My take on An Economist Gets Lunch

Marginal Revolution is one of my favorite blogs. Together Tyler Cowen and Alex Taborrak provide a good mix of relevant information, insightful commentary and enjoyable yet somehow relevant nonsense. I also really like learning about how to eat better food. So when An Economist Gets Lunch by Tyler Cowen was announced I immediately pre-ordered it. Leading up to the publication, I read most of the reviews of the book that Tyler Cowen linked from his blog. He also linked to many articles and interviews he did in order to promote the book and I excitedly read them. This led to an interesting situation, as by the time I got the book I had already read over half of the material in it. The idea that you should eat where the scene is not specializing in attracting beautiful women who attract other patrons regardless of the quality of the food or that Pakistani (Vietnamese) food will be better than Indian (Thai) food because the typical Indian (Chinese/Thai) restaurant caters to the less demanding average American was something I'd read a few times before I finally got to that chapter in the book.

It was helpful to read the material within the framework that Tyler Cowen decided to present it, and it is certainly one of the few books which isn't just bread slices of a theory around meat of interesting but generally useless anecdotes. If anything, Tyler Cowen's book would be one of the few books where the bread slices are the less interesting part, since it basically says "economic institutions and incentives matter when it comes to finding good food" and the interesting part is learning how they have mattered throughout history and how that can be applied to finding really good food today.  

Other than having read the interesting parts of the book before the book came out, there was another problem, Tyler was basically ignoring how most people who care about food find good places: Yelp or other online review sites. He did address using guidebooks in foreign countries, and how the places near the restaurant recommended by the guidebook will be better than the restaurant specifically recommended or how asking a middle aged cab driver who gets excited at the mention of food will lead to better results than going with the place everyone "knows" is good. Maybe he doesn't use a smart phone to check the reviews of places on yelp before he goes inside because he enjoys being able to apply his unique heuristics to find a good food place almost as much as he enjoys the good food.

But for fans of good food with disposable income living in a major metropolitan area, here is some advice on how to use Yelp (though the advice is generalizable to other sites). It isn't as simple as using the score. The score is a good starting point, but it frequently needs to be modified.

4.5 to 5 Star places
These places will have three potential problems. They are too crowded, too cheap or too expensive. 

1. Being too crowded could mean that the place is more of a scene that people like than a good food place, but generally the main downside is the trouble it takes to get into the restaurant when it is too popular. If it has been too popular for long then the food quality may have also started to degrade faster than the place's score. 
2. The problem of being too cheap doesn't sound like a problem, but sometimes people will rate a place highly if it provides a lot of food even if the quality isn't high. 
3. When restaurants get to be quite expensive then the food is going to be good, but ratings such as Zagat will give more nuanced reviews. Many of the people writing the reviews were not the ones paying the bill and do not visit restaurants of this expected caliber often enough to be a good judge of whether or not it is really worth the money compared to other places in its class.

3.5 to 4 stars places
For this group, we need to find evidence that the lower score is not about the food.  A high skew in scores with lots of 4's and 5's and a few 1's and 2's is better than the scores being clustered around 3 and 4 stars. This is especially true if the low scores complain about service, price or portions.  A good sign is when the main complaint is that reviewers think that the place is too expensive for its type of food. This means that the place would be a crowded 4.5 to 5 star place but decided to raise prices in response to demand. 

3.0 stars and below
Good luck! You might want to read the section in an Economist Gets Lunch where Tyler talks about how he can often convince chefs to make him something special. Or you can google around and find it in a review somewhere. (Hint for those unwilling to take either of those steps: It involves signaling that you are a knowledgeable and discerning customer)

The alternative way to use reviews is to find a few critics, amateur or professional, whose taste you've confirmed that you agree with and follow the advice of their reviews. But the above method works well when a trusted reviewer has not looked at the restaurant being considered or has not updated their view for some time.

My only other quibble was with the heuristics Tyler used for finding good sushi. The advice was mostly "You'll get what you pay for." And while at the really high end this might be true, there is a lot to negotiate in the middle range. Places that offer sake bombs will have bad sushi and high prices (this relates to his "don't look for good food at places with lots of beautiful women and people having fun" thesis). Places with more creative rolls on offer generally have lower quality fish and are trying to mask the low quality with lots of sauces and often by frying the fish. And unlike his advice to head for the suburbs for good ethnic food, good sushi is more often found in cities with both more competition and more demanding customers (Customers will become more demanding if they've had good sushi at other places in the city). He also leaves out the best way to get affordable pretty high quality sushi which is to buy fresh sashimi at a Japanese supermarket then take it home and cut it yourself.

