, are available for some states-for example, Texas, at http://www.window.state.tx.us/taxinfo/incidence/table33_66.html.

For a fairly technical review of estimates of the value people place on their own lives, see Kip Viscusi and Joseph Aldy, The Value of Statistical Life: A Critical Review of Market Estimates Throughout the World (AEI-Brookings Joint Center for Regulatory Studies, Related Publication 03-02, Jan. 2003), http:// www.aei.brookings.org/publications/abstract.php?pid=305.

I learned about the Camelback houses from David Friedman, Hidden Order (New York: HarperBusiness, 1997), 91; and the window tax from David Smith, Free Lunch (London: Profile Books, 2003), 148.

On tradable permits in the United States, see Paul L. Joskow, Richard Schmalensee, and Elizabeth Bailey, "The Market for Sulfur Dioxide Emissions," American Economic Review 8, no. 4 (Sept. 1998): 66985. The Chinese program is explained in "A Great Leap Forward," The Economist, May 9, 2002. For a design intended to work on a global level see Peter Cramton and Suzi Kerr, "Tradeable Carbon Permit Auctions" (working paper, University of Maryland, 1998), http:// www.market-design.com/files/98wp-tradeable-carbon-permit-auctions.pdf. Paul Klemperer, the auction designer who features in chapter 7, helped to design an auction for the United Kingdom government to kick-start their program of tradable emission permits.

Anyone doubting my statement that "economists have long been in the forefront of a.n.a.lyzing environmental problems" will be surprised to hear that one of the first environmentalists was also one of the first and most famous economists, Thomas Malthus, whose study of overpopulation was published in 1798. ("An Essay on the Principle of Population" (London: Murray). Only slightly less famous is the inspiration for this entire chapter: Arthur Pigou, professor of economics at Cambridge University, whose seminal book The Economics of Welfare (London: Macmillan, 1920) developed the theory of externalities and the solution of externality pricing. Some readers may also doubt my claim that economists don't care much about GDP. Consider then, this quotation from Steven Landsburg's The Armchair Economist (New York: Free Press, 1995, 13536), which is a characteristically elegant explanation of what most economists believe: The gross national product is the most frequently reported measure of general economic well-being. As such, it has some obvious deficiencies. It counts the value of all goods and services produced in the economy, but not the value of time spent relaxing on the beach. . . . Another deficiency is that increased output of goods and services can be either a good or a bad thing. A construction boom that creates thousands of desirable new houses is a good thing; a construction boom that replaces thousands of old houses destroyed by a hurricane consists of running as fast as possible just to stay in one place. The GNP counts them equally.

Other sources for statistics: Deaths in the United States caused by particulate matter, from EPA brochure, Diesel Exhaust in the United States, http://www.epa.gov/otaq/retrofit/doc.u.ments/ 420f03022.pdf.

The tax bill paid by British drivers from D. Newbery, "Fair and Efficient Pricing and the Finance of Roads" Proceedings of the Chartered Inst.i.tute of Transport 7, no. 3, 1998, cited in G. Roth, "Road Pricing in a Free Society," Economic Affairs, December 1998. The tax bill paid by American drivers from the US Department of Transportation, http://www.fhwa.dot.gov/ohim/2000hfbt.pdf.

The effect of London's congestion charge on traffic levels is described in "Congestion Charging Six Months On," Transport for London, October 2003.

Chapter 5

The cla.s.sic article on lemons and asymmetric information is George Akerlof, "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," Quarterly Journal of Economics (August 1970). Akerlof 's book An Economic Theorist's Book of Tales (Cambridge: Cambridge University Press, 1984) contains many of his most interesting papers up to that date-not only the lemons paper but, for instance, economic theories of the caste system.

In conversation, John Kay has made me realize that the explanation of bad restaurants in tourist traps is more subtle than it appears. Tourists can, of course, tell the difference between an upscale and a downscale restaurant, just as in the market for cars, buyers can tell a Ferrari from a Ford. But in both cases, the ignorant buyers cannot tell good from bad within the obvious categories: there are good burger joints and bad ones, and even Ferraris, when secondhand, are likely to be lemons.

