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This post is only vaguely related to economics, so if that bothers you (and if you have a low tolerance for crackpot ramblings) please leave now.

A few days ago, google brought us the buzz, a social network-type function right in your Gmail inbox. Sounds good, no? In case you haven’t been following the techosphere’s reaction, the BBC has an article that pretty much sums up the major complaints.

I don’t find Google’s statements in response to privacy concerns all that convincing - for some reason, I haven’t heard this mentioned anywhere, but the same thing happened when they launched the Google Reader sharing feature: Your shared items were automatically shared with your friends, and just like with buzz the procedure was opt-out rather than opt-in. Surely, they wouldn’t make that mistake a second time?

When people first agreed to enable buzz within Gmail, they automatically started “following” the people they e-mailed most because Google assumed they were the core social circle. This is probably true, but the nature of that social circle will vary with your main use of Gmail. For example, I automatically followed a bunch of friends from university, even though I wouldn’t consider them my primary social circle but apparently, I e-mail them a lot. This isn’t terribly problematic and I don’t mind what happened in the next step: the list of followers and followees was made public on my Google profile. But other people use Gmail for other purposes, and they may well mind having their social circle revealed to the public.

Now, who else is known to use gmail? For example:

• journalists
• famous people
• Chinese human rights activists

While revealing the connections of the first two is definitely a problem, the third is what inspired my conspiracy theory.

My crackpot theory

Recently, Google announced that it will stop filtering google.cn search results, a change in its policy re China which followed an attack on several gmail accounts belonging to human rights activists.  Google received a lot of applause for this move and it was even seen as a turning point in business relations with China that would potentially inspire other companies to follow suit. A bold move indeed as China has one of the few major economies (and populations) still growing, promising a lucrative market your shareholders wouldn’t want you to pass by just like that.

A few weeks later, Google launches buzz, revealing the most e-mailed contacts of Gmail users.

Now imagine someone knew this was going to happen and had a way of collecting that data.

I’m not saying this is what happened and I don’t know if it is even possible (although I suspect it probably is). The data would reveal the network of connections between gmail users and may make it possible to identify clusters of people who communicate, e.g. human rights groups. In addition to confirming known connections, it could also implicate people who were previously unknow to be involved in such activities. For an example how data mining of e-mails can be used to discover social networks, see this interesting article where I also nicked the image below.

If, for example, the Chinese government really was interested in those accounts, this would have been a perfect opportunity to get a bunch of juicy data - without the hassle of hacking anything.

We’ll see if there is a backlash from all this beyond the class action lawsuit.

Andrew Gelman over at Statistical Modeling, Causal Inference, and Social Science has been arguing that the following statement by Becker doesn’t make sense:

According to the economic approach, therefore, most (if not all!) deaths are to some extent “suicides” in the sense that they could have been postponed if more resources had been invested in prolonging life.

This goes back to a quote from Becker’s book The Economic Approach to Human Behaviour (which has been catapulted to the pole position of my reading list) posted on the Freakonomics Blog.

Gelman makes a few points, but this one seems central to his argument:

I don’t see how you can call it suicidal of the pedestrian that the driver was not paying attention. Nor do I see it as suicidal if someone develops kidney cancer and dies, nor do I see it as suicidal if a kid is playing and falls out of a high window, or if someone in the Middle East is hit by a bomb while sitting in a school, etc.

I may tend to look at the issue of suicide prevention through my economist glasses while wearing my economics hat, but to my mind, Becker makes nothing but sense. It is all about marginality, and diminishing returns to scale. The same point is made in the comments, but this is how I see it:

What Becker means is very much along the lines of the example commonly used to illustrate that the value of life is apparently not infinitely high. If it were, we would be willing to take zero risk of death, i.e. invest all our resources into the prevention of death.

Traffic lights reduce the probability of having an accident. So why do we not have traffic lights everywhere? Because the impracticality of it (= a type of cost) outweighs the perceived benefit.

