Two Krugmans Enter, One Krugman Leaves

Paul Krugman likes to contradict himself but never have I seen it happen within a single column. Writing on health care costs, he states:

But even as Republicans demand “entitlement reform”, they are dead set against anything like that. Bargaining over drug prices? Horrors!

I agree, being able to bargain over drug prices is a good thing. Makes sense: being able to bargain and not blindly accept forced prices is a hallmark of free-markets. But later he writes:

If they were serious about deficits, they’d be willing to consider policies that might actually work; instead, they cling to free-market fantasies that have failed repeatedly in practice.

Ah, but you might say that the goal is to allow the government more bargaining power and since the government increasingly has monopsony power (like a monopoly but there're few buyers rather than few sellers), it's not a free-market. In other words, Krugman tells us that monopsonies are actually desirable, which is endorsing a law which states only Microsoft gets to hire engineers. Even non-economists should understand why that's a bad idea.

That's not the only issue with today's column--the claim that private firms apparently have no incentive to reduce costs is equally strange and the point that an underfunded voucher system won't work is equally obvious (since it's underfunded!)--but those are for another post.

I'm Not a Grinch; I Just Don't Like Negative Externalities

I don't remember how it came up, but I couldn't help myself. And when it started, I couldn't stop. Today I told my managerial class that I don't like Christmas. Or, more accurately, the Christmas season. They were surprised, and so of course I had to tell them why. But my hatred for the season really stems for a hatred of any negative externality people blissfully ignore, things people don't think are externalities.

A negative externality is when something imposes a cost onto others. We are familiar with examples: pollution, cigarette smoke, screaming/crying babies, traffic. Basically anything someone does which makes people who had nothing to do with the transaction worse off. I buy power from the power company, but neither of us pay the cost of the pollution which poisons the water downstream from the power plant.

We're all well aware of these problems and there are attempts to correct for them. But what I find endless annoying are those negative externalties which so many refuse to acknowledge. And that brings me to the  Christmas season.

Christmas Season. For one month, everything becomes about Christmas. I must endure the decorations, the constant Christmas references in all media, the music on the radio, the Christmas theme in virtually every article, the extra traffic, and, most of all, the cheeriness of everyone who assumes you are as excited about the season as they are. Don't get me wrong: there are things I've found enjoyable. I like time with the family, I like my neighbor's Christmas cookies she bakes every year, I like the time off from work. But if we were to at least diversify the season for a month, I would welcome the change.

Sports. If you like sports, that's fine, but shut up about it. Don't be surprised when other people think slaying dragons is more interesting than watching football. Don't think me a fool because I don't know if the Raiders and the Cubs play the same game. Don't run around screaming and honking horns when the team you like wins. Or loses. (I really don't understand what motivates you.)

Dogs. Again, I don't hate dogs as much as the externalities they create. And really, I don't like how dog-lovers don't understand how inconsiderate they can be when they assume no one cares about these externalities. Dogs are not angels: they bark, they smell, their "kisses" are slobber. Dog poop, even when I see it to avoid it (which isn't always) stinks. Not to mention, they bite (and yes, they do bite; they of course don't bite you because you're the one who feeds them).

I am well aware that all of these things are better existing than not; the total annoyance they create is probably outweighed by the total joy they create. Benefits probably exceed costs, including the external, and in my book that's the thumbs up even if I'm not a fan.

But, for the love of all that is good and holy (religion: that's another one; not everyone's religious you know) stop assuming everyone's like you. I'm not excited that Christmas is coming, I don't want to pet your dog, and no, I didn't watch the #%$%^ game last night.

A Very Interesting Sentence

Within two or three decades the difference between automated driving and human driving will be so great you may not be legally allowed to drive your own car...

From The New Yorker

Let People Sell Kidneys!

In 2011, 35,031 people were added to the wait list for a kidney transplant. Only 31,626 were taken off the list that year, growing the waiting list by over 3,000 people.

Of those removed, 16,195 were taken off because they got a new kidney. However, 4,959 were taken off because they died and an additional 2,506 were taken off because they became too sick to either survive the surgery or have a new kidney make the difference (it's not clear from the source which one, or both, is the case).

About half of the individuals who are waiting for a new kidney are between the ages of 50 and 64. Their median wait time (between 2003 and 2004, the most recent years available) is 1,627 days or 4.45 years.

Dialysis cost about $75,000 per patient per year. That's $3,375,000 per patient.

