Sunk Costs and The Sense of Self

My 3 year-old will scream. She will lay on the floor, thrash about, and make demands as an infant would if they could communicate and develop the motor control adequate to do so. It doesn’t matter whether she can remember the reason for her disposition – she will continue. My wife and I usually sense the situation. We could get angry and threaten punishments. Alternatively, we know that no amount of reasoning and attempts at persuasion will convert our daughter’s behavior into the sweet, desirable sort. We have found that smothering her with love works best. And when the demands of other children prevent such single-minded attention, we at least try to act lovingly toward her.

My wife is quite beside herself. Why is this happening? (Truth be told, it’s all my fault. It’s in the genes.) Sometimes we see the momentary consideration of a calmer world in our daughter’s face. Then, she rejects it like there is no goodness left in the world. To be clear: I see my daughter know that she can stop her comprehensive riot and instead enjoy some other activity, then definitively decline the opportunity. She has cognitive dissonance.

My child is not crazy. One might say that she is irrational. The entirety of her behavior up to that point is a sunk cost. She could just stop the outburst and feel better. But she doesn’t. Why the heck doesn’t she?

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Age-Old Dads

Do you know how old you are?

I’m 33. Specifically, I’m 33 years, 29 days old. I don’t know the time of day that I was born, but my mom probably remembers within a couple of hours. My dad did not keep track of my age. Growing up, it was normal for him to take me to a sports registration event and need to ask me for plenty of my details in order to complete the paperwork.

Do you know the age of your children? Is it normal for parents to lose track? Or is it just the dads?  …Or just my dad? I have no idea what is typical.

But I do have some decent evidence that, had my dad lived in 1850, he would not have been such an anomaly. Consider exhibit A: A histogram of US ages in 1850. The population was only about 23 million at the time and we have the age for about 19 million of those people. So the graph is relatively representative (IPUMS census data).

Do you notice anything weird about the graph?

That’s the question I asked my Western Economic History class.

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Vegetarian Culpability Part 2 (Economics of Information Edition)

Previously, I wrote about the paralysis that a vegetarian would face if confronted with a broad view of production inputs. Namely, that hunting Cecil the lion was part of the dentist’s maintenance of his own labor. Given that preferences are diverse, we’re all perpetually facing a similar dilemma: If we trade with someone, then we are definitely, 100% helping them to do immoral things with which we disagree.

After a good night’s rest, I awoke and realized an age-old tool that humans have used to address the issue. As humans, we care and know most about those people who are closest to us. My previous analysis took as given that all of the relevant information concerning our trade partners was available. However, as Stigler knew well, information is a good and it’s costly to obtain.

When you know that your local lawyer is also a drug-dealer and a lecher, you don’t employ his services. Of course, your moral taste dictates a boycott as appropriate because his actions would be aided by your cooperative trade. The information about his divergent moral preferences is cheap and easy to obtain.

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Vegetarian Culpability

Do you remember that dentist who went to Africa and shot Cecil the lion? I had a vegan friend who said that she would boycott him – had he been her dentist.

I can’t tell you how many questions I had. Why boycott him? In a competitive market, it would have no long-run impact on his economic profits. Was it important that his murder of Cecil was part of his consumption/leisure behavior rather than part of his provision of dental services? Does trading with people who have different preferences make one morally culpable for their consequently afforded activities?

A Trip Down Reasoning Lane

Let’s take some things as given. 

  • My friend is vegan and didn’t want Cecil to be on the receiving end of homicide (leon-icide?). 
  • Big-game hunting was a consumption activity for, who I’ll call, the dentist.
  • Everyone has unique preferences – including moral tastes.
  • Voluntary trade makes both parties better off.
  • There are a variety of input combinations that a firm can adopt in order to create output.
  • Humans are responsible for their own behavior to varying degrees.

My understanding of my friend’s would-be boycott is that lion-hunting was a direct result of the dentist’s inappropriate preferences and economic empowerment. Therefore, boycotting the dentist would reduce the dentist’s budget, and consequently reduce his spending on improper activities. Knowing that the dentist would spend his income in this manner makes each transaction with him a contribution to satisfying his illicit preferences.