We accept a non-zero risk of death because we prefer not to shift all resources to the prevention of death. I think his argument boils down to this, rather than to the question whether one should fly or drive to a family gathering. It is not about the resources involved in choosing a lower risk option, but about the resources involved in reducing (or eliminating!) the risk of death per se.

Alistair Darling today presented his much anticipated budget report, and apart from raising National Insurance (which most people will have to pay) and capping public sector pay increases at 1% (which will mean a decline in real salary for a lot of people), he has come up with another really good plan: Bankers’ bonuses will be subject to a “super tax” of 50%.

I don’t really care about taxing bonuses either way, but what annoys me is that apparently, nobody in the government or their advisory staff thought to consult an introductory Microeconomics textbook (or even Wikipedia - it’s free!) before they came out with this statement:

 Alistair Darling attempted to appease critics who feared the tax on bonuses would prompt defections from the City by insisting the 50% tax rate on bonuses of more than £25,000 would be paid by the banks rather than employees. (guardian.co.uk)

 So… Since Greg Mankiw’s book is copyrighted, see this link for a primer on tax incidence. If you can’t be bothered, here’s the gist: It doesn’t matter who pays a tax, the effect is the same. The tax is “wedged” between the supply and demand curve, and who pays what portion of it depends on the shape and slope of the two curves - NOT on the structure of the tax!

It’s simple, really: if the tax is taken out of bankers’ paychecks, that lowers their total income. But assuming the banks pay them the same total amount of money they would have in absence of the tax, this means that for every pound the banks pay, the banker receives less. This is going to discourage some individuals from further pursuing their high-flying career and the total quantity of bankers’ hours worked (or whatever particular Q you are looking at) decreases.

If the tax is taken from the banks, again holding constant the total amount they want to pay for bankers, they can afford fewer hours. Unless of course people are willing to work for less but I think if we’re completely honest, it may be easy to demand that other people do it, but we’d be quite upset if we were asked to take a paycut ourselves! (Of course, “we” didn’t cause the greatest recession in the history of mankind and therefore aren’t morally obliged to, because the banking system operates completely independent of the rest of the economic system of which we are a part… Let’s just pretend the economy is purely supply-driven, shall we.)

To summarize, a tax makes bankers more expensive to banks, while bankers receive less money. So a smaller quantity of “banking” will be bought, at a higher cost per unit.

 

Another point I find at least amusing is that there is a continuous collective outcry about the size of bankers bonuses. What we seem to forget is that there are incentives in place that encourage banks to shift payments to their employees from base salaries to bonuses. The obvious ones are the power to reward or punish etc. I don’t claim to have a complete picture of the banking industry, but in my (all be it short) time in the City, my base salary was rather low - hardly enough to live modestly in London, in fact. This was also the case at a certain (now rather broke) large bank from the self-governed North. As a rule, base salaries are low and bonuses make up for it, at the same time keeping people nicely in line with corporate policies. But another aspect is rarely mentioned.

Bonuses are not pensionable.

This is analogous to the argument above. From the point of view of the bank, their pension contribution (usually a percentage of base salary) works like a tax. If the choice is to pay a reasonable base and reasonable bonus, or to pay a low base and a huge bonus, the second option probably works out cheaper for the bank.

The question is why bankers, who are know to be the cream of the mathematically-minded crop, put up with this, because it obviously has implications for their pensions down the line. I can only come up with the usual behavioural econ explanation: People are irrational. This may manifest itself as follows.

• A preference for a certain amout of money NOW rather than an uncertain amount much much later, when we’re too old to enjoy it anyway.
• Not grasping that we are actually forgoing a benefit there. The book “Nudge” has a nice story about membership in company pension schemes where employers make matching contributions, yet loads of people neglect to join them.
• Or, just maybe, bankers expect to make so much money up to retirement that the measly employer contribution won’t make much of a difference, thus defying the law of non-decreasing marginal utility of money.

Rather than proposing more taxes which all no doubt cause some hassle for the administration and, more importantly, can be easily avoided by paying bonuses late, it would make more sense to a) stop subsidising and bailing out banks and instead support home owners and small businesses and b) set those incentives right.

Comments very welcome!