Even if the market price for a kidney was $100,000, that would save not only millions of dollars per patient but, by getting kidneys faster, save thousands of lives. Every. Single. Year.

Data on kidney wait list found here.

Sweet Thoughts

Friend and economist Brian Hollar made a tongue and cheek reference to claims that eating chocolate helps you win the Nobel Prize. Per capita chocolate consumption correlates strongly with per capita Laureates. Yes, yes, yes, we're all aware of the "correlation is not causation" platitude--though I wonder if half the people who say truly understands it--and it probably applies here. But there's probably such a story here. Not that winning Nobels cause people eat chocolate but wealthier nations eat chocolate and have more Laureates. Wealthier countries, after all, have better nutrition and caloric intake (which helps the brain develop), are safer (so smart/driven people are less likely to die young), and allow greater specialization (so smart/driven people don't get stuck doing menial labor rather than expanding the boundaries of knowledge). Moreover, wealthier countries have the capital equipment that's so helpful when doing revolutionary work. Switzerland has the highest per-capita in Laureates. Switzerland also has CERN. The heteroskedastic nature of the best fit line supports this theory: chocolate-starved countries have few Nobels but chocolate-rich ones have either many or (relatively) few. When you're wealthy, there's a lot of different things you can spend your money on. (I assume if there was a Nobel for engineering, Germany would be higher.) This is all pretty straight forward; this post is largely a record so I can remember to use this example in class when I teach research methods next year. Still, it's a fun exercise.

Billionaires Per 10 Million

The US tops the list of countries with the most billionaires but who cares about the raw numbers? I'm much more interested in the number of billionaires per person. Or per ten million people in this case. That makes it easier (though some countries on this list don't have ten million people...but that just highlights how billionaire-friendly they are). Here's where I got my countries by population data. I removed Hong Kong's population from China's as I assume that their billionaires weren't included in China's billionaire count.

Country	Billionaires per 10m
Hong Kong	91.4
Switzerland	71.3
United Kingdom	22.6
Germany	16.8
United States	15.3
Canada	11.4
Russia	6.8
Brazil	2.5
China	1.1
India	0.9

A World Without Greed

Suppose we lived in a world without gravity. How would we feel about that? (For now, ignore the fact that without gravity our atmosphere and oceans would dissipate, suffocating all life on earth.)

How we feel depends on what we're talking about. No one could fall to their death and flying around would be really easy. Launches to space could happen almost accidentally. But at the same time liquids would get in all sorts of electronics and ruin them. Hydroelectric dams won't work. Plumbing, irrigation, and natural gas lines would fail. Assemblies lines would be chaos. Drinking would be hard.

Our civilization is built with gravity in mind. This counts not just preventing the bad stuff that comes with gravity (we have rails to prevent falls) but leveraging its reliable existence into something that benefits us. The constant gravitational pull lets us generate enormous quantities of power very cheaply. We'd be fools to ignore it.

Why then are we so reluctant to build our world assuming greed is as consistent as gravity? Why do we often assume that we live in a world without greed, where teachers, politicians, labor unions, and even companies will not act in their best interest? It is particularly tragic because we could rely on that consistent force of nature (and if you've ever seen a plant turn its leaves to light, you've seen greed as a force of nature) to transform that force into something productive.

Instead of relying on benevolent governments to determine the best way to reduce pollution, tax pollution and give people the incentive to find the best solution.

Instead of relying on good feelings to ensure we have good teachers, let there be a marketplace for education so the good teachers are rewarded and the bad ones are punished.

Instead of forcing experience and credentials to ensure everything from doctors to hairdressers make a quality product at a low price, remove barriers of entry and allow consumer sovereignty and competition to encourage a better world.

Instead of capping liability damages and relying on a regulatory agency to make sure firms don't skimp on safety, let's instead make sure that the firm will swallow the full cost of its carelessness.

If you think it's hard to change laws, you are absolutely right. But it's as impossible to repeal greed as it is to repeal gravity. Best to learn to live with it.

Ethics Are Incentives

It is not enough to know what's the right thing to do; one must also have the incentive to. If your back is to the wall, you'll do unethical things (even if you may justify it as ethical while you're doing it). But it is hard to blame people for doing bad things if they are just responding to incentives. Consider this passage from Nothing to Envy describing life in North Korea during the famine.

...[Hunger] targets the most innocent, the people who would never steal food, lie, cheat, break the law, or betray a friend. It was a phenomenon that the Italian writer Primo Levi identified after emerging from Auschwitz, when he wrote that he and his fellow survivors never wanted to see one another again after the war because they had all done something of which they were ashamed.