Overall the book was very interesting. Over the past few years I applied his advice on food from an early book to order the least attractive sounding thing on the menu at a good restaurant because it is there for a reason and have benefited enormously from it. Going forward I'm sure that what I've learned from this book (or the reviews and interviews promoting this book) will lead to a lot of improved meals. I've already switched the marginal Thai meal to a Vietnamese one and have been better off for it.

At least it's not a wall

A policy proposed by members of the legislature in the freest country in the world: 

...their plan to re-impose taxes on expatriates like Saverin even after they flee the United States and take up residence in a foreign country. Their proposal would also impose a mandatory 30 percent tax on the capital gains of anybody who renounces their U.S. citizenship.
The plan would bar individuals like Saverin from ever reentering the United States again.

Just kidding. Not about the proposed policy, that's unfortunately true although it is doubtful that it will pass. I was kidding about this happening in the freest country, since the United States is the 10th most economically free country and it doesn't top the list in other surveys either.  The countries ahead of the United States, and even all of the industrial countries that are measured as less free, respect their citizens enough to let them earn income in other places without taxing that income.

The right to exit is a very important institution. It's tempting to label people who leave as "outsiders" or "disloyal" and punish them, but removing this very important safety valve paves the way for things to get much worse in our country.  Instead of preventing people from leaving or punishing them after the fact it would be useful to think about why they left in the first place and correct those problems.  One of those problems is that this type of political grandstanding actually ends up being turned into a law. Worries about Americans not paying their taxes overseas has led to FACTA, whose high compliance costs which make it exceedingly difficult for expatriate Americans and causes some of them to choose to no longer be citizens.

Three assertions

1. The developing world is now the main driving force behind world economic growth.

2. In places like China and the Eastern Bloc, most of the significant institutional reform occurred in the 90's.  Relative to what people think, economic convergence in the previous decade has been driven more by the internet reducing the cost of cooperating over long distances and less by institutional reform in the relatively corrupt developing countries. 

3. The Foreign Corrupt Practices Act is putting US companies that do business in developing countries at a serious disadvantage relative to local domestic competitors. Either they accept that disadvantage or they get caught trying to skirt the around the edge of the law and face the consequences.

A few links

1. Indian is exporting a negative externality. This is one of the first mainstream articles to focus on plasmids in the growing problem of antibiotic resistance. They allow a transfer of resistance at a much greater rate than resistance would spread if only direct descendants of mutant bacteria were able to pass on resistance. 

2. Even a crappy game like Mass Effect 3... the other views in this piece are not as contrarian as that one.

3. Interesting interpretation of the drawbacks to Hollande's victory. The policy markers seem to like playing chicken over there. If you are playing chicken with someone you don't trust do you flinch each time or do you get the collision over with so you don't have to keep flinching in subsequent games? It probably depends on how many times you think you'll have to play chicken.

4. Twitter does something very good. If more companies followed their lead then this would at the very least mitigate a significant amount of damage. Maybe eventually it will help public opinion turn against patent trolls in a way that can finally get the attention of lawmakers.

May 17th and Capital Gains

Facebook is expected to go public on May 17th. That means the 6 month lock up for investors and employees would end around November 17th. This gives them the option to sell before the capital gains tax goes up due to the Bush capital gains tax cut expiring and the 3.8% tax on from the healthcare law taking effect in 2013. At least one member of Facebook's board has been telling people that the change in the capital gains tax rate is going to impact the markets, so this probably isn't a coincidence. 

Hopefully the process goes smoothly and they don't have to push back the date much farther. During the holidays liquidity tends to dry up and employees and investors that decide to diversify their holdings closer to year end might move the market and give up in market impact what they are hoping to save in taxes.

Finite Willpower and Fake Investments

In my last post I went over a variety of fake investments. What I didn't get into is why this can be bad outside of the low or negative returns that will accrue to the fake investments.  The reason these fake investments are bad basically boils down to the idea that willpower is finite

Researchers have found that exerting self-control on an initial task impaired self-control on subsequent tasks: Consumers became more susceptible to tempting products; chronic dieters overate; people were more likely to lie for monetary gain; and so on. As Baumeister toldTeaching of Psychology in 2008, “After you exert self-control in any sphere at all, like resisting dessert, you have less self-control at the next task.”

One aspect of self control is delaying consumption and investing. With fake investments the person is using some of their finite self control that might have otherwise gone towards something actually useful. So the student who is fresh out of college who decides to get a master's degree in humanities at a low tier university probably isn't planning for their economic future in other ways because they believe they have already addressed it by continuing their education.  The cost is higher than "This investment will turn out to be useless" because there is the large opportunity cost of the real investments that aren't made after a person makes a fake investment. Economically useless education that a student can't afford is even more pernicious because they will be saddled with debt that doesn't go away in bankruptcy.

What investments are actually consumption?

