Inequality and immigration

Prof. Peri spoke at GMU today about immigration. There’s an economic argument against immigration that says because most immigrants are unskilled, they reduce the wages of native unskilled workers. These are the most economically vulnerable members of society, so we should care about the effect immigration has on these folks.

Well, one solution would be to tax immigrants and give the proceeds to native unskilled workers. This would make everyone better off because the natives would be compensated for lost wages and the immigrants would get to work in America where their wages are much higher than in their sending country. Besides being a little perverse, this policy would be hard to implement. You’d have to figure out who exactly is “low-skill” and you’d need to spend money to collect taxes from the immigrants. Plus, you’d get some inefficiency from the fact that people would switch from “high-skilled” to “low-skilled” jobs so they could get in on the action.

Apparently, Prof. Peri offered another solution in today’s talk. (GMU is suppose to be all internet friendly… where’s the video feed?!) Let more high skilled workers into the country. Open the flood gates. These engineers from India would compete with high-skill native Americans, thus increasing the (relative) wage of low-skill workers. Problem solved!

I’m on TV!

In the first couple of seconds of this video you see a guy holding a coffee cup in the lower left hand corner. That’s me!

Oh and these other guys talked about the financial crisis:

Recommendation: Prof. Taylor’s the best (and first) speaker. The second dude talks about standard investment strategies (stocks are risky!) and probably you can skip him. The third dude, a historian, talked too briefly about history and made a lame plug for the need for fiscal stimulus.

Basically his argument is that four years after the government brought the economy to its knees during the depression, President Roosevelt needed to stimulate aggregate demand. Well, today’s economy is I-guess-sorta-maybe to its knees and well people have been talking about how this might be a depression and wow can you believe the similarities between now and the Great Depression, I mean jeez… where was I… oh, right, so yeah we need to implement my pet policy! QED.

(h/t that other dude in the death star… thanks for figuring out how to embed video, btw)

Art as investment

Fellow grad student, Bed Mandel, has a paper coming out in AER ((holy shit!)) called Art as an Investment and Conspicuous Consumption Good (pdf):

This paper provides a simple and empirically plausible model of artworks as investment vehicles. It reconciles the observation that average financial returns for collectibles are low and volatile with the theory of consumption-based asset pricing. Art assets are appealing both for their ability to transfer consumption over time and their use as signals of wealth, as in the literature on the demand for luxuries. Adding art value into utility, returns also reflect this ‘conspicuous consumption’ dividend; as a result, average financial returns are low. Risk premia for artworks are predicted to be modest or even negative.

He cites Veblan, but the best line is the last:

In a boast, a friend once told me that his art was a better investment than all other assets, including …financial securities and real estate. Accounting for his utility in telling me so, that is indeed likely.

Oh, and Prof. Kling, you’ll notice equations 5-7 are Euler equations. I defy you make the claim that Ben is just “producing stochastic calculus porn to satisfy [his] urge for mathematical masturbation.” I’d say you actually learn something about Art looking at those equations.

BTW, Ben is on the job market this year. Snap him up before its too late!

UC Davis Econ in the News

Faculty had a busy August:

  • Knittel on gas prices: they rise fast but they fall slow. The reason may not be what you expect.
  • Prof. Carrell shows having bad kids in the classroom creates quite large negative externalities. Here’s the newspaper’s account and here’s the NBER link.
  • Rising incomes increases demand for trade which induces innovation that reduces the cost of trade and raises incomes. Wash, rinse, repeat. Governments screw with this process. Prof. Meissner’s evidence.

Drought == price ceiling enduced surplus demand?

So says newly minted Davis Ag Econ PhD David Zetland:

The real problem is that the price of water in California, as in most of America, has virtually nothing to do with supply and demand. Although water is distributed by public and private monopolies that could easily charge high prices, municipalities and regulators set prices that are as low as possible. Underpriced water sends the wrong signal to the people using it: It tells them not to worry about how much they use.

“But water is a necessity!” you cry? Well, sure people need to drink a couple gallons a day to live, but after that is the back yard pool really a necessity? do people in the desert really need to plant tropical flowers and trees? do golf greens need to be that green?

