Coordination Problem

Attention-Grabbing Advertising: Gates and Buffet in a NetJets Plane

NetJets, the world leader in fractional ownership in business jets put out an attention-grabbing advertising in The Economist this week. I don’t pay much attention to advertising in general and I ignore most ads in The Economist (or so it seems to me). So coming across an ad that grabbed my attention was novelty, and it reminded me of some of the issues around the economics of advertising.

Over the last two centuries, economists have had many strange (and possibly useless) debates. One of them was about the role of advertising. In the 1950s and 1960s many economists held the view that advertising was not part of a firm’s production costs and thus was a waste. One of the best responses came from the Austrian camp with Israel Kirzner who argued that advertising plays a very important role in alerting people about an opportunity available to them. Advertising is a crucial component of the entrepreneurial process (e.g. see Kirzner’s Competition and Entrepreneurship and the foreword to Advertising and the Market Process).

Fractional ownership in private jets has been growing for more than a decade and many companies (e.g. NetJets, Flexjet, Flight Options, CitationShares, FractionAir) have entered the field. Price competition is fierce. The difficulty in this business is to coordinate the demands of thousands of customers at short notice. Richard Santulli, NetJets’ founder and CEO wants to alert the readers of The Economist that his company has the best offer for them. Gates and Buffet may own their own jets (I don’t know), but showing them as NetJets customers surely sends a message. Buffet is known for his frugality and if he uses NetJets it must make sense from a cost perspective (he also owns the company). This is more attention-grabbing than presenting a table full of figures for instance.

Another championship for Coach Walters and the GCC Men's Tennis team

The college experience I had at GCC is what I hope for my own son's.  I had great friends, I learned much from my teachers that changed my life, and I was fortunate enough to play 4 years of a varsity sport for a fantastic coach -- Joe Walters.  During my time at GCC, we did not compete in the President's Athletic Conference (PAC), but instead competed as an independent in DIII.  We often played DII and sometimes DI teams on our schedule, which included an annual trip down south.  And we won.

Soon after I graduated, GCC joined the PAC.  And Coach Walters just won ... and he has just kept on winning for all those years since.  Over 300 match wins, and all those PAC championship.

Emergency and Supplemental Spending: the Great Fiscal Scam

The natural proclivities of government are about concentrating the benefits (of government activity) in the hands of small groups in the short run and dispersing the costs over the populace in the long run. In short, government is about spending now and paying later. These proclivities manifest themselves in a very interesting way in the US budget.

Every year, there are two types of spending in the US budget: discretionary and mandatory (the distinction is a bit strange for those not accustomed to public accounting because that distinction is really a convention and nothing more: elected officials in Congress have the power to revoke any law they want including Medicaid which is part of mandatory spending). Every year, the US President submits his budget to Congress in February and by October the budget is voted. During that period, more spending can take place as part of the current fiscal year (whereas the budget under discussion is for the next one); this is what is called supplemental spending.

For decades, supplemental spending represented only a very small fraction of the total budget (around 1%). Supplementals were justified because of new spending that the Federal government had to incur and had not been accounted for in advance. In the last decade however, things have changed. More and more spending is qualified as supplemental (and in general “emergency” as well although emergency spending is not necessarily part of supplemental and supplemental can be non-emergency).

In a very good Mercatus Policy Series paper (see The Never-Ending Emergency), Veronique de Rugy explains why this is happening. Her take is that the US government faces lots of perverse incentives and as a result, spends more and more money outside the initial budget. Supplemental appropriations currently represent more than $100 billion a year and there are already supplemental in discussion for FY08 and FY09 that would be in the order of $178 billion (and yes it is unusual to have supplemental for the coming FY). Just yesterday, House Democratic leaders were looking to add $3 to $4 billion in domestic spending to the emergency war supplemental beyond economic stimulus and troop-related funds. That spending comes on top of $12 billion for both 13 extra weeks of unemployment benefits for those whose eligibility has expired and a boost in GI education spending that has broad, bipartisan support.