Mo’ Money Mo’ Problems

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Vegetarians and Profits

Like most people, vegetarians have some weird opinions. Let’s assume that they have the ultimate goal of fewer live-stock deaths and less chattel cattle. Ask a vegetarian what they are achieving by choosing not to eat meat and you’ll hear the explanations let loose. By abstaining from meat they’re “reducing factory farm profits” or “helping to keep the price of beef low and unprofitable”. While being a vegetarian may save more cows from the butcher’s blade, it’s not at all clear that vegetarians have a good understanding of their sometimes perpetual boycotts.

What do vegetarians even do?

The decision to consume meat or not falls nicely into the supply-and-demand framework. Fewer people willing to eat meat means fewer purchases of meat products – no matter the price. A decline in meat demand lowers both the number of cows that ranchers will raise a slaughter and the price that they receive. There you have it. By lowering demand for meat, vegetarians reduce both the quantity and price of meat, reducing profits for those evil, animal-carving businessmen.

Not so fast.

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Good Old Lemons

This post doesn’t have a darn thing to do with economics, statistics, or finance. This is a post about citrus storage.

There are problems with buying citrus.

  • If you get a big Sam’s Club size bag of limes, then they start going hard and thin-skinned by the end of a week.
  • A bag of grapefruit? There’s usually one in the bag that’s goes moldy almost immediately and you know what they say about one bad grapefruit spoiling the bunch.
  • Mandarins shrink and get hard to peel.
  • Lemons – even if you refrigerate them – get soft and un-zest-worthy.

There is a solution. Now, our lemons and limes last upwards of 6-8 weeks with hardly a symptom of age. Mandarins don’t shrivel and grapefruits remain edible. No, silly goose, the answer isn’t free markets and the price system.

Maybe it’s all of the additional vitamin C that I’m getting. Maybe it’s the warm and fuzzy feeling of money well spent. But I’m now excited each time that we purchase citrus. And I get a cozy feeling of satisfaction whenever I see a nice lemon that definitely should not still be any good.

The answer is really simple. You too can achieve such amazing results. All you have to do is:

  • Rinse your citrus under water, rubbing gently to remove any invisible bad-guy germs. In reality, you’re probably getting rid of mold spores.
  • Place the wet citrus into a ziploc bag, seal, and refrigerate. The refrigeration further retards the growth of any unwanted spores. The sealed bag prevents too much air flow and drying.( I don’t bother refrigerating grapefruit and oranges because I eat them quickly enough).

That’s it. You too can have 8 week old limes and lemons that you bought on sale or in bulk that are nearly as fresh as the day that you purchased them.

Enjoy!

Aggregate Demand Regimes

Is inflation correlated with output growth?

Consider the AD-AS model which is often expressed in growth rates. Economists will often say that the short-run supply curve is flatter in the short-run and vertical in the long-run. In other words, aggregate demand policy can have SR output effects, and only has LR price effects.  Sounds good.

But there is a lot of baggage hiding behind “can have effects”. Often we’ll say that lackadaisical businesses cause a flatter SRS and that businesses with rational expectations have a vertical one. Also sounds good.

What causes the steepness of the SR supply curve? I’m sure that there are multiple determinants in regard to expectations. Here’s what got me on this topic. David Andolfatto shared the below graph and asked “Does lowflation necessarily mean low growth?.

Good question. My answer includes expectations concerning the monetary policy regime. Specifically, my answer was “It does in a regime of volatile and uncertain nominal income. Surprise AD growth pushes us up the SRAS.” Andolfatto called me out and in the right way, asking “What’s the evidences for this?

[…crickets…]

I had no evidence. I had the AS-AD model in hand and some logic – but no evidence. My logic is as follows. In a monetary regime that includes a constant rate of AD growth, output and price growth are inversely correlated. If NGDP grows at 5% always, then inflation falls when output growth rises. In other words, AD is exactly what people expect – illustrated as a vertical SRAS curve.

However, expectations are different in a regime of erratic AD. Let’s say that the rate of AD growth is unknown, but that the variance is known. If this is the world that you live in, then you make hay when the sun shines. Businesses sell more in periods of higher income. And, because they’re marching up the marginal cost curve, prices also rise. Alternatively, it may be that output growth is inflexible and prices rise as a goods are rationed.