As [North Korean] Mrs. Song would observe a decade later, when she thought back on all the people she knew who died during those years in Chongjin, it was the "simple and kindhearted people who did what they were told--they were the first to die."

If you refuse to give a starving child your food when you are starving, are you really a bad person?

A True Coasean

In India, Rajesh Shah opened a menswear shop called "Hitler." Naturally the local Jewish community is rather upset and demand that he changes the name. Mr. Shah's response?

If the Jewish community really wants the name changed, they can pay for it, Mr. Shah said. “I have spent too much on branding for my shop,” he said.

Ronald Coase would be proud.

Yeah I Like Free Stuff, Too

Today marks the beginning of additional provisions from the Affordable Health Care Act. Lauded as a victory for gender equal rights, insurers are now required to cover birth control.

Why gender equal rights? Because insurers have long covered Viagra. Men get coverage for their sex stuff; shouldn't women? If that's as sophisticated as you're going to get, yes it seems unfair. But you're being way too sloppy.

This isn't about religion. It's about cost.

As of 2012, 15 pills cost $332.58; that's sex every other day...in practice it's probably much cheaper.

The price for a month of birth control varies widely: from $15 to $80. Let's take the average (note I'm not adjusting for frequency of purchase for each price since I don't have that information): $47.50 a month.

Now we know the costs, how often is each cost used?

For men over the age of 40, 6.3% of men use some form of ED medication. Since 21.86% of the US is over the age of 40 (as of 2010), 1.38% of Americans use ED drugs.

For women between 15 and 44 who have had sex at least once, 82% have used the pill. As of 2010, that age range is about 20.2% of the population. Let's assume 75% of these women have had sex once (a low estimate, to be sure): that's 15.15%. Multiply that by the 82% who use the pill and we have 12.42% Americans using the pill.

Each month, assuming insurance is footing the whole bill, insurance companies pay $4.67 per person to cover ED drugs. Note this assumes their customer make-up is similar to the US population make-up; unreasonable perhaps but soon it will be required by law.

Each month, assuming insurance is footing the whole bill, insurance companies will pay $5.90 per person to cover the pill.

There are many, many complications to my back-of-the envelope calculations. For one, I'm not sure all firms cover ED drugs but since they will all have to cover contraception, you can bet that $5.90 per person is a low estimate. I also don't know exactly what they will be forced to cover--perhaps other contraception besides the pill--so that 82% might be too low.

On the other hand, you could argue that it's too high, since the number comes from a survey asking if you've "ever" used it. And you could point to the health benefits of birth control, too.

But at the end of the day, health insurance companies are profit maximizers and they can run these numbers much more accurately than I can. If they felt they could cover pills without losing money, I'm sure they would have. But they don't; we have to assume it's for a good reason.

Post Hoc Ergo Non Propter Hoc

Ever hear of post hoc ergo propter hoc? It's a Latin phrase describing a logical fallacy: "after therefore because of." But of course just because one thing follows another doesn't mean one caused the other. It's a common mistake, especially in macroeconomics where it's so hard to determine causation. Yesterday Paul Krugman reminded me of a relative: "post hoc ergo non propter hoc" or "after therefore not because of this" (this was assembled via Google Translate so its Latin might be off). Here he is questioning calls for lower taxes on the wealthy:

When John F. Kennedy was elected president, the top 0.01 percent was only about a quarter as rich compared with the typical family as it is now — and members of that class paid much higher taxes than they do today. Yet somehow we managed to have a dynamic, innovative economy that was the envy of the world. The superrich may imagine that their wealth makes the world go round, but history says otherwise.

No where does he say why taxes on the wealthy shouldn't have hamper economic growth. Indeed, he seems to argue that it would enhance it!

Macroeconomics is very, very hard, especially when you draw on history. JFK's America was very different than our own: trade, technology, local and global politics, demographics, etc. etc. All of which have major economic implications. To say nothing of the fact that we are actually much wealthier now than we were 50 years ago.

There Is No Such Thing As Wrongful Abandonment

Alex Tabarrok rightly defends a company's ability to fire someone for virtually any reason noting there are no restrictions on the reasons why a person can quit their job. Some might be skeptical of this analogy: being unexpectedly fired causes immense financial harm to the employee. Unexpectedly quitting causes no such harm to the firm.

