Books cost too much! (so I wrote a blog post)

Academic textbooks are really expensive. The current version of Mankiw’s principles text is $186 in hardcover.  I’ll go out on a limb and conservatively guess that the marginal cost of producing another copy is no more than $25. Of course there are substantial fixed costs but…

Here’s what I think is going on.

Textbooks are a type of network good. The more people use a given text, the more others will also want to use it. So the market approaches winner take all with just a few books selling well and making profits. This is probably true of all kinds of books.

Weirdly, the books that don’t sell well (the losers) almost have to price high as they are trying to cover their fixed costs over a small sales volume.

The winners don’t have to price high to break even, but given that demand is high and relatively inelastic, why shouldn’t they? Indeed they do, and with gusto.

So the losers price high to try and stay in business and the winners price high because the network good nature of the market gives them a serious degree of market power. In a market like this, a loser cutting price is quite unlikely to receive much of an increase in market share

So how to fix the problem?

Doubly weird is the tried and true idea of “more competition” in form of a larger number of texts on the market probably isn’t really going to help as will just create more losers struggling to stay alive. Competition here is “for the market” rather than “in the market” to use the terms of Cowen and Tabarrok’s expensive text.

Another market solution is resale, which happens on a very large scale already. Amazingly, new text prices would likely be even higher without this form of competition, where old copies of the winning books compete against new ones. Naturally, publishers don’t like resale and respond by pumping out new editions on an inefficiently fast schedule. But resale definitely is a check on new text prices already. If we want them lower, it’s not a new tool to use. It’s also true that resale doesn’t only work to lower new prices. The fact that there is a resale market for a product likely would increase the demand and raise the price for that product. So, it’s complicated.

If increased competition in terms of more textbooks is unlikely to help, and resale has already done what it can do, then what?

Well, Facebook is a network good and it’s free to the end users, so maybe allow textbooks to contain paid ads? There’s a free market solution for you folks!

There’s another type of industry with high fixed costs and low marginal costs; natural monopolies like utility companies. We generally regulate them with the alleged aim of getting the outcome to be close to average cost pricing. Maybe the same should happen in the textbook market?

If we don’t like a regulatory response, then it’s going to take a big decline in demand to get prices down. There is some evidence that some schools, community colleges in particular are going to open source texts or even abandoning the use of textbooks at all. This kind of makes sense as their customers are the most price elastic ones.

Oh pity the poor publishers. If only they could price discriminate better!

So don’t worry, Mankiw’s days at the top are numbered (anybody remember Lotus 1-2-3?), but the new best seller probably won’t be any cheaper.

Go on, take the money and run….to Stanford?

So Peru announced a 100,000 Soles bounty on the head of that desperado, Alejandro Toledo, its president from 2001 to 2006, who’s accused of taking in millions in bribes while in office.

Some observations:

That’s about $30,000 making Toledo 1/833 as evil as Saddam or Bin Laden ($25 million).

Toledo is an unpaid “visiting scholar” at Stanford with an office and library privileges so it shouldn’t be too hard to find him.

If he really has $20 million in ill-gotten booty, couldn’t he just offer $31,000 to NOT capture him?

Is the government of Peru unaware that they have an extradition treaty with the USA (since 2001 ironically enough)?

Since I was once mistaken for Toledo by a crowd of Peruvians in 2000, this whole situation has me marginally more jittery than usual.

These kinds of prosecutions are often just political payback and posturing, but in this case the ex CEO of the bribing company is directly saying they bribed Toledo.

Maybe Alejandro could get the cell next to Fujimori??

 

 

Leggo my Ego (Morales)

Ah Evo.

Who can forget his “signing” as a pro player by a Bolivian soccer club in 2014?

And of course there’s his new “Evo Museum” built for $7.1 million in his home town of Orinoca (population 900) and dedicated to his life. This has been in the works since 2006, as it was one of Evo’s first acts as president to commission his museum.