Regardless of the truth, the above explanation is just story-telling. I had no evidence. What would the evidence even be? Here’s what I settled on. First, let’s express the AS-AD model in quarterly growth rates. In order to get a handle on monetary regime AD variance, I calculated the standard deviation of the NGDP growth rate by Fed Chair. Presumably, the Fed chair has a decent amount to do with monetary policy and the rear that occupies that chair is an indicator of when a regime begins and ends. I calculated the correlation between the GDP deflator and RGDP growth rates by regime. Below is the scatter plot.

What does it tell us? It tells us that regimes of stable AD growth experience a negative correlation between inflation and output growth. It also tells us that a AD growth volatility is associated with a positive correlation between inflation and output growth. So,  Does lowflation necessarily mean low growth? It does in a regime of volatile and uncertain nominal income.

(Of course this is all casual. It makes sense to me at first blush though. Having said that, the line of best fit also looks like it’s driven by the 2 extremely variable times: McCabe & Powell.)

Why Eliminate Water Subsidies when we could Reform Our Entire Society?

I love the Gastropod podcast. The hosts do a great job of trying to explain the historical debates concerning food in a charitable and careful manner. Their guests also tend to be very careful.

But the guest from the September 15th, 2020 episode about beef in the US was not nearly so careful. It’s a curse, really, to listen to a great podcast, only to have a portion of an episode ruined because a guest was allowed to spout on a topic outside of their expertise.

John Specht, a history professor at Notre Dame, committed such an offense that irked the heck out of me:

“Any reform is likely to make beef more expensive. So what that means is, I think, to avoid a charge of elitism, we have to recognize that changing how we produce our food has to happen in concert with building a more just society. We need to think of ways to make people better able to afford better-produced food. And we can’t just focus on one facet of that story. We have to think holistically about that. And what that means is that this is an even bigger challenge of what already was a big challenge. But it’s also perhaps even more powerful and even more important.”

Let me first say that I have no doubts concerning Dr. Specht’s knowledge concerning the history of beef in the US. If it’s like the rest of his Gastropod interview, I look forward to reading his book and I suspect that it is stellar. But the above quote has nothing to do with history and everything to do economics, public choice, and political economy. The above quote is why I can’t take seriously many people’s claims about what the ‘good’ is and how to achieve it.

  1. Any regulation or legislation that introduces additional requirements for beef producers will, almost certainly, increase production costs. I’m not sure what a ‘just society’ means to Dr. Specht, but I’m sure that it’s not an objective thing (knowable or not) that aids in analysis.
  2. We need to think of ways to make people better able to afford better-produced food.” Luckily *we* don’t need to think of that. We don’t have the local knowledge of the beef market, nor the potential markets that beef-processing laborers face as alternatives (it’s different for everyone). The age-old, classical econ answer for improving people’s real incomes is to increase their productivity. Even if the labor supply for beef processing is perfectly elastic, and all increases in productivity accrue to the firm, the result of constant wages is a *partial* equilibrium conclusion. In general equilibrium, beef processing skills are probably partial substitutes for some other labor activity. This means that skilled employees can move to other sectors, employers, and industries. *We* don’t have much say aside from policy that makes productive innovation and skill accumulation easier.

Dr. Specht makes the problem out to be worse than it is and the solution to be more difficult than it is. We don’t need to reform an entire social and economic system. We don’t need a new political system that somehow, against all incentives, reflects compassion for beef processing laborers. That’s more than government can achieve.

Government *can* get out of the way. It can ease pathways to working legally in the US, which would reduce the labor abuses in which beef firms can indulge. Legal employment alternatives increases the opportunity cost of laborers. Government can stop subsidizing cattle hydration through water subsidies to ranchers. Reducing the number of cattle, and demand for meat processing laborers would cause fewer of these workers to be employed in what many consider an unpleasant job. With perfectly elastic labor supply, there is no decrease in wages. In general equilibrium, the decline in wages is small if there are many other firms that would demand the unemployed manual labor.  Further, the decline in the quantity of beef produced would make the marginal carcasses more valuable. Employers will likely desire more skilled and better-compensated labor to carve the more valuable inputs. Importantly, the better compensation comes, not from a re-orientation of societal values, rather, from the higher opportunity cost enjoyed by labor that is more skilled.