Data on health-care spending in different countries is from David M. Cutler, "A Guide to Health Care Reform," Journal of Economic Perspectives 8, no. 3 (1994): 1329; Cutler also reports on the survey of satisfaction with health-care systems carried out by Karen Donelan, Robert Blendon, Cathy Schoen, Karen David, and Katherine Binns: "The Cost of Health System Change: Public Discontent in Five Nations," Health Affairs 18, no. 3: 20616. The responses are: "On the whole, the health system works pretty well, and only minor changes are necessary to make it work better" (these are the respondents I described as "content"); "There are some good things in our health-care system, but fundamental changes are needed to make it work better"; "Our health-care system has so much wrong with it that we need to completely rebuild it."

The World Health Organization website provides a rich resource on European health systems, http://www.euro.who.int/observatory/hits/20020525_1, while the WTO's World Health Report 2000 provides detailed statistics on the cost of public and private health care across the world.

The cost of the American health-care system to taxpayers is a.n.a.lyzed by S. Woolhandler and D. Himmelstein, "Paying for national health insurance-and not getting it," Health Affairs 21 (August 2002): 8898, and administrative costs are from Harvard Medical School press release, "New England Journal of Medicine Study Shows U.S. Health Care Paperwork Cost $294.3 Billion in 1999 Far More Than in Canada," August 20, 2003, http://www.hms.harvard.edu/news/releases/ 0820woolhimmel.html. The US Census Bureau (2003) measures coverage of the American health system: http://www.census.gov/Press-Release/www/2003/cb03154.html.

On the controversy over treatment for macular degeneration, see the RNIB's views at http://www.rnib.org.uk/campaign/agemacdegen.htm, and those of NICE at http://www.nice.org.uk/article.asp?a=37590. In September 2003, NICE eventually recommended the use of the treatment in certain circ.u.mstances, but the British government delayed implementation. At the time of writing, the treatment is still not widely available. My point is not to attack a specific ruling of NICE but to show that their methodology will inevitably produce results that make patients very unhappy.

The Leksell Gamma Knife is discussed in Honolulu Star Bulletin, May 25, 2001 http://starbulletin.com/2001/05/25/news/index.html; Steve Goetsch, San Diego Gamma Knife Center, http://www.medphysics.wisc.edu/medphys_docs/seminars/ goetsch.html.htm; Hawaii Business, http://www.hawaiibusiness.cc/hb72001/ default.cfm?articleid=26; and BBC Online News, September 8, 1998, http:// news.bbc.co.uk/1/hi/health/166993.stm. The Gamma Knife is manufactured by Elekta (www.elekta.com).

The Singaporean health system is described by T. A. Ma.s.saro and Y. Wong, Medical Savings Accounts: The Singapore Experience, National Centre for Policy a.n.a.lysis report, no. 203 (April 1996), http://www.ncpa.org/studies/s203/ s203.html; and R. Taylor and S. Blair, "Financing Health Care: Singapore's Innovative Approach" http://rru.worldbank.org/PublicPolicyJournal/ Summary.aspx?id=261.

Chapter 6

The a.n.a.lysis of the balance between efficient markets that don't encourage information gathering and inefficient ones that do is by S. J. Grossman and J. E. Stiglitz, "On the Impossibility of Informationally Efficient Markets," American Economic Review, 70, no. 3 (June 1980): 393408. The shopping cart a.n.a.logy is David Friedman's idea, from his book Hidden Order (New York: HarperBusiness, 1996), 9.

Keynes's characterization of the stock market as a beauty contest is in J. M. Keynes, General Theory of Employment, Interest and Money (London: Macmillan, 1967), 156. Irving Fisher's misplaced optimism was recorded in The Stock Market Crash-and After (New York: Macmillan, 1930).

The sad story of Tony Dye is told by the Times (London), "Dye is cast out but strategy remains," March 3, 2000, and The Guardian, "Vindication for Dye as P&D fund wins top spot," July 20, 2000.