Usually, you don’t build the “presidential” library until after you are no longer president. But as far as Evo is concerned, that’s not happening anytime soon. Already on his supposedly impossible (according to the constitution) 3rd term, Evo is still planning on running and winning a fourth term in 2019. This despite last year’s referendum where voters rejected his bid.

“Now, Morales is trying to invalidate the referendum claiming that the opposition had won because of false news reports, and is seeking new ways to reform the constitution to be able to run for a fourth term. He was recently quoted by the daily La Razon online as saying — using a soccer analogy — that the 2016 referendum was only “the first half” of the game and that there will be a “second half.””

When I was born for the 7th time

Very cool new paper in the AEJ Applied.

Here’s the abstract:

Political favoritism affects the allocation of government resources, but is it consequential for growth? Using a close election regression discontinuity design and data from India, we measure the local economic impact of being represented by a politician in the ruling party. Favoritism leads to higher private sector employment, higher share prices of firms, and increased output as measured by night lights; the three effects are similar and economically substantive. Finally, we present evidence that politicians influence firms primarily through control over the implementation of regulation. 

I love these kind of quasi-experimental papers! I preach/teach this approach to all who will listen (or are forced to pretend to listen).

Here’s a link to a working paper version.

A few comments.

“Favoritism leads to” is a bit of false precision. “Just barely electing the ruling party candidate vs an opposition candidate” is probably more accurate.

What are we supposed to think here, that the ruling party does this for all districts? Or that, having won a district they didn’t think they would, they invest at the margin to try and make it more secure?

Is this happening because the ruling party is favoring the barely won constituency or because it is punishing the barely lost constituency (or a combo of both)?

Do these kind of effects depend on how competitive the overall elections are? If say Congress has 70% of the districts, would this be happening? In other words, how generalizable is the finding.

These comments probably seem critical, but I would have pushed the “accept” button if I’d refereed the piece.

And here’s the “money shot” from the piece:

screenshot-2017-02-09-08-08-53

 

Looks like they punish the closely lost districts, no? or low growth is serially correlated and low growers vote for the opposition?

 

 

Holiday advice from Dr. Angus

If you must listen to Christmas music (and I really don’t recommend it), you could do a lot worse that the collected Christmas works of Sufjan Stevens. Dude really loves Christmas and has put out a ton of Sufjan-ized holiday music. You can get a lot of it on the u-tubes right here.

For Non-Christmas Sufjan, I highly recommend, Greetings from Michigan, Come on feel the Illinoise, and his latest, Carrie & Lowell.

 

Broken Branches, Peruvian Edition

The executive and legislative branches of the Peruvian government appear to be heading for a showdown. Longtime CG friend and awesome economist Cesar Martinelli breaks it down for us in this guest post:

 