David’s proposal:

I propose a system where every person gets the first 75 gallons, or 1.5 bathtubs, per day for free but pays $5.60 for each 75 gallons after that. Under my system, the monthly bill for the average household of three would come to $95.

My system is designed to reduce demand rather than cover costs. Revenue paid by guzzlers would cover the costs of those who use only a small amount of water. Any leftover profits could be refunded to consumers or used to enhance the quality or quantity of the water supply.

And there’s even a pretty picture:

Creative Capitalism

Professor Clark is in good company at this new group blog.

Here Clark critiques Bill Gates’ idea, Creative Capitalism:

Bill Gates has two major points. First the profit motive fails to provide goods such as vaccines needed by the poor of the Third World. Second the solution to this is not government action, and not private philanthropy. The needs are too great. Instead we need corporate action.

Despite Bill Gates’ abundant good intentions, I have to dispute both propositions.

1. As Michael Kinsley points out, much of modern capitalism is characterized by firms with high fixed costs – for research and development, for production facilities – but low production costs. Think computer software, think computers, think drugs, think airplanes. This production structure, however, mostly favors Third World consumers.

True, they have little to spend. But such goods cost little to deliver to them once developed in the high income countries, because of the low cost of producing more units. And the poor get served because the good old-fashioned profit motive says make a buck wherever you can. This works unless the good sold cheaply in such markets can find their way back to US markets and undercut prices there. But companies are good at erecting barriers to this flow.

It is only when the goods the Third World desires differ from those of rich country consumers that we get a problem. Though Bill Gates gives a list of such goods—anti-malarial drugs being prominent—it is actually a short list. For a whole range of goods—clothing, cars, cell phones, electronics, computers, entertainment—the goods bought by the poorest overlap enough with those bought by the rich that there is little problem. They are indeed well served by selfish capitalism.

The cellphone is a great example…
2. A second problem with the Gates proposal is that is assumes that the poor of Africa do not know their own best interests. Only corporate America can discern this.

Short Clark: “There’s not many goods for which this idea makes sense (i.e. goods that people in poor countries demand, but that aren’t produced cheaply in the rich countries) and for those that it does the profit motive will take care of things.”

Found it

I mentioned that I couldn’t find Prof. Knittel’s paper on gas demand on his website. I should have looked harder. Here it is:

Understanding the sensitivity of gasoline demand to changes in prices and income has important implications for policies related to climate change, optimal taxation and national security, to name only a few. While the short-run price and income elasticities of gasoline demand in the United States have been studied extensively, the vast majority of these studies focus on consumer behavior in the 1970s and 1980s. There are a number of reasons to believe that current demand elasticities differ from these previous periods, as transportation analysts have hypothesized that behavioral and structural factors over the past several decades have changed the responsiveness of U.S. consumers to changes in gasoline prices. In this paper, we compare the price and income elasticities of gasoline demand in two periods of similarly high prices from 1975 to 1980 and 2001 to 2006. The short-run price elasticities differ considerably: and range from -0.034 to -0.077 during 2001 to 2006, versus -0.21 to -0.34 for 1975 to 1980. The estimated short-run income elasticities range from 0.21 to 0.75 and when estimated with the same models are not significantly different between the two periods.

Basically, in the short run people are much less sensitive to gas prices than they used to be.

In fact, I’ve linked to this research before…

UC Davis Econ in the News

A threefer:

  • Egghead points us to this New Scientist article($$$) about Prof. Knittel’s work on — you guessed it — gas prices (I can’t find a pdf on the professor’s website… for shame professor).
  • Our colleagues upstairs with the spacious offices, voluminous library and state of the art computer lab are ranked the number two Ag Econ department in the world.
  • Clark: “But before we get too light here and a chorus of “Kumbaya” breaks out, we do have one sharp difference: Economists think that if resources such as oil become more scarce, the economy will adjust on its own. We do not know what the best outcome is. We rely on the market system, a giant living algorithm, to figure that out on its own.”