The most famous bullish book was James Gla.s.sman and Kevin Ha.s.sett's Dow 36,000: The New Strategy for Profiting from the Coming Rise in the Stock Market (New York: Times Books, 1999); the authors defend it in the Wall Street Journal, August 1, 2002, "Dow 36,000 revisited," available at http://www.aei.org/news/ filter.,newsID.14128/news_detail.asp) and http://www.techcentralstation.com/ 120504A.html. The prediction that the Dow will hit 36,000 in 3 to 5 years is made on page 18 of "Dow 36,000," and economist Brad DeLong is extremely dismissive: http://www.j-bradford-delong.net/movable_type/2005_archives/000025.html.

How transformational is the "new economy"? Robert Gordon has given the definitive skeptical statement in "Does the 'New Economy' Measure up to the Great Inventions of the Past?" Journal of Economic Perspectives 4, no.14 (Fall 2000): 4974. Paul David's argument that new technology takes time to have a real economic impact is most famously expounded in "The Dynamo and the Computer: An Historical Perspective on the Modern Productivity Paradox," The American Economic Review Papers and Proceedings, May 1990, 35561. The results of my lost bet with John Kay are in the Financial Times, October 29, 1999, or at http:// www.johnkay.com/articles/search.php?action=view&doc_id=127&date=&t.i.tle=&topic=.

Although I am generally dismissive of the idea that Internet companies enjoy a first-mover advantage, I think there is at least one important exception. Online auction sites, which match buyers and sellers of every imaginable product, do have such an edge. The sellers want to go where the buyers are, and the buyers want to go where the sellers are. The first site to do a decent job of bringing them together will prove very hard to dislodge, even if a compet.i.tor has a superior technology. The auction site eBay has a dominant position in the United States for just this reason; but in j.a.pan, they moved too late and were beaten out by Yahoo's auction service. (See the interview with eBay's Meg Whitman in Business Week, October 2, 2002.) Other sources for statistics: Amazon.com stock price data comes from the Amazon.com investor relations website and other information comes from Amazon.com's 2003 Annual Report.

Losses due to internet music piracy from "Rock profits and boogie woogie blues," May 2, 2004, BBC Online News, http://news.bbc.co.uk/1/hi/business/ 3622285.stm.

Data from Robert s.h.i.+ller are available at his home page, http:// aida.econ.yale.edu/~s.h.i.+ller/.

Chapter 7

See Prisoner's Dilemma by William Poundstone (New York: Doubleday, 1992) to find out more about Von Neumann and the use of game theory in the cold war. For an a.n.a.lysis of poker models by Emile Borel, Von Neumann, John Nash, and Lloyd Shapley, see chapter 12 of Ken Binmore's textbook Fun and Games (Lexington: D. C. Heath, 1992). This is the same Ken Binmore who later went on to lead the auction design team for the UK 3G auction.

The United States spectrum auctions are expertly discussed in John McMillan's "Selling Spectrum Rights," Journal of Economic Perspectives 8, no. 3 (Summer 1994): 14562; also McAfee and McMillan's "a.n.a.lysing the Airwaves Auction," Journal of Economic Perspectives 10, no. 1 (Winter 1996): 15975. McMillan also draws lessons from failures in Australia and New Zealand. The collusion theory is explained in The Economist, "Economics Brief," May 17, 1997. Not all economists believe that this was the result of collusion3-it may also have been a dramatic reevaluation of the licenses.

The design team for the UK auction was a.s.sembled by the ESCRC Centre for Economic Learning and Social Equilibrium (ELSE). See www.paulklemperer.org and http://else.econ.ucl.ac.uk/research/spectrum.shtml for papers and contem-porary press. Paul Klemperer's Auctions: Theory and Practice (Princeton: Princeton University Press, 2004), especially chapter 6, contains a wealth of material on the spectrum auctions. The book describes (187) a.n.a.lysts' forecasts of the auction revenues (25bn); the auction raised five to ten times this amount. It also contains Klemperer's defense of the auctions (207), originally published as "The Wrong Culprit for Telecom Trouble," Financial Times, November 26, 2002.

William Vickrey's cla.s.sic paper on auctions is "Counterspeculation, Auctions and Compet.i.tive Sealed Tenders," Journal of Finance 16 (March 1961): 837.