PRESIDENT VS CONGRESS IN PERU

by

CESAR MARTINELLI

Forget about the soccer war of the 1960s. Peru’s current government may collapse apparently because of disputes about the organization of the Pan American games in 2019. President Pedro Pablo Kuczynski of Peru—or PPK as he is known in Peru—was sworn in merely four months ago, receiving high marks from both domestic public opinion and the international press. A typical profile of PPK in the media like this one written by my colleague at George Mason University, Tyler Cowen, would extoll PPK’s impressive experience as a policy-maker and as a private banker, his connections with international organizations, and his academic pedigree. One of the best-received initial decisions of PPK was to include in his first cabinet the Minister of Education of the previous administration, Jaime Saavedra. With impeccable credentials of his own as a policymaker and academic, including a PhD in economics at Columbia University, Jaime Saavedra has pushed successfully for a revamping of education in Peru, around the recognition of the importance of evaluation and incentives—two themes that are central to the economic view of policy making. Saavedra’s popularity has been cemented by his ability as administrator and his obvious enthusiasm and knowledge of the field, even if there remains in Peru like elsewhere widely different views about the proper role of the state in the education sector, some at odds with Saavedra’s mildly interventionist stance regarding guaranteeing the quality of college education.
These coming weeks, PPK’s government is bound to appear again in the news, and the apparent reason is Minister of Education Saavedra. Yesterday, Saavedra was required to appear in Peru’s Congress to answer a list of questions posed by the majority in Congress, conformed by the followers of Keiko Fujimori, still smarting from the lost of the presidential runoff against PPK, and minor allies. The list of questions, unfortunately, has nothing to do with discussing the direction of the education reform, and reads more like a laundry list of assorted complaints, mainly about the organization of the Pan American games. The debate yesterday in Congress has not been an edifying spectacle, with the spokesperson for the majority roundly declaring that Peru’s recent improvements in the PISA evaluations were the result of some sort of conspiracy promoted by the Peruvian government. We live in a post-truth world, I guess. Absent any real policy disagreement, the only reason the majority in Congress may be moving toward the dismissal of Saavedra is precisely because he is successful and, as such, an asset to the government. A successful administration by PPK would delay or endanger Fujimoristas’ anxiously awaited return to the control of the executive, where most political rents can be generated.

This is what follows next. Fujimoristas have announced that will move toward censoring Saavedra in the coming days. According to the Peruvian constitution, Saavedra will have three days to resign. The executive can reply by promoting a question of confidence regarding the whole cabinet. If the Congress insists, then the whole cabinet must resign, and the President will be forced to form a new cabinet. This may be less daunting than it sounds since the President can in principle reshuffle the cabinet and propose it to Congress as a new cabinet, for instance promoting Saavedra to Prime Minister. And here starts a chicken game. If the Congress rejects the new cabinet or in any other way fails to approve a question of confidence, the President has the ability to dissolve the Congress and call new elections. Therein lies a wonderful irony. The current constitution dates from 1993, and was approved in a referendum promoted by the President Alberto Fujimori, father of Keiko, after illegally seizing power following disputes with Congress. One of the purposes of the constitution of 1993 was precisely to make it easier for the President to legally dismiss Congress.

 

One can imagine two alternative scenarios. In one scenario, the PPK government caves in, trying to appease Fujimoristas. We have seen that movie before; PPK himself wrote in 1977 a great book describing the economics and politics of Peru in the 1960s, when a reformist and generally well-meaning president was trapped in a tug of conflict with an opposition-controlled Congress. Things did not go very well, and representative democracy gave room to a military takeover. Much has changed in the Peruvian economy and society since then; sadly, rent-seeking and irresponsible behavior by political hacks has not. In the other scenario, PPK promotes a question of confidence and lets Congress inch towards a legal dissolution. This requires something new from PPK, beyond all the highs and lows of his extensive vita—true political leadership.

Notes from a red planet

On my last couple of visits to the River Wind Casino, I’ve heard a lot of talk about Trump. And people, the talk has been overwhelmingly positive. Even folks that I know did not vote for him are impressed.

The Carrier deal? Aces.

The proposed tariff on firms who move production abroad? Even better.

Talking to Taiwan on the phone was highly rated as well.

Here are some more or less quotes:

China can kiss our ass if they don’t like it.

The president of the US can talk to whoever he wants on the phone.

Trump is our only chance for change.

35% is ok but you know what would be better? 100%!

Trump is the only one trying to help.

We are crazy to let China sent their stuff here.

I hope he makes more companies keep jobs here.

While Trump’s trade and industrial policies are horrible economics, attitudes on the red planet (aka Oklahoma) have changed from simply anti-Hillary (Benghazi!! Lock her up!!!) to very pro Trump based on his actions over the last month.

Whatever our own attitude toward the dude is, I think we should understand that, for a pretty large chunk of America, he’s winning them over.

No wonder I hear so much talk from my progressive friends about getting rid of the electoral college.

And don’t think the folks at the casino don’t have an opinion about what that is code for: allowing politics to go back to ignoring them and their interests.