Both are only true sometimes. If you've saved smartly and adjust your consumption, being fired won't be financially devastating. It's why folks like Suze Orman suggest you have 8 months expenses in liquidity at all times. Sadly, few people meet this benchmark; sometimes it is their fault, sometimes not.

It's harder to see the risk of an employee quitting, but it can be immense. If the employee is working on a project, leaving the company will cause the project to stall or even fail. Just as a person can be overly reliant on their job, a company can be overly reliant on a particular project, whether it's creating a new product, securing a big account, or reworking its internal structure to cut costs. Again, it's foolish to put too many eggs in one basket but sometimes that's all you can do.

Even if an employee isn't crucial to some project, quitting creates costs for the employer. They have to go through reams of CVs. They have interview applicants. They have to pay for background checks, fill out paperwork, take days to train the new guy, all while other employees work extra hard to fill the gap.

If an employee leaves for a silly reason, no one sues anyone. It never seems to cross anyone's mind. We have laws against "wrongful termination" but not against "wrongful abandonment." This is a good thing--my point is we shouldn't have laws against either--but one must wonder, even hope, that if we had more firms suing on the grounds of the latter on the basis of equal treatment, we'd have fewer opportunities to do either.

The Real Health Care Surprise

I was surprised this morning AHCA was upheld. When the whole Supreme Court thing started, I thought sure it would be upheld but the Intrade predictions (bouyed by the hearings, commentaries, etc.) changed my mind. Here's the Intrade chart as of today:

For those who don't know, Intrade creates these tickets where are worth $10 if some event happens and $0 if it doesn't. By seeing how much people are willing to pay for the ticket, we estimate how likely an event it. Rather than rely on predictions of people who lose little-to-nothing if they are wrong, prediction markets like Intrade make people put their money where their mouth is.

Thus Intrade is usually very accurate, predicting presidential elections, economic conditions and academy award winners very accurately. This morning, a ticket that the SC would rule the mandate unconstitutional was going for $7, or a 70% chance they will do just that. But Intrade was very, very wrong. Why? Two theories.

Few Decision Makers. It's very hard to predict anything that a very small number of people decide. Here, there were really only two decision-makers. In fact, most thought it was just one--Justice Kennedy--who indeed sided with conservatives. But no one predicted Justice Roberts would switch sides. Like a sample size that's too small, it's really hard to predict what will happen when so few determine the outcome.

Sample Bias. Go ahead and try to set up an account. If you try to get starting money via a card from your American bank account, you'll see this message:

If your credit or debit card was issued by a US bank then unfortunately you will not be able to use this card to fund your account. This not the decision of Intrade but due to regulations in the US that restrict what US residents can do with their cards.

So that puts a bias on who uses Intrade and it makes sense that non-Americans wouldn't be very good at predicting what our highest court does, especially since American's can't seem to predict it, either. It is worth noting that every expert, not just Intrade, was surprised by how the Supremes ruled.

The Schizophrenic Keynesian

From Robert Reich:

The major reason this recovery has been so anemic is not ...as some liberals contend, because the Obama administration hasn’t spent enough on a temporary Keynesian stimulus. The answer is in front of our faces. It’s because American consumers, whose spending is 70 percent of economic activity, don’t have the dough to buy enough to boost the economy

Wait, wait, wait. The whole theory behind the stimulus package--any stimulus package--is to put money in the hands of consumers.

Yes, Reich's article is about long term growth (he credit our long run problems with inequality). Stimulus is about short term growth; it's not like he's saying there's nothing we can do in the short term.

What to do? There’s no simple answer in the short term except to hope we stay in first gear and don’t slide backwards.

Okay, Okay. Maybe Reich isn't a Keynesian. It's not like he advocated for the stimulus back in 2011, only criticizing it for its meager size.

The economy is in crisis. People are hurting. So government must act, and act quickly. It’s irresponsible at a time like this to suggest that government should simply close down.

But a jeer because the jobs plan he presented isn’t nearly large enough or bold enough to make a major dent in unemployment, or to restart the economy.

I have no idea what Keynesians believe anymore.

Every Time I Read the News, I Want to Plan a Trip to Europe

But then I look at the exchange rate numbers. Let me explain. An exchange rate is the price of one currency in terms of another. One U.S. can buy 0.62 British pounds or 81.4 Japanese yen. The more currency you can buy, the less valuable the currency. A weak currency is good if you're traveling. Imagine being able to turn one dollar into two or three of four. Yes, some stuff will cost two or three or four times as much, but on the whole it doesn't completely cancel out the exchange rate. So when I read about Greece protesting austerity measures, Spain re-entering recession, and France about to elect a member of the Socialist party, I naturally think this will lead to fewer people wanting to do business in Europe. This should make the Euro less valuable, which means it's cheaper to buy, which means it's cheaper to vacation there. I think about where I'd like to visit. But then I look at the exchange rate numbers.

I structured the "% change" such that if it's negative, it indicates a falling value (because you can buy more). All values are in dollar terms (one dollar buys you 0.76 euros). "Before" refers to this time last year. All data are from the April 28 Economist. Yes, the Euro's value fell by about 10%, but virtually everyone's falling in value which indicates that it's a stronger dollar, not a weaker Euro, which is driving the change. You can look at the British pound and note that it only fell by 1.64%; Switzerland fell by 3.41%. These are European countries so the Euro-crisis effect is roughly the difference between them. That seems reasonable, but still: a U.S. still can't buy a single Euro? This is really evidence of the strength of German economy. If the Euro breaks up, expect Italy to be much cheaper and Germany more expensive. If France has issues (and The Economist is quite worried about that, for what it's worth), the other major economic pillar of the Euro-zone will stumble. It may be the beginning of the end of the Zone. Intrade predicts a 57.6% chance that one country will abandon the Euro by December of 2014. Lesson: plan the Germany trip for the near future and delay other visits to the continent for about five years.

The Oncoming Trit Bubble

About a week ago, I found myself back in a game I hadn't played in years: EVE Online, an MMORPG. It has the most sophisticated economy I've seen in a game with tens of thousands of people buying and selling hundreds of goods.

On April 24th, EVE will alter the rules of the game (a "patch" as they call it) which will radically change the economy. Basically it means players will have to create more things themselves, rather than just getting it from killing computer characters. This increased focus on player production (and it is already quite focused) will increase the demand for the game key mineral: tritanium, or trit.

When the patch notes came out earlier this month, trit prices exploded, along with veldspar (an ore that's refined into trit) and hulks (a ship that's really good at mining veldspar). (All screen shots were taken on April 19 at about 19:45 EVE time, or 3:45 EST, in the game region of Verge Vendor.)







(That recent dip in hulks is interesting; I'll get to that in a sec.)

As predicted by basic economics, the price is rising. If the demand shifts out (more people want something), the price will rise. This is why I, and many people in EVE, are mining. Prices are really high. But a friend of mine who plays insists I shouldn't sell my veldspar now. I should sell it after the patch is released because then the price is even higher.

But if the price is over-inflated, as I think it is, then this is a horrible decision. I should sell while the price is high. Like a house in 2007, get out while the getting's good.

It's hard to tell if something is a bubble or not. Is this price increase just the beginning? Or are people holding on to the veldspar and trit because everyone assumes the price will rise, only to find it dropping when they want to sell. I'm inclined to believe the latter for the following reasons:

Elasticity. This is the measure of how sensitive the supply and demand curves are to price changes. It's really easy to mine veldspar. Thus the supply of veldspar is elastic: a small change in price will radically increase how much people will bring to market. This price increase will be small.



But the price increase isn't small. It's gone from from 4.50 to 5.75, a 27.8% increase. The price is probably too high.

Quantity. According to the little model up there, quantity should be off the charts. But the amount of trit sold (seen as the green bars) is (slightly) falling. Hulk sales, on the other hand, saw a jump in quantity when the patch was first release. They're the first thing you'd buy if you're a semi-experienced player (thus able to fly one and can afford one) and want to respond to veldspar prices. But we're not seeing veldspar and trit quantities rising. People are holding onto them. And now that the hulks have been bought, quantity's fallen and price is beginning to, as well. (Though I don't want to read too much into a short-run dip in a price.)

The Winner's Curse. Estimations are normally distributed. Some people will overestimate the future price of trit and others will underestimate it. The person who over estimates the most will pay the most. They will win the bid and they will regret it. Prices are driven by the winning bid so things will seem more valuable than they are. And this is made worse because...

Prices are correlated. EVE uses an English auction: if you're buying you place your bid and the high bid will buy the auction. You can up your bid if you want. But people tend to use other people's prices as information. If someone keeps outbidding me, then I might think that they know something important I don't so I outbid them. They then use my bid to think I know something they don't so they outbid me. Around and around we go until we wise up and the market crashes.

