Showing posts from June, 2011

Incentives, belief in incentives, the left, the right and moral hazard

Several old political problems turn out to be based on the same underlying question. Here are some examples. Should we tax the rich more? The "yes" argument says rich people need the money less (that is, poor people's utility from wealth is higher), and wealth partly arises from luck and therefore is a legitimate target for taxation. The "no" argument says that if people expect to be taxed when they're rich (and receive handouts when they're poor) they have less incentive to earn wealth, and therefore less wealth will be produced by society. Should we pay higher unemployment benefits? The "yes" argument: people are unemployed through no fault of their own; their spending will support the economy; it's moral to share resources with the poor; if it happened to you, you'd want benefits too. The "no" argument: it gives people an incentive not to work; it requires confiscation of resources from hardworking people to pay those w

Thaler, annuities, freedom and self-knowledge

Richard Thaler has an oddly limited writeup of the " annuity puzzle " in the New York Times this week. He presents a choice between two people retiring at 65. One gets a guaranteed $4,000/month for the rest of their life (a standard annuity). The other retains a standard investment portfolio and draws down $4,000/month until it runs out (at the age of 85, if he lives that long) - or $3,000/month till he's 100. Presenting only these three options, he argues that people should really opt for the annuity as it is lower-risk and saves your family the worry of having to support you after the money runs out. The puzzle, in Thaler's view, is that most people don't buy the annuity but instead keep their money in an investment portfolio that they manage themselves. But I'm not sure this is all that puzzling. In reality, someone who keeps their money in a portfolio is not likely to draw on it at a consistent $4,000/month rate. Why would they happen to withdraw exact

The economics zeitgeist, 5 June 2011

This week's word cloud from the economics blogs. I generate a new one every Sunday, so please subscribe using RSS or the email box on the right and you'll get a message every week with the new cloud. The words moving up and down the chart are listed here . I summarise around four hundred blogs through their RSS feeds. Thanks in particular to the Palgrave Econolog who have an excellent database of economics blogs; I have also added a number of blogs that are not on their list. Contact me if you'd like to make sure yours is included too. I use Wordle to generate the image, the ROME RSS reader to download the RSS feeds, and Java software from Inon to process the data. You can also see the Java version in the Wordle gallery (please ignore the "5 May" caption, my mistake - it's actually 5 June). If anyone would like a copy of the underlying data used to generate these clouds, or if you would like to see a version with consistent colour and typeface to m