Supplementals are not part of budget caps and deficit accounting, rules that are supposed to constrain the natural proclivities of government. Supplemental enables agencies to get more funds without having to make difficult tradeoffs since these moneys are not voted as part of the general funds. Supplementals are akin to “off-balance sheet accounting,” which is why all this is ironical. Private entrepreneurs have gone to jail for not revealing unfunded liabilities and doing various accounting gimmicks. However, legislatures can vote unsustainable budgets based on weird accounting rules because they make the rules and have the power to print money (and to tax of course but even that power is becoming less and less useful).

The natural proclivities of government have no limits (I came across another interesting example recently and I’ll post something about it soon). It is frightening and the consequences could be lethal for Americans. Read Veronique’s piece, it is well-worth the read, as it is the best work available on the subject.

Rushing to War, Part Two

Thanks to the generosity of the Koch Foundation, we have inaugurated a Visiting Speaker Series in Political Economy here at St.  Lawrence.  Our kickoff speaker in March was co-blogger Chris, who did a fantastic job with a talk on After War.  Last night was our second speaker for the  semester, Pierre Desrochers of the Geography Department of the University of Toronto at Mississauga.  Many of you are probably familiar with Pierre’s work.

As I did with Chris, I gave a brief introduction that both said something about the speaker but also talked about the issues each was addressing.  I tried to pick themes that illustrated the ways in which libertarianism shares the values of the left. In  Chris’s case, I talked about the anti-imperialist tradition of classical  liberalism.  For Pierre last night, I talked about the parallels between the War in Iraq and the calls, especially in the current issue of Time, for a “war on global warming.”  I share a slightly revised and extended version of my thoughts on those parallels below.

Front Page Coverage, But Where is the Economics?

The Wednesday April 23rd edition of The Washington Post has a story about a UN report on the food crisis that is spreading throughout the world.  The proposed solution to the "silent tsunami" is government policies of aid and a mix of command and control.  Josette Sheeran of the World Food Program is quoted as stating that "I think much of the world is waking up to the fact that food doesn't spontaneously show up on grocery store shelves."

Didn't Adam Smith tell us in The Wealth of Nations that the butcher, the baker and the brewer provides us with our daily meals not due to benevolence but self-interest directed toward mutually beneficial exchange?

So the intellectual battle in economic policy and over the basic lesson of economic science is far from settled.  And while it is important once again to demonstrate to Ms. Sheeran and others the power of the spontaneous order of the market mechanism, to really address this issue we need to detail the facts of the policy failures that are resulting in the recent spike of food prices.

Who have you read that provides the best discussion of the current crisis with food prices from an economic point of view?

BTW, F. A. Hayek once said that the economist is called upon by the public to comment on policy matters more often than any other social scientist but to have his advice ignored almost as soon as it is given.  Such is our plight.  What remedy do you have to rectify that situation?

Dr. Dan D'Amico

It is with great pleasure that I announce that Dan D'Amico successfully defended his dissertation on Tuesday April 22, 2008.  Dan is a deep thinker and committed Austrian economist and radical libertarian social thinker.  His dissertation addressed the 'imprisoner dilemma'.  D'Amico uses economic analysis (market process theory and public choice analysis) to examine and adjudicate the debates in criminal justice.  Should our criminal justice system focus on rehabilitation, retribution, or restitution?  D'Amico argues that while the literature seems to have settled on proportionality, the political production of criminal justice services fails to live up to that standard.

D'Amico also argues that market provision of criminal justice will comparatively speaking outperform state controlled systems.  For his outstanding dissertation work, Dan has also won the Israel M. Kirzner Award for the Outstanding Dissertation in Austrian Economics at GMU.  Congratulations to Dan.

In addition to being an economist full of penetrating insights, Dan is an outstanding teacher.  We will not only be reading and learning from Dan's scholarship for the next few decades, but I imagine the Austrian community will have D'Amico students running around for years to come.  Dan will join with Walter Block at Loyola University of New Orleans next fall and form one of the most promising dynamic duos in the economic teaching ranks.  At GMU, I have benefited greatly over the years from students from Hillsdale, Beloit, and Loyola.  During my career I would argue that the most effective undergraduate teachers as measured by sending students on to pursue a PhD in economics have included Hans Sennholz, Richard Ebeling, and Walter Block.  My prediction is that Dan will follow in that tradition.  We will have to change our nickname for Loyola students from "Block heads" to "D'Amico duplicates" and I for one cannot wait to see the students that Block and D'Amico jointly produce at Loyola and the pure fun I will have working with them here in graduate school at GMU.

