Cheap Talk

Gave a lunchtime talk at MIT today and was exhausted by 4 pm or so by rush of adrenalin leaving the bloodstream.  Had to re-energize.  What could be better than the take-out counterpart to the Oleana empire, Sofra Bakery?  Yummy flatbreads, meaty (wife had lamb) and veggy (I had spinach and three cheese).  Lots of mezzes, including feta with hot peppers, beet tzatziki, bean and walnut pate.  Great cheese borek which, unfortunately, by annoying kids were too picky to eat.   Wish it was on my way to work as they also have great breakfast.  If only Cambridge schools were less random, so we could have settled here.  But, looking on the bright side, we have Clear Flour Bread in Brookline.  And that’s a HUGE positive.

When cellphone use is allowed on planes (e.g. on foreign airlines), people get on the phone.  But passengers seem to want airlines to ban use.  How are these things consistent?  Some simple theories:

1. Negative externality 1: You can’t control who calls you, e.g. your boss giving you yet more work.  If cellphone use is not allowed, no-one can call you.

2. Behavioral Economics story: You have a self-control problem.  You know you’ll use the phone excessively as you’re a phone addict.  Banning use helps you commit not to use it.

3. Prisoner’s Dilemma (Negative Externality 2): You want to use your phone on a flight but you don’t want your neighbour to use it.  But this is not possible so you know everyone will use their phone.  Then, you prefer that no-one be allowed to use a cellphone on flight, even if it prevents you from using your phone.  A possible solution: Some of the revenue generated can be returned to the passengers to compensate them for the externality they suffer.  Only way this will happen is if it gives one airline a competitive advantage over another.

Of course, with airlines in financial trouble, selling snacks on planes, Wi-Fi is coming somewhere to a plane near you whether you like it or not as someone will pay for it as they like it.

The list of Summers’ gaffes is long.  A key early entry occurred when he was the Chief Economist at the World Bank.  In a memo, it was suggested:

The measurements of the costs of health impairing pollution depends on the foregone earnings from increased morbidity and mortality. From this point of view a given amount of health impairing pollution should be done in the country with the lowest cost, which will be the country with the lowest wages. I think the economic logic behind dumping a load of toxic waste in the lowest wage country is impeccable and we should face up to that.

(It turns out that the memo was written by an underling and Summers just signed it.)

This policy prescription is being followed illegally in Europe.  Recycling laws impose high costs of disposable in Europe and it is cheaper to export the waste to China, India and elsewhere.   The old memo made a point based on efficiency.   If transactions costs are low, the efficient solution is also the solution to decentralized voluntary trade (the Coase Theorem).  Ships arriving in Europe or the U.S. with goods from China have to go somewhere afterwards anyway.  Why not send them back full of waste?  Transactions costs are low and the solution the World Bank identified gives firms the incentive to transfer the waste, sometimes illegally.  Sometimes the dismal science’s dismal predictions turn out to be right.  Now, we have to think of whether we can design a better solution.  I’m going to look at Jeff’s intermediate micro notes to see if  I can come up with something.  Don’t hold your breath.

Kennebunkport ME

In Chicago, I love Semiramis and Nazareth Sweets.  The falafel special sandwich and the baklava form the basis of an initially healthy but finally indulgent meal.  While delicious, the options are generic.  Our main food discoveries in Boston have been Middle Eastern (broadly defined!).  The Armenian takeout we had a friend’s house had the usual hummus and babaganoush.  The dish that was spectacular and totally new to me was a pomegranate, chili and walnut mush  (I think it is called mouhamara).

And then last night, we went to Oleana.  What a revelation.  Greek, Turkish, Lebanese…etc. etc.  All represented and modified till the cuisine achieved a different level.  Everything was good.  The whipped feta with peppers, zucchini pancakes (I could have done with less haloumi) and finally the fideos – I’d never had them in a restaurant, have tried to cook them (the Zuni cookbook has a recipe I tried) and never knew how they should be.  Now I know.  Not sure if I will reach Oleana’s heights on this dish but at least I know what to aim at.  My wife enjoyed her lamb and eggplant dumplings and sausage.  We didn’t have room for desert.  Can’t wait to go back.

You spend too much on your credit card and/or forget to pay off your bill on time and get hit with late fees.  To commit to better behavior, you chop up your credit card and move to a debit card.  You avoid late fees by definition and it should help you commit to less spending as your bank balance acts as a natural upper bound on expenditure.

Dream on – the banks and credit card companies are too smart to give away profits like this.

They do two things.  First, you get “overdraft protection” meaning you can go over your bank balance at the cost of incurring fees of around $30/charge.  They make it very hard to turn down overdraft protection so you get a “service” you don’t really want.  In fact, it removes the commitment device you hoped to acquire by getting a debit card.  Second, as a I learned from watching this video, on a given day they debit your account in the order that maximizes the number of overdraft charges you incur (i.e they charge your account with bigger debits before smaller debits whatever the chronological order of the charges).

There is another effect:  the debit card selects for precisely those people who have the funds to pay their bills but lack the self-control to pay on time.  This is why they switch from a credit card to the debit card.   Credit cards are also used by people living beyond their means who might default.  These people do not get a debit card as they can’t afford the fees and they do not get the large credit line they need to spend like crazy.  This means a debit card is potentially more profitable to a bank than a credit card.  Banks have a great instrument for extracting surplus from sloppy consumers while avoiding bad risks.  So, confused consumers are still exploited, getting overdraft protection they don’t want and incurring fees that are unnecessary.

I’m typing this on my MacBook Pro, I walked to work listening to music on my iPhone but I have been shaken to my core by the videoclip in the middle of this page.

1. The unbundled economy.
2. Not a placebo.
3. A man’s salute to Patrick Swayze. (consider yourself warned.)

X-inefficiency at output q is the difference between the realized cost of production at q and the minimum cost of producing q.

If firms are maximizing profits, the difference is zero.  But there are many reasons why they might differ.  One is lack of competition.  The rough argument is that a monopoly has less incentive to minimize costs because it can absorb X-inefficiency in the form of reduced profits without going bankrupt.  Here is a video of X-inefficiency: