My interview with Fluent U

Departing from our usual discussion of economics, I'm happy to report that I was recently interviewed by Christina Lu from FluentU.com on my experience learning Chinese, living in China and strategies for improving fluency.

I would also like to add that I've been enthusiastically using memrise to improve vocabulary, and have managed to add a few hundred more words and idioms to my Mandarin in the last few months.  The software is designed to maximize retention and minimize study time through the use of predictive algorithms.  If you are considering learning a language, I highly suggest giving the site a try.  Next week we will discuss a method for improving GDP calculation to better take into account the nature of digital consumption.

My Favorite Podcasts

Hey Now,

I've had a few requests in the last few months from some of my close friends for podcast recommendations. 

Top 5 Podcasts:

1. Econtalk (www.econtalk.org)  

2. Radio Lab (www.radiolab.org)

3. This American Life (www.thisamericanlife.org)

4. The Joe Rogan Experience (www.joerogan.net)

5. Tiesto's Club Life (www.tiesto.com/Tiesto-club-life-podcasts)

All of these are approximately 1 hour in length and free.

Enjoy!

Food Stalls: A Purposely Hidden Gem.

How often have you heard a politician say something to the effect of, "we can never be too safe, right?"  When you hear a words like never, always, totally, conclusively, or absolutely come from anyone but a scientist, get alert for trickery.**  In some parts of the US, food trucks and food stalls are illegal or heavily regulated while in other countries, even some developed countries like Singapore  and Hong Kong, they are embraced as part of the national culture.  First let's talk about the experience of eating at food stalls in the US and then look at Singapore. Next we will talk about the alleged problems.  Finally, we'll try and look at both benefits and costs on balance and see where the scale lies.

Food stalls are best described as kitchens with a customer window.  A customer walks to the window and tells the chef what she wants, the chef whips up the dishes, and gives them to the her in exchange for a fee.  In the US, these sorts of stalls were common at town fairs and other places where crowds gather.  They tended to offer the standard American fare: Hamburgers, Hot dogs, Chicken Schnitzel, Fries, Coke, and Ice Cream etc.  In NYC there are thousands of hot dog vendors spread throughout the city selling more or less fungible products.

The Food Stall market in Singapore could not be more different than the US.  In Singapore, the Maxwell Food Center, a food court that is known throughout Asia as being one of the most delicious places to eat on Earth is the polar opposite of NYC.  In Singapore rather than serving the same sort of standard fare, each individual food court functions like a specialist restaurant.  You have chefs that specialize in cooking 2-5 dishes.  It is possible that the food stall you buy your Chicken Rice may be run by a chef who has been cooking the same dish 7 days per week for 40 years... Now apply level of sophistication to 100 other dishes and styles of cooking from Indian to Japanese and you have Maxwell Food Court.***

The benefits of a food stall are that you are paying 100% for food quality, you do not pay for a restaurants ambiance, you do not pay for a restaurants staff to clean and maintain the dining room, you do not pay for any frills besides food.  Because you do not pay for these additional features, the price for these foods is very low.  In fact you often have stalls competing on price which is a blessing for when all your looking for is good food at an economical price.

In America, you really can't find this in most places.  In parts of California, food trucks are trying to open and provide a similar sort of service as the stalls in Singapore, but they face many regulations and safety features which make doing business nearly impossible.  Restaurants are often the largest opponents of food trucks, while they claim that the reason has to do with "health and safety", the real reason is more than obvious.  Everyone likes competition except when it effects your business negatively.

If you get sick eating bad food, you have many options including but not limited to:

1. Never patronize the stall again.
2. Tell your friends to refrain too.
3. Go online and give them an unfavorable review with pictures of the pain they caused you.
4. Sue the bastards.

There is no reason that we should try and regulate food stalls and trucks out of existence based on safety, and restaurants facing competition need to get innovative or buy a truck themselves.  It is distressing to me that food trucks and stalls are not extremely prevalent throughout America and of the same quality as exists in Singapore.  America's entrepreneurial spirit is one of the strongest in the world, but it has doomed itself to eating TGIF, Ruby Tuesdays, or hot pockets for lunch, when people in much less mobile, command based economies, with much less wealthy citizens, eat considerably more delicious  food on a day to day basis.  This must change.

Notes:
**It is still wise to beware of scientific claims, however I think politicians, attorneys, religious figures, and journalists are far more likely to play fast and loose with their words.
*** While I was in Singapore I heard that successful food stalls will often sell their cooking methods, recipe,  and stall for more than 2 million USD!

Labor markets tell a grim picture for Europe.

If this chart does not scare the crap out of you, then you do not understand the chart.  Hat tip to Zero Hedge.

Looks Like Meat Is Back On The Menu

Thanks to Zero Hedge

Chinese people really, really, like pork.  

What can a car stereos and hurricane Sandy tell us about Capitalism?

Economists, business people, and consumers alike love innovation.  When the iPhone first debuted it had a low resolution camera, today it has an 8mp camera capable of HD video recording.  Certainly a marvelous development.  There are many instances however of design changes that seemed like features to developers, but actually turn out to be bugs once released.  

One clear example of the idea that not all change is productive comes from the stereo.  At first, stereos used dials and knobs that one turns in a circular direction to change the station or advance a recording.  Later, once the advent of cheap plastic and buttons came into popularity, changing the radio station necessitated pressing a button, where each press advanced one station.  Recently in the last 5 years, stereos design has been reverting back to the dial and knob design.  Why? It's just much more convenient than pressing a button 100 damn times.

How is it that engineers know that the designs they have created are up to snuff?  Prices.  Prices are signals which indicate to producers whether what they are doing is the right thing, or whether they need to alter their product in some way.  If the price of a particular type of with a dial stereo is higher than an equivalent radio with a button system for tuning in a station, it's a guarantee that the producer of the button model will be carefully observing the sales of its competitor to determine whether changes to his product are necessary.  If we prevent prices from fluctuating by interfering with the market price, it is impossible for the producer of the stereo to know whether or not he is producing the good which people actually desire relative to some other arrangement of productive resources.  In capitalism, the profits are just as important as the losses.  Both serve as signals to the producer whether they are catering to their customers needs.

Imagine we take this same sort of logic and apply it to the recent Hurricane Sandy that hit NJ and NY.  When we pass "Anti-Gouging" laws.  We are in effect passing a law which says that the price of gasoline cannot fluctuate regardless of demand.  This means that consumers will need to pay for gas in other ways other than money, and in the case of NJ's rationing system, they instead had to pay with their time.  Rather than trading more money for gasoline and minimizing time waiting in line, the Gov. Christie choose to only allow people to pay with their time waiting in gas lines.  He forgot an important lesson about prices.  Namely that high prices signal to suppliers that more gas is demanded than normal.

If gasoline were allowed to fluctuate, prices would have been very high right after the storm; perhaps $25.00 a gallon. Seeing those high prices I absolutely guarantee that we would have seen entrepreneurial gas station managers calling their friends in neighboring counties and states unaffected by the storm to deliver gas, thus reaping the temporarily high price.  The more gas stations making these sorts of calls, the faster the price would be driven back to normal levels.  Rather than allowing the price to fall to normal levels rationing the gas simply made people pay with huge quantities of time, for most people these quantities were worth much more than the paltry savings in gasoline.  Therefore, this policy is almost certainly a huge social loss on net.  It  seems incredibly immoral to me to force people to pay higher prices (time is a resource too!) than they otherwise would have to especially in a time of great hardship like a hurricane.  If anything, this is exactly the time the a well functioning price system is MOST necessary.

A Charter City In Peril

Imagine if a small city in rural Mexico could become as large and vibrant as London in the next 20 years.  While this may sound impossible, in Shenzhen China, something akin to this situation has already occurred.  

Shenzhen 30 years ago.

If you looked at per capita income data in 1980 and compared Hong Kong and Shenzhen you would see that HK had a per capita income more than 10 times that of Shenzhen and a population almost 100 times larger.   In the last 30 years, Shenzhen has gone from a few thousand people living in a fishing village to one of the largest cities in China with one of the highest per capita incomes in the country.  It behooves anyone interested in economic development to ask, how did this growth miracle happen? 

Shenzhen 2010

The disparity between these two areas cannot be the result of culture or geography. People living in Shenzhen spoke the same language, had the same family values, and had access to the same natural resources (if anything those in HK had less).  The trigger that ignited Shenzhen’s rapid growth was the result of economic reform policies instituted by Deng Xiaoping.  Deng’s economic reforms created relatively free markets, along with respect for private poverty, foreign investment opportunity, and a lax immigration policy.   While these factors will not surprise economists as necessary conditions for economic growth, their appearance in Communist China represented a monumental shift in Chinese public policy.

In December of 2011 Paul Romer, a lauded growth economist at NYU, had the opportunity to present the concept of "Charter City" to the Honduran congress. Romer explained that, “the insight behind the idea is simple, if you want to improve human well-being, we do not need more economic aid, but rather we need more Hong Kong.”   Romer’s plan is to create new cities in poor countries where the host country would cede control over a plot of uninhabited land to a developed country with a strong tradition of the rule of law, low corruption, and free markets, such as Switzerland, Canada, or Korea.  These developed countries would administer the Charter City’s government and other countries would volunteer their court system to adjudicate disputes.  While many academic ideas are unable to leave the ivory tower, Romer has found an interested party in the government of Honduras.

The government of Honduras asked Romer to come to Tegucigalpa to pitch his idea on Charter Cities.  The congress was moved by his idea and voted 126-2 to approve land to become a RED (autonomous region) zone.  One of the stipulations of the approval was that a transparency commission chaired by Romer and consisting of internationally recognized scholars and luminaries were to be appointed to oversee the independence of the RED zone from the Honduran government. 

In mid-July 2012, something unforeseen and disheartening occurred.  The Honduran government created a contract with a private firm relating to the RED.  If this contract were to be legal under the rules of the RED then it would have to be made available to the transparency commission for review, but Romer and other commission members were explicitly forbidden from receiving information regarding this contract.  The reason given was that the Honduran Congress chose not to publish its decision to appoint a commission until after a challenge to it was settled in the Supreme Court.  Therefore, until that time they were not officially commission members and were not entitled to view the contract.  The Honduran government's decision at this juncture is disturbing at best and outright devious at worst. By surreptitiously contracting with third parties in direct contravention to the idea of a charter city with a transparent government, the Honduran government may sabotage the city before it begins. 

This turn of events away from open institutions towards backroom dealing is tragic and is illustrative of the exact reason that Honduras has remained a poor country for decades.  If Honduras wants to improve the well being of its citizens it must reinstate the transparency commission and begin on the path to create prosperity for its citizens.

What can a spider tell us about public finance?

Recently, a large spider showed up outside my kitchen window.  Using the internet I was able to easily identify it as a female Brown Orb Spider which is common in New Jersey.  This spider has a number of unusual benefits for humans.  It primarily eats mosquitoes and builds quite beautiful webs.  Additionally, its coloring consists of a light brown and orange thorax combined with black and white legs.  Moreover, its a skilled web builder and has produced an intricate web about 30cm  in diameter in less than a night!

Brown Orb Weaver

After taking Biology for a number of years, I remember that this relationship is said to be commensalistic because the spider benefits (it can eat mosquitoes unencumbered) and we neither benefit nor are harmed (it is safely outside the window and does not obstruct the view).  If we use economics to consider the relationship it seems that the spider, at least for me, confers a positive social benefit owing to its beauty and symbolism.  Identifying it as a positive social benefit is more a matter of my taste compared with those of other people, and considering other members of my family's stated interest killing Brown Orb, perhaps it is more of an negative externality.

We can view my taste in beautiful spiders (from a safe distance) relative to other peoples desire to kill spiders (even if they are a safe distance) as an example that the deciding factor when determining nature of an externality is taste.

In some cases people do contract to only allow for certain types of activities presumably because there is agreement that a particular activity is beautiful.  For example, people live in communities where everyone is contractually obligated to mow and water their lawn, maintain a well painted home, and a prevent the placement of lawn gnomes just to name a few.  While these activities may not be perceived by everyone as positive those who agree to live there on net accept these practices.  In other cases, a fresh smelling garden may seem like something which is a certain positive externality, and then when we consider those with seasonal allergies we realize that the benefits may be more private than social.

So why does it matter if a thing with putative beauty is a positive or negative externalities?  The trouble is that when it comes to government financing things that some consider beautiful  (public art, music, gardens, libraries, etc.) often receive public funding. These institutions receive funding because government officials believe that they are positive externalities, and theory tells us that positive externalities are a great candidate for subsidies.  In many cases they may be correct, but it behooves us from time to time to consider those people who at one end are indifferent to or at the other end staunchly opposed to the use of public funds to satisfy certain peoples opinion of what constitutes a positive externality.

UFC Fighters and Insurance

In the last year, the UFC has offered insurance coverage for all fighters on their roster which providing coverage for any injuries sustained during training.  Prior to this year, only injuries sustained while participating in contracted fights were covered under the UFC's insurance policy.  The additional insurance coverage purchased for fighters was universally hailed by fighters, sports reporters, and fans as a victory which would ensure fighter safety.  The trouble with insurance however is that it is a tricky business which tends to produce incentives which may not be obvious to these same groups of people who lauded the institution of total fighter coverage.

One omnipresent outcome of insurance contracts is that insurance against a given outcome will often cause the purchaser to be more risky in relation to the event they are insured against.  The technical term for this idea is moral hazard. For example, if I purchase insurance on my cell phone, I will be marginally less cautious regarding the phone's safety.  Of course, in this case, because I purchased my insurance on my phone, it is likely that I will correctly internalize the risk of damaging the phone and take appropriate risk mitigation measures.  However in the case of UFC fighters, the fighters obtaining coverage, are not purchasing the insurance directly, like I was in my example about my cell phone.*

Patrick Cote blowing his knee against Anderson Silva

Now that fighters are able to have their injuries treated at not cost to them, it stands to reason that if they are injured they will be more likely to pull out of a fight and recover their health rather than fight injured.  In this way, we would should expect more UFC events to be canceled or have their cards interrupted than the time prior to the institution of universal insurance.  Furthermore, fighters may be marginally less likely to utilize safe training measures in their fights because they feel that if something does go wrong, "hey it's covered, and I can sit out and have it paid for."  I have no opinion whether this state of affairs is better or worse than one without insurance, but two facts seem clear:

1. We should expect fights to be canceled more frequently due to the decision to treat injuries under an insurance plan rather than fight through the injury.

2. Fighters will likely be marginally more cavalier about their health and training methods because they feel the shadow of moral hazard creeping in the back of their mind.

Notes:

*It is probably true that the result is that they are, in fact, purchasing the insurance through lower wages,  but this fact may not be as palpable to fighters as if they were personally cutting the check, and because of the universal nature of the coverage, fighters must consume the insurance plan and so they may simply view it as a condition of working for the UFC as opposed to a part of their compensation which must be balanced with risk mitigation. 

Rolling With Death On Weekday Nights

I have always been interested in martial arts primarily because of its practicality.  If you are looking for a way to stay in shape, why not choose a sport that confers other positive benefits besides fitness, such as self defense.  Playing basketball, while fun, is unlikely to help you off the court.  On the other hand, joining the swim team will certainly save your life if you fall in a pool, and give you a high degree of comfort when trying virtually all water sports.  In this way martial arts is a lot like swimming.

When I first began training in martial arts, I started with Isshinryu Karate.  My instructor was a 6th degree black belt, and in incredibly good physical condition.  He also had fought as a golden gloves amateur boxer so he regularly combined karate with boxing.  Karate is a form of martial arts that relies equally on punches and kicks, but really does not practice any aspect of ground fighting.  By the time I was 18, I was a brown belt and I genuinely believed that what I was learning was useful and would help me defend myself.  Once in high school I had used karate to defend myself successfully, but retrospectively this was more luck and displaying confidence then the result of my training. 

The truth of the matter, is that if I were to get into a fight with someone and they threw me on the ground, I would have been helpless.  Once you're on the ground, all years of studying karate or boxing become instantly useless.  Watching the UFC on television helped me realize that if you do not incorporate some elements of ground fighting into your training, you are a fool.  While, I am not suggesting that the 6 years I spent doing karate were useless, quite the contrary, it taught me a lot about judging distance, striking technique, and breathing control, it must be combined with other styles in order to be comprehensive. 

In 2008 I started taking Brazilian Jiu Jitsu lessons for a few months when I was home from University over the summer.  In those 3 months, I learned more about self defense than I had in 6 years doing karate.  Brazilian Jiu Jitsu is a martial art focused on efficiency, leverage, and finishing techniques such as chokes, joint locks, and achieving dominant position.  Learning BJJ was the most humbling experience I have ever had.  For months every day in practice I was choked out at least 2-10 times and was forced to tap out, surrender, to arm locks, knee bars, shoulder locks, forearm locks, foot locks, spine locks, wrist locks, and various other techniques.*

    This photo is of Marcelo Garcia (175 lbs) choking out another world champion who outweighs him by more than 50 lbs.

The most fascinating part of BJJ is that strength really is not the relevent factor for victory.  I have seen 125lbs men literally rag doll men twice their size.  My Instructor who weights 170 lbs, could if he wanted to, choke out (in other words, select to kill) literally any man on earth who was unarmed and has not trained in BJJ for at least 5 years.  I do not mean to imply that my instructor is likely to become a murderer, quite the contrary, he has no ego at all. My point is just that until you have studied BJJ, you really cannot fathom just how vulnerable you are to someone that has trained in the art. 

The other wonderful fact about BJJ is that nearly everyone I've met that plays is really kind and has no ego at all.  The reason for this is simple.  If you have a big ego and can't stand having to give up, you will probably quit very quickly.  For the first year, you will have to learn to surrender so so so many times, that your ego is totally defeated.  This leaves a group of highly motivated, fun loving, ego-less people excited to teach you how to improve your BJJ.  If you have never tried BJJ you are really missing out on a great way to keep your body healthy and if necessary use it as a weapon. 

Note:

*In BJJ if you do not tap out, you will face serious injury such as an elbow joint being bent past 180 degrees, requiring surgery to heal and at least 6 months recovery, or in the case of a rear naked choke unconsciousness in 5 to 10 seconds or death if more than a minute.