But removing subsidies and permitting more foreign-born workers aren’t the reforms that are proposed by the likes of do-gooders. Do-gooders want to feel responsible for their good. It’s not enough for them to get out of the way – no one receives praise for permitting others to engage in hard work. Typically, it’s the hard-workers who get that credit. Do-gooders mistake proactivity with good intentions. The result is a desire to employ government in activities that are doomed to failure due to imperfect design and adverse incentives. The incentives provided by markets are inadequate – not for firms, but for the people who desire a prominent role as caring managers.

Slips of the Atheist’s Expert Tongue

People have a lot of opinions about diet. For many, dietary opinion is individual – they don’t prescribe that anyone else adopt their beliefs and practices. Others have a more universal bent. Some people are dead-set against starches and others think that meat is taboo – for themselves and others. There are a lot of beliefs about diet.

The reasoning that people use for their dietary beliefs are just as diverse. Motivations range from religious beliefs, moral systems, social signaling, personal experimentation, anecdotal evidence, and so on.

Some people use the theory of evolution. They reason that we have canine teeth, like carnivores, so our ancestors had advantages in meat-eating. Others reason that we have relatively long small intestines, like herbivores, so our ancestors had advantages in plant-eating. Expert scientists from any one of a plethora of subjects are interviewed or write as authorities on the matter.

Scientists who are atheists say things like “Were humans designed to eat meat?”, or “If humans were meant to eat meat, then…”, or “our canines aren’t specially meant for processing meat”.

The problem, of course, is that using words like ‘meant’ or ‘designed’ implies one who ‘means’ or one who ‘designs’. For most religious people, there is no conflict. For an atheist, it’s strange turn of phrase. Why? Because evolution has two parts: 1) mutations that introduce variety and 2) natural selection. The former occurs prior to an animal’s birth. The latter occurs as a result of environmental reproductive pressure and opportunity.

In other words, to an atheist, there is no designer. So, what gives? I’ve settled on several plausible good-intentioned explanations that I order by increasing charity.

  1. Poor Evolutionary Understanding: The atheist scientist’s understanding of evolution is flawed. Maybe their theory includes first-person or third-person intentionality. An example would be that giraffes stretched and intended that their necks would become longer over the generations. An alternative poor belief is that environmental pressures, including predators and vegetation, intended that giraffe necks would lengthen. Environmental pressures achieved their goal through reward of the long-necked and the punishment of the short-necked. I like to think that scientists have a better handle on their area of expertise rather than having beliefs such these.
  1. Poor Grasp of English: The atheist scientist has a perfect grasp of evolution, but they are unpracticed at English in contexts of emergent order. Economists often have similar challenges and often refer to speaking allegorically as a crutch. Economists will say that prices ‘want’ to change or that a government desires social outcomes. Neither of which is true. Suppliers lower prices as their sales become lackluster.  Policy outcomes are desired by someone within a governing process – though the social outcomes may be desirable by nobody. Similarly, predators desire to eat and unknowingly exert selective pressure for genetic traits. Or, a drought causes smaller lizards to survive and larger ones to dehydrate and die. English speakers have difficulty discussing biological processes without intention-denoting verbiage.
  1. Implicit Theism: The atheist is really no atheist at all, but has belief in God that they cannot shake, despite their professions and logic otherwise. Using the past perfect tense in regard to the design of humans is case of parapraxis – a Freudian slip.
  1. An Expertise Gap: Specialists in arts and sciences utilize highly specific jargon so that very specific concepts can be expressed concisely. But such jargon muddies communication with those who aren’t specialists in the field. The specialist grapples with this expertise gap. Although the struggle deserves sympathy, anthropomorphizing is far different from the expert’s idea of the truth.
  • The problem is that jargon has highly a specific meaning. So, when a specialist makes a claim with jargon, the claim is also specific. A narrower set of applicability has less room for credible challenges at the margins of a claim and ideas can be clearly communicated precisely – though, the applicable cases may not be interesting. As the breadth of a claim increases, jargon can help to ensure that the breadth is limited to appropriately specific cases.
  • When the listener is not an expert, the scientist is uncertain of the gap in knowledge. They attempt to make relatively broad and interesting claims, but without the aid of their case-narrowing jargon. The result is that the expert says something which is clearly false to another specialist, but may be mostly true – or true enough for the listener.