A lot of times people think that they are planning for the future when they are really just enjoying themselves in the present.  I thought it would be helpful to classify a list of things that are sold as investments that may actually be more about consumption.

Young people's fake investments:

Certain formers of higher education education are definitely consumption rather than investment. Advanced degrees in humanities at less prestigious institutions come to mind. The supply of people with these degrees far outweighs the number of jobs available. Low ranked MBA schools give people an excuse to party for two years, but the cost of the school combined with the opportunity cost of not working for two years means that the marginally higher salary that most students get out of having an MBA does not make up for the time and money cost of the degree. Low ranked law schools might not be fun for students, but they are still paying up for the idea of being a lawyer and the many students suing their schools for misleading jobs statistics show that being a lawyer doesn't really pay.  A four year college degree is probably an investment, but unless the students are actually learning something useful or learning how to learn it is only an investment because of how it helps the student signal.

Fake investments older people make: 

A lot of real estate is actually consumption rather investment. Time shares are the most blatant obvious example. People are sold on them by being given free trips if they listen to a pitch, so someone who thinks about the margin these salesmen are making on the deal to make sales pitches worth it should think twice before buying.  They are told that they will go up in value but generally time shares can be bought for much more cheaply than they were sold on the secondary market.  Buying a home to live in makes more sense, especially with the mortgage deduction and the recent stagnant prices, but in 2005 and 2006 this was one of the biggest consumption decisions masked as an investment out there.  Going forward, investing in housing only makes sense if you expect moderate inflation instead of deflation (But then, not many investments make sense in a deflationary environment).

Certifications such as those for yoga teacher or massage therapists are another expensive investment (more in time than in money) and people who think they are making an investment choice instead of a consumption choice are probably fooling themselves. 

Fake investments for rich people:

Movies, wineries, start ups, second homes. 

In each of these categories, there are people who know what they are doing who can make money. But for outsiders to the movie industry, a lot of their return on investment is the fun of being able to participate in the process in the first place.  Wine country is littered with bankrupt wineries started by those who thought running a winery would be fun but didn't realize that they need scale to get proper distribution. Surprisingly, start ups can also be fake investments. If someone is working on their start up only because it's the cool thing to do or because they can't handle having a boss, that's a decision they are making because it suites their preference unrelated to whether or not they'll be able to capture the value they might be able to create outside of the institutional support of a normal business. Start up investors who are investing in science experiments or in really fun ideas might consistently lose money just for the idea of being able to hang around cool people doing cool things*. A good example of an investment that is really a consumption choice is company that will supposedly mine asteroids, Planetary Resources.  It's a really cool idea, but the investors are most likely happy about the idea that they are working towards a really cool idea and won't mind when it doesn't work quite out.    

I should probably add "writing blog posts" to this list, but I'm not sure which category it would fit under. 

While investment that is actually consumption is bad, there is an additional category, consumption that's also an investment, that is good in exactly the way investments that are actually consumption is bad. If people can identify wich activities they enjoy are also good for their long term success and happiness they will be better off in the long run.

*If one of those cool things works well enough, then they'll make most of their money back, but this isn't the case outside of a small group of connected VCs and angel investors.

Economists missing the point

Professor Mark Perry discusses the underpriced Garth Brooks tickets in order to make a basic economic point. When the price is below the clearing price of demand at that specified quantity the tickets will sell out quickly. Increasing the price or quantity will alleviate the supposed shortage. But that isn't the whole story.

The problem is actually more about resellers than most economists would like to think. The preference of the artist isn't to price the tickets where markets clear and they can maximize their profits. The idea is to give their fans a large consumer surplus and to create buzz around the show to help them sell out future shows. This could be because the artists are trying to appear altruistic to their fans or merely because the artists want to make sure their fans keep coming back. If a concert was just barely worth the combined price of the ticket and inconvenience of attending for a majority of their fans the artist wouldn't have long term staying power. A popular restaurant that raises their prices by too much can go from having lines out the door each night to being empty, there is no easily identifiable middle ground.

The problem is that current institutions allow resellers to capture a large percentage of this consumer surplus by buying up most of the tickets and selling them on ticket reselling sites.  So the challenge is for the artists to set up institutions that reduce the resale value of the tickets. There are various ways that the promoters can make it more likely that the difference in value between the price that the tickets are sold at and the market price goes to consumer surplus of fans rather than ticket resellers.

One method that is starting to be used is to only allow for small ticket purchases and to require that the person with the credit card shows up to pick up the ticket and goes directly into the show with their guest. At the very least, it reduces the premium to the reseller who actually has to drive and show up to the show in order to get their customers inside.

Another option would be to have a lottery for their fans, making each fan give a valid non-PO box address. The random winners would be given the option to buy tickets at the lower price. The tickets would be tied to the ID of the winner and that person would have to be the one to enter the concert.  The ticket could only be resold back to the promoter to give the buyer some optionality but to prevent the secondary market.

