The contractual view of marriage

One of my former students asked me to write up the contractual view of marriage that I teach in my classes.  Here it is:

POST INVESTMENT HOLDUP ROUTINE (I deliver this after I describe the problem of post investment hold-up and how vertical integration can re-establish the incentive of parties to make relationship specific investments)

When I got engaged, my fiance and I had to go through pre-marital counseling with a priest, and he asked us why we wanted to get married.

I said “Long-term relationships induce higher levels of relationship-specific investment.”

The priest looked as if he didn’t understand, so I said “you know, the kind of investments that differentiate a marriage from a series of meaningless spot-market transactions.”

On our first anniversary, my wife gave me a card declaring that “her relationship-specific investment was earning an abnormally high rate of return.”

Regulating Everclear Sales in Iowa

The state of Iowa is considering increased regulation of the sale of Everclear, a 151-proof alcohol popular with college students (the 190-proof version of Everclear is illegal to sell in a number of states according to Wikipedea). The consideration follows a recent hazing incident in which a Drake University student nearly died with a blood alcohol level of 0.5 (Wow!)

So what do you think is happening to current sales of Everclear in Iowa? They're going up.

Lord Keynes on the State of the Union

The political pressure for deficit reduction is also seen as an anti-stimulus by some economists, suggesting a difficult trade off (jobs vs. deficits). So here is President Obama's policy solution:

Over the weekend, Obama endorsed legislation that would set up a bipartisan budget commission, to make recommendations on tax hikes and spending cuts later this year. One appeal of this approach is that it offers the promise of deficit reduction, while postponing any hard decisions until the economy is on more solid ground — or at least until after the November election.

How would Lord Keynes view this policy?

Organized public works, at home and abroad, may be the right cure for a chronic tendency to a deficiency of effective demand. But they are not capable of sufficiently rapid organisation (and above all cannot be reversed or undone at a later date), to be the most serviceable instrument for the prevention of the trade cycle.

UPDATE: The recently announced spending freeze seems too small to make much difference, but some economists are worried.

Prominent economist Brad DeLong of the University of California at Berkeley took to his blog to express fear that Obama was repeating the missteps of President Hebert Hoover, widely blamed in academic circles for not aggressively trying to fight the forces that caused the worldwide economic collapse that lasted from 1929 until the start of the World War II.

Privatizing liquor sales in Virginia

Only the market can stop a populist politician

The Washington Post is following the economic problems caused by the socialist political model in Venezuela:

During the past two weeks, just before and after the earthquake outside Port-au-Prince, the following happened: Chávez was forced to devalue the Venezuelan currency, and impose and then revoke massive power cuts in the Venezuelan capitalas the country reeled from recession, double-digit inflation and the possible collapse of the national power grid.

Despite the recovery in oil prices, the Venezuelan economy is deep in recession and continues to sink even as the rest of Latin America recovers. Economists guess inflation could rise to 60 percent in the coming months. Meanwhile, due to a drought, the country is threatened with the shutdown of a hydroelectric plant that supplies 70 percent of its electricity. And Chávez's failure to invest in new plants means there is no backup. There is also the crime epidemic -- homicides have tripled since Chávez took office, making Caracas one of the world's most dangerous cities. At a recent baseball game a sign in the crowd read: "3 Strikes-Lights-Water-Insecurity/President You Struck Out."

Outsourcing and the Pinewood Derby

If you have heard of the Boy Scouts or Cub Scouts, you've probably heard of the Pinewood Derby. It's one of the major events of the year for Cub Scouts, and it involves model wooden cars racing down a sloped track of around 30 feet. According to Wikipedia, "Cub Scouts, with the help of parents, build their own cars from wood, usually from kits containing a block of pine, plastic wheels and metal axles."

Having attended my first Pinewood Derby this past weekend, I can tell you that economic principles are alive and well in the world of Pinewood Derby. Obviously, not every Cub Scout (even with the help of parents) is going to be particularly skilled in building a car from a wooden block and other spare parts. So, what do you do when someone else can do a job better or more cheaply than you? Outsource! I was impressed to learn of the number of companies offering plans, supplies, and even completed cars to potential racers (just do a Google search on "Pinewood derby"). I think the Cub Scouts should offer an economics badge to Scouts who show the most proficiency in outsourcing production of their cars.

The cancer is growing

Lead article in the Economist:

“The question that we ask today”, said Barack Obama in his inaugural address, “is not whether our government is too big or too small, but whether it works.” This is clearly naive: with deficits soaring, nobody can afford to ignore the size of government. Mr Obama’s appeal for pragmatism has some value: conservative attempts to roll back government regulations have led to disaster in the finance industry. But left-wing attempts to defend entitlements and public-sector privileges willy-nilly will condemn the state to collapse under its own weight. Policymakers will not be able to give a serious answer to Mr Obama’s question of whether “government works” without first asking themselves some more fundamental questions about what the state should be doing and what it should be leaving well alone.

But why do we have to pay the public employees so much?

The problem is likely to get worse:

The United Nations points out that the proportion of the world’s population that is over 60 will rise from 11% today to 22% in 2050. The situation is especially dire in the developed world: in 2050 one in three people in the rich world will be pensioners, and one in ten will be over 80.

Denmark: high taxes, big social safety net, but all the talent has left the country

Interesting two part podcast on Denmark, which at first glance seems to defy the usual tradeoff:  higher taxes (63% income tax) may make it easier to take care of everyone (four years of unemployment insurance), but all the really productive people have left the country. 

• First Part:  Denmark utopia
  
• Second Part:  Tax me please
  

Why are homeowners reluctant to walk away from underwater mortgages?

Especially in states like Arizona and California, where mortgages are nonrecourse loans, which cost more because they are easier to walk away from ($800 for each $100,000 borrowed).

Morality aside, there are other factors deterring “strategic defaults,” whether in recourse or nonrecourse states. These include the economic and emotional costs of giving up one’s home and moving, the perceived social stigma of defaulting, and a serious hit to a borrower’s credit rating. Still, if they added up these costs, many households might find them to be far less than the cost of paying off an underwater mortgage.

An important implication is that we could be facing another wave of foreclosures, spurred less by spells of unemployment and more by strategic thinking. Research shows that bankruptcies and foreclosures are “contagious.” People are less likely to think it’s immoral to walk away from their home if they know others who have done so. And if enough people do it, the stigma begins to erode.

Other people's money

President Obama recognizes moral hazard:

Phony populism aside, yesterday Mr. Obama introduced his first serious idea into the debate on reforming the financial system. In calling for an end to proprietary trading at firms with a federal safety net, the President showed that he now understands an important principle: Risk-taking in the capital markets is incompatible with a taxpayer guarantee.

Now, if we could only get him to recognize the same problem in health care.