Again, these four interpretations of misspeaking and miscommunicating experts are ordered by charity. I especially sympathize with the last interpretation. Imagine trying to teach a student that inflation is always costly, but sometimes more beneficial than costly. And that the costs still exist when the benefits outweigh the costs. So, should we have a policy of inflation? The true answer is highly specific.

Does an atheist scientist understand that there is no designer of human bodies – much less one that had diet in mind? Very much. Does the same atheist scientist know how to communicate unintentional biological advantages to the non-specialist? They do not.  What’s more is that they are not alone. Specialization introduces a knowledge gap and the unavailability of common jargon prevents adequately finessed broad claims.

How HOAs are Born

I live in Florida and there is a lot of residential construction down here. It’s not typically people just deciding to build a house on some isolated plot of land. A large portion of construction is private or semi-private neighborhoods built by developers. They often include manicured common spaces and strict Home Owners Association (HOA) rules.

The typical procedure is that a developer purchases a large parcel of land, and then starts building. Before the first house is even sold, the HOA is established and the governing board is packed with developer representatives.  Written into the HOA bylaws is that the developer maintains a preponderance of the HOA representation during construction. This makes sense. ‘Nice’ neighborhoods command higher property prices and the developer has often invested *very* large sums of money. Certainly more money than it’s willing to risk at the hands of a sloppy, owner-controlled HOA.

Best practice differs by developer.

Typically, the residents will have seats on the HOA board in some proportion of development project completeness. For example, if 75% of the total planned lots have been built and sold, then the developer may retain 2/3 or 3/5 control of an HOA board. The developer finally relinquishes all HOA control after 100% of the planned units are completed and sold.

Ignoring policies for beautification and such, a HOA boards under developer control act differently from those that are resident controlled. As I said, the developer has full discretion on HOA policy, practically speaking, because it maintains a majority of the voting members. But, HOA fees are *not paid* by the developer.[1] Only homeowners pay HOA fees.

For example: Not everyone wants cable TV. But the developer knows that home-buyers want the option for cable TV. Typically, one of the first HOA orders of business is to pay for monthly cable TV. Every single unit pays for cable TV through their HOA fees – whether they use it or not – in exchange for the cable company laying cable lines and providing access. Typically, these contracts are often a decade in duration, after which time the contract can be cancelled and owners can individually decide whether to pay for cable. It’s not obvious that an owner-controlled HOA would pay for cable and have lines laid in the first place (Satellite TV anyone?).

To be clear: The developer sets the HOA policy priorities and determines the HOA budget. Then, the owners pay the quarterly HOA fee. Can you say Principal-Agent problem? Early HOA activities include less resident engagement because residents don’t much affect outcomes. The developer also doesn’t mind higher HOA fees because it doesn’t bear the cost. Do you expect your HOA to put contracts up for bid, say, to do landscaping, pressure washing, etc.? If your HOA is developer-controlled, then you should expect no such thing. Putting contracts ‘up for bid’ is time consuming and reflects a concern for costs. Not to mention that the quality of the bid work may be variable. Developers want high property values and they want them dependably. HOA fiscal prudence, besides solvency, is not a priority.

Having said all this – it’s true that your neighborhood may be ‘nicer’ due to developer control of the HOA. Depending on you preferences, this might align nicely with your priorities. If that’s true, however, you can expect to be less happy in the long-run when your neighbors ultimately gain control of the HOA.

I’m on my HOA board and it’s now 100% privately owned. There are still principal-agent problems. But they are much easier to address now that everyone on the board pays HOA fees. Our problems and our opportunities are truly ours.


[1] Sometimes, the developer will provide a loan to the HOA to provide for initial management costs.