Bulow and Klemperer's paper on the merits of auctions relative to other forms of negotiations is "Auctions vs. Negotiations," American Economic Review (March 1996): 18094. Also available at www.paulklemperer.org.

The UK auction history is still available at http://www.ofcom.org.uk/static/ archive/spectrumauctions/3gindex.htm.

Chapter 8

Cameroon's level of corruption is rated by Transparency International at www.transparency.org.

Robert Lucas's memorable statement on the importance of economic growth is from "On the Mechanics of Economic Development," Journal of Monetary Economics (1988).

The legitimacy of Cameroon's electoral process is a matter for debate. At the time of talking to Sam, Biya's most recent mandate had been to win 93 percent of the votes in the 1997 presidential election, which was boycotted by the opposition. In October 2004, after I had visited Cameroon, Biya won another election with around 75 percent of the vote. Many external observers regarded the election as reasonably fair (see http://news.bbc.co.uk/1/hi/world/africa/3746686.stm). BBC reporters were skeptical; they concluded that many people were unaware of the election or did not vote because they felt their vote would not count. The BBC reported short lines at the polls despite official reports of a high turnout. The number of registered voters is only four million, with a voting-age population of eight million. http://news.bbc.co.uk/1/hi/world/africa/3732512.stm. My own pessimistic view of Cameroon's democracy was formed by talking to Cameroonian citizens who, like Sam, believe it to be a sham.

Mancur Olson's theories are expounded in his Power and Prosperity (New York: Basic Books, 2000). The World Bank measures red tape every year in the "Doing Business" reports, http://rru.worldbank.org/DoingBusiness/.

All you ever wanted to know about Nepalese dams is in Elinor Ostrom, "Incentives, Rules of the Game, and Development" (Annual Bank Conference of Development Economics, World Bank, May 1995); Nepal is now in a state of civil war and there are other reasons for civil servants not to leave Kathmandu. At the time of Ostrom's study, though, it was tedium rather than danger that discouraged them.

Alan Gelb of the World Bank gave me the striking comparisons to ill.u.s.trate how tiny African economies are.

Other sources for statistics: South Korea's gains from foreign investment from Bohn-Young Koo, "New Forms of Foreign Direct Investment in Korea," (working paper no. 82-02, Korean Development Inst.i.tute, June 1982).

Cameroon's trade barriers from World Development Indicators 2001, 336. http:// www.worldbank.org/data/wdi2001/pdfs/tab6_6.pdf.

Chapter 9

Globalization and trade has been the subject of some excellent books in recent years, and ideas and statistics in this chapter are drawn liberally from Martin Wolf's Why Globalization Works (New Haven: Yale University Press, 2004), Philippe Legrain's Open World (London: Abacus, 2002), Douglas Irwin's Free Trade Under Fire (Princeton: Princeton University Press, 2002), and Jagdish Bhagwati's Free Trade Today (Princeton: Princeton University Press, 2002). David Friedman's book Hidden Order (New York: Harpercollins, 1996, 6577) contains an excellent chapter on trade theory.

E. O. Wilson's discussion of h.o.m.ogenization is from his splendid display of his comparative advantage. See Wilson's Consilience-The Unity of Knowledge (London: Abacus, 2003), 304.

The original paper proving that a tax on imports is a tax on exports is Abba P. Lerner's "The Symmetry Between Import and Export Taxes," Economica 3 (August 1936): 30613.

I leave to one side discussion of migration, capital flows, and technological transfers. You can find out more in Martin Wolf 's Why Globalization Works or in a speech by Stanley Fischer, "Globalization and its challenges" http://www.iie.com/ fischer/pdf/fischer011903.pdf (delivered to the American Economics a.s.sociation, January 3, 2003).

Vandana s.h.i.+va's view on environmental apartheid is from "On the edge: living with Global Capitalism," Will Hutton and Anthony Giddens, eds., cited in Philippe Legrain's Open World (London: Abacus, 2002).