Eventually the technology to track purchases should be available and the large ticket resellers will have the potential to be stopped. The issue here is whether or not artists and promoters actually want to give their fans a high consumer surplus or just want to look like that's what they are trying to do while capturing most of it. A significant portion of the extra charge by Ticket-master goes directly to the promoters and artists who want to look like they are offering a lower ticket price and that Ticket-master is the greedy corporation. 

More generally, the relationship between an artist and their fans isn't always a market relationship where the artist is attempting to maximize profits. At the very least, there are social norms that most artists are trying to follow where they want to appear to be trying to give their fans large consumer surpluses and this approach should maximize profits in the long run by increasing the artist's popularity. It's from these social norms that the market inefficiencies exploited by resellers are created. But if the promoters and artists change the nature of what a ticket is, there are ways that artists can supply tickets to their shows that at the very least significantly reduce the problem and profits of resellers. 

Assorted Links

1. A 2010 internal Spanish study found that green jobs cost jobs. Each green job destroyed 2.2 other jobs. Those hoping for an employment recovery might want to focus on more than just green jobs.

2. The transcript of my favorite polymath interviewing a popular utilitarian philosopher. If people could win interviews then it's fair to say that the polymath won. Be sure to read the part about the fish.

3. Unfortunately, a regime shift towards deflation doesn't seem very likely. (Hat tip: Jonathan)

Take the S out of STEM

Science, technology, engineering and math jobs are seen as being important for the modern economy.Collectively, these are known as STEM majors. Many people have talked about how important it is to have more STEM majors.  The problem is, not all STEM majors are created equal. And this isn't a new phenomena. 

From this 2005 report by the BLS, we see that natural science technicians make less than most other STEM researchers. They have an average salary of almost 40 thousand dollars a year while STEM majors overall average 64 thousand dollars a year. Life Scientists don't do quite as badly on the salary front, but their jobs have been slowly disappearing even over the past year of job expansions. 
 
This isn't to say that science isn't important. It's just that supply and demand matter. Students aren't being told to think about their job prospects at all when they go to college. Many of them will end up in majors that seem comfortable and familiar because they've already taken similar classes in high school and they have potential career paths.  The problem is that not all biology majors are going to be doctors (if our country was more efficient, maybe we'd be graduating primary care physicians directly from college in the first place) and not all chemistry majors are going to be pharmacists or go on for their PhD's and Master's degrees. And then even those with advanced degrees in chemistry aren't having a great time. So instead these students end up with specialized skills that aren't in high demand relative to the supply of lab workers. And many of workers see lab work as a way to beef up their resume while they apply to schools and therefore are willing to take a lower salary, making it harder for those who just want to earn a living without having to go back for even more years of school after college.

And yet still everywhere people are promoting STEM education and talking about STEM jobs like they are all the same. It's too simple to just take out the S, both because smart students who are interested in basic research should be encouraged and because in fact some of the more niche scientific professions are seeing tighter markets, such as the market for geologists which is being bid up by oil companies.

Alex Tabarrok has a post discussing how important it is to have more STEM graduates. He uses the acronym STEM, but he's generally referring to CS, Chemical Engineering and Math and Statistics majors. There should be a better more widely recognized acronym to highlight the importance of the (non-life science S)TEM majors. What these majors have in common is they generally leave their students feeling comfortable with quantitative analysis. In this modern economy where everything is getting quantified and there is a greater opportunity for businesses to study these numbers and optimize more of their processes, being comfortable with mathematics and statistics is going to be more important. When people talk about training STEM majors, they should instead talk about TEQ majors and TEQ jobs. TEQ stands for Technology, Engineering and Quants. The term "quant" needs to be stolen back from finance, rehabilitated and then applied to everyone who is working with statistics and data analysis. 

Science is important because it forms the backbone of long term technological progress. But we don't need to be telling every impressionable high school student that they should major in something that's familiar but difficult when their job prospects would be much better if they picked something that was less immediately familiar but more scarce in the market place relative to its demand.

Random related items:

Some jobs will have higher average salaries because they involve living in unpleasant places far away from civilized society. Many oil jobs fall into these categories.  This should be adjusted for when students are looking at the average salaries of various majors.

It is possible that there is a negative selection effect to explain the difference in starting salary between engineering and natural science majors. It is more likely that a good engineer will work in industry after school (or a good CS major will drop out while still in school) while someone who excelled in natural sciences isn't likely to stop their education with just a Bachelor's degree.

The better schools provide superior networks and credentials, students at these schools can afford to think less about the average returns to their specific majors. The problem is that every school wants to pretend that they are one of the better schools so the myth of "What you study doesn't matter" is perpetuated even when it really shouldn't be.