Please join me in congratulating Dan for his great accomplishment and wishing him well as he embarks on his most promising future as an economist and teacher.  On a more personal note, Dan is one of the really 'great guys' who has walked the halls of GMU economics and his intelligence, commitment to truth and justice, and his joyous nature will be missed as he moves on to his own teaching and research career.  I know I will miss him very much.  However, I am also thrilled that he has found his career path and am fully confident he will not only make his mark in economics, but will make a significant mark on the lives of hundreds (perhaps thousands) of students over the next few decades.

An Economics of Pirates Research Update

Close to a year ago I blogged about a new pirates paper I was writing investigating the economics of infamous pirate practices. Since then, the paper has undergone massive revisions. The new and hopefully improved paper is now available on my website.

You can download it here: "Pirational Choice: The Economics of Infamous Pirate Practices."  

For those who have emailed me over the past half year or so looking for the paper since I removed it to revise, thank you for your patience; I hope the wait was worth it.

Also in June of last year I mentioned that I would soon be putting the third part of my economics of pirates trilogy on my website in the fall. It's now spring and, as a number of you who have emailed me looking for this paper have noted, the title is up but the link is not yet active. Very soon it will be, so stay tuned.

Finally, I'm now in the process of writing a book on the economics of pirates entitled, The Invisible Hook: The Hidden Economics of Pirates, History's Most Notorious Criminals. It's currently under contract with Princeton University Press and, with any luck, will be out in 2009. Here I explore in depth the economics of all manner of pirate behavior.

March 2008 Issue of The Freeman Now Available

The March issue of The Foundation for Economic Education's excellent monthly magazine The Freeman is now available on the web.  You can find the table of contents here.  Contributors include Gene Callahan, Walter Block, David Henderson and yours truly.  My piece is "Profit:  Not Just a Motive," (PDF) and it explores the problems with the frequent argument on the left that we should "take the profit motive out" of various activities and industries, especially health care.

Enjoy the whole issue!

American Economic History texts

Oh great and wise readers of The Austrian Economists, I need your help.  I'm teaching American Economic History this fall for the first time in 9 years.  When I last taught it, I used Gene Smiley's wonderful textbook "The American Economy in the Twentieth Century".  That was published in 1993 and appears to be out of print. 

So... any recommendations about other textbooks?  I'm especially focusing on the 20th century, or at least the Progressive Era and forward.  I have plenty of "other" texts (Higgs' Crisis and Leviathan for one, and Cox and Alm's book for another) and readings.  What I need is the background/foundational material that a more traditional textbook can provide.

I'm prepared to go without one and perhaps just use scans of some of Smiley's chapters if need be, but if there's a good one out there that I don't know about, I'd prefer it.  You can put suggestions in the comments or email me.  Thanks.

I'm in My "What a Median Means" Mode

New York Times economics writer David Leonhardt has a nice column today on the money-happiness connection, centered around a new Wolfers-Stevenson paper that provides some evidence against the Easterlin paradox.  But that connection is not what I want to talk about.

At the very end, Leonhardt writes:

"Affluence is a pretty good deal. Judging from that map, the people of the world seem to agree. At a time when the American economy seems to have fallen into recession and most families’ incomes have been stagnant for almost a decade, it’s good to be reminded of why we should care."

Here we go again.  Most families' incomes have NOT been stagnant for almost a decade.  What I suspect he's thinking of here is the data on stagnant median household income.  However, a stagnant median says nothing about whether individual households did better or worse over time.  Median income has been fairly stable (though even that doesn't account for non-wage compensation), but a constant median between time X and time Y is consistent with each household in the population at time X having had their income rise, IF by time Y the right number of new households have entered the population at incomes below the median.  Increased immigration and more people entering the labor market as young workers can cause the median to stay constant even as most households see real income increases through time.

Put differently, a constant median over time where the population at each point in time differs says nothing about how well or poorly any individual households in the original population did over that whole period.  Leonhardt's little throwaway line is simply wrong on the facts.  Not only that, it is overwhelmingly likely the case that the majority, if not a substantial majority, of American households have higher real incomes now than ten years ago, even as the median has remained stagnant.

This is how economic myths get started.