Statistics on the cleanliness of US investment overseas from the American Census Bureau and from R. Repetto and J. Albrecht, both cited in Legrain, Open World. Figure 6 is from D. Wheeler, "Racing to the Bottom: Foreign Investment and Air Pollution in Developing Countries," Journal of Environment and Development 10, no. 3: 22545, reported in an overview by Dasgupta et al., "Confronting the Environmental Kuznets Curve," Journal of Economic Perspectives 16, no. 1 (Winter 2001): 14768.

On agricultural subsidies see Martin Wolf, "Weeding Out Subsidies," Financial Times, November 5, 2002; and Douglas Irwin, Free Trade Under Fire, 6162.

Jonah Peretti tells his story in "My Nike Media Adventure," The Nation, March 22, 2001, http://www.thenation.com/doc.mhtml?i=20010409&s=peretti. The Smokey Mountain example is from Paul Krugman, "In Praise of Cheap Labor," Slate, Thursday, March 20, 1997, http://web.mit.edu/krugman/www/smokey.html. News of the landslide came from The Economist, July 13, 2000. William Greider explains his support of New York's rules on imported clothes in "No to Global Sweatshops," The Nation, April 19, 2001, http://www.thenation.com/ doc.mhtml?i=20010507&s=greider. Douglas Irwin and Philippe Legrain both have good arguments and data to support the view that multinationals pay more and offer better conditions than local firms.

The political economy of trade restrictions explains the stability of Tokugawa, j.a.pan, described by Janet E. Hunter, The Emergence of Modern j.a.pan (London: Longman, 1989), 47; it is fully explored by Douglas Irwin in Free Trade Under Fire, chapter 5.

The BBC has covered the fate of the poor coffee farmers in depth: http:// news.bbc.co.uk/1/hi/business/1493104.stm ("Coffee Farmers Switch to Drugs," August 15, 2001); http://news.bbc.co.uk/1/hi/business/1333204.stm ("Coffee Farmers Face Dest.i.tution," May 16, 2001); http://news.bbc.co.uk/1/hi/business/ 1488758.stm ("The Cappuccino Trail," 16 August 16, 2001); http:// news.bbc.co.uk/1/hi/business/1608356.stm ("Coffee Cartel Shuts Up Shop," October 19, 2001).

Other sources for statistics: Job creation and destruction in the United States, from Bureau of Labor Statistics, 2004.

The Duke of Westminster's agricultural handout, from "Oxfam calls for EU reform" http://news.bbc.co.uk/1/hi/uk_politics/4374655.stm, BBC Online News, March 23, 2005.

Various estimates of the benefits from trade are gathered from Douglas Irwin's Free Trade Under Fire, 3048.

Data on trade barriers from World Development Indicators 2001, 336, http:// www.worldbank.org/data/wdi2001/pdfs/tab6_6.pdf.

Other trade statistics from the World Trade Overview 2000, World Trade Organization, 2001.

Chapter 10

The effects of Mao's "great leap forward" are discussed by J. M. Roberts in Penguin History of the World (London: Penguin, 1995), 1013, and especially Jonathan Glover, Humanity: A Moral History of the 20th Century (New Haven: Yale University Press, 1999). John Kay tells the story of Khrushchev's great experiment in The Truth about Markets (London: Allen Lane, Penguin Press, 2003), 88.

A symposium in the Journal of Economic Perspectives 8, no 2 (Spring 1994) is a wonderful a.n.a.lysis of Deng's reforms in the 1980s. Articles include Dwight Perkins, "Completing China's move to the market"; Shahid Yusuf, "China's Macroeconomic performance and management during transition"; and Gary Jefferson and Thomas Rawski, "Enterprise reform in Chinese industry." Other invaluable resources are Barry Naughton, Growing Out of the Plan (Cambridge: Cambridge University Press, 1995); Justin Yifu Lin, "Rural reforms and agricultural growth in China," American Economic Review 82, no 1 (March 1992); and Robert F. Dernberger, "The People's Republic of China at 50: The Economy," in The People's Republic of China After 50 Years, ed. Richard Louis Edmonds (New York: Oxford University Press, 1999). More recent views on China come from Martin Wolf, "Asia's Awakening," Financial Times, September 21, 2003; and from David Hale and Lyric Hughes Hale, "China takes off," Foreign Affairs 86, no 6 (Nov/Dec 2003).