T C A Srinivasa-Raghavan: Drink more, earn more

OKONOMOS

'Drinkers earn more than non-drinkers, even after controlling for human capital and local labor market conditions'

Richard Feynman, the Nobel winning physicist, tells a story in his autobiography about a group of Jewish rabbis standing before a lift in an 80-story building on the Jewish Sabbath, Friday, wondering if they should take it and arguing whether electricity is fire or not-fire because their religion forbids lighting a fire on a Friday.

Hindu priests and the Greek Orthodox Church have also been known to argue about such riveting matters.

As the following two papers* show, economists seem to be well down that road of futile debate.

In the first, James E Rauch and Vitor Trindade ask why Western cultural products find such a ready market in non-Western countries and what are the effects of policies for protecting domestic cultural goods.

In the second, Philip J Cook and Bethany Peters examine the relationship between drinking alcohol and income. It seems those who drink more, also earn more.

Rauch and Trindade also suffer from what I call economicsitis. It affects the language skills of economists.

Thus, "Consumption network externalities reinforce the home market effect, the reinforcement being stronger for cultural goods for which consumption network externalities are stronger. Increased sharing of consumption network externalities across countries also exacerbates the home market effect, so increased communication and travel between countries will increase the cultural market share of the larger country."

The simplest answer, I would have thought, is that there is a lot more implicit and explicit sex and violence in Western cultural products, be they popular music and films, the two main exports. Take these out and see what happens then.

But some countries try to protect their cultural products. Should they? If so, how?

Rauch and Trindade are at their elucidatory best when they say "...globalisation entails an intertemporal welfare tradeoff if ideas of different cultures are imperfect substitutes in production of future cultural goods quality."

In other words, when smaller countries try to protect their, say, films, they only end up producing inferior substitutes. That at least is true. Look at Bollywood.

The paper by Cook and Peters is at least easier to comprehend. "Drinkers earn more than non-drinkers, even after controlling for human capital and local labor market conditions." You can't put it more plainly than that. Better start drinking right away.

But, since this flies against the conventional wisdom, they have done what modern economics mandates everyone to do: look at the data for American adults age 27-34, albeit for the years preceding 1979. They then do the usual econometric calisthenics.

They "find strong evidence that the prevalence of full-time work increases with alcohol prices "" suggesting that a reduction in drinking increases the labor supply."

So they conclude that the "positive association between drinking and earnings is the result of the fact that ethanol is a normal commodity, the consumption of which increases with income, rather than an elixir that enhances productivity."

The authors have clearly not made any allowance for what happens in low income countries where the male wage earner can spend his entire income on liquor consistently, turn up drunk at his job and then lose it. This may well happen in the US as well, but it happens more often in poor countries.

The real problem in such data analysis is that while it looks very scientific, when it comes to establishing causality it falls victim to the oldest problem in economics: post hoc, ergo propter hoc (after this, therefore because of this).

Neckties in the Tropics: A Model of International Trade and Cultural Diversity, NBER Working Paper No. 1, 1890 December 2005

The Myth of the Drinker's Bonus, NBER Working Paper No. 11902, December 2005