This prediction comes with caveats. (1) I may know that the supply curve is elastic, but I don't know how elastic. I may know the demand will shift, but I don't know how far. It's entirely possible that a 27.8% increase is modest and this is just the beginning. (2) If players can't sell their trit at a price they want, they will probably just hold on it. You don't have to pay a store fee after all. Thus prices might not crash. But if they don't, quantity sold will.

So I could be wrong--I'm not selling all my veldspar now--but I'm selling most of it. In less than a week, I'm going to look either really smart or really dumb. C'est la vie.

Too Many Stars

Imagine there are two types of jobs in the world: stars and support. Stars are the jobs where you're the center of attention. They are the decision-makers, the bosses (or at least appear to be): CEOs, professional athletes, entrepreneurs, newscasters. Support are all those jobs that make the stars' job possible: administrative assistants, janitors, supply chain management. Support is logistics.

We tend to romanticize stars. People often dream of being the Most Important Person in the Room, the one who orders others around and makes the Big Decisions. College encourages students to be leaders: "training future leaders" is common theme in mission statements. While grading senior projects (which are typically a detailed business proposal), students seem to prefer starting a high-end specialty store rather than something more humdrum, even if the humdrum one makes more sense.

And so good support is hard to find: advertising over supply chain management, boutiques over discounts, cooks over waiters, researchers over teachers, Apple over Wal-Mart, etc. It even happens in online video games (where the main goal is killing stuff): damage dealers are a dime a dozen but players interested in keeping their allies alive are a bitch to find.

We have too many people dreaming of becoming stars and it's incredibly wasteful. Think of all of the people who would be great at "mediocre" roles but instead are instead wasting their time trying to be actors or entrepreneurs. Being a star has more prestige and for good reason--don't get me wrong, stars are important--but we place too much emphasis on stars. We rarely think of training and encouraging good support and that should change. It's not the generals who win wars; it's the logistics.

How Libertarians Are Different

Tennessee Senate approved a bill allowing teachers to present challenges to evolution and climate change theories.

Conservatives: It is absurd to deny teachers and opportunity to encourage critical thinking skills.

Liberals: It is absurd that we would allow teachers to present definitely false material as credible.

Libertarians: It is absurd our only option is to choose between these two extremes.

At the heart of all of the quality and content discussions of education should be the virtual monopoly on secondary and primary education the government has. This discussion is not evidence for one or the other side; it is evidence for why we need more direct competition between schools because what's optimal depends on what families want to prioritize. The best option is the middle ground:

Yes, we should take every opportunity we can to develop critical thinking skills. If students get excited about evolution v. creationism, then the teacher should leverage that interest into instruction.

And yes, we don't want nonsense to crowd out good ideas, especially ideas which are hard to understand or have a lot of interesting applications.

Should we focus on breadth (critical thinking skills) or depth (deep understanding or an important subject)? The answer should be up to you, not politicians.

A Mathematical Definition of Evil

I told my Advanced Micro students the other day that economists don't really believe in good and evil. There's just good or bad incentives. They protests: what about rapists and murders? This lead me to the following (working) definition of evil:

A person is evil if the derivative of his/her utility function with respect to actions with negative externalities is positive because such actions have negative externalities.

-A utility function is a mathematical formula that describes how different variables affect how happy someone is.
-Taking the derivative of the function with respect to a variable tells us if this person is happier (result is positive) or sadder (result is negative) if they get more of something.
-A negative externality is something that makes others' worse off.

So if someone enjoys playing loud annoying music because he enjoys the fact that he is annoying people, he is evil by this definition. If someone enjoys killing someone because the victim doesn't want to be killed, this person is evil. If someone enjoys torturing someone, but only if the victim doesn't enjoy being torture, then that person is evil.

Note that the victim would have her own utility function with a negative derivative with respect to the activity. The louder your music, the greater the torture, the sadder she is.

We can further qualify levels of evil by either (a) how much the person enjoys making others miserable (the size of the derivative) and/or (b) how much the negative externality hurts other (the size of the derivative of victim with respect to that same activity).

You can quibble--how much do we control our own utility functions?--but I think this is mathematically close to what most people imagine "evil" to be.

How Common Are Functional Families?

Happy families are all alike; every unhappy family is unhappy in its own way.

Before I begin, let me emphasize I'm talking in very large generalizations. This is for clarity purposes; please don't mistake my simplifications for being rude.

I was born and raised in a "functional family." I always got enough to eat, I got help with school work, and my parents showed love and affection. They never hit my brother or myself and their fights were rare and civil. I had an excellent upbringing (thanks, by the way, Mom and Dad). For my brother's and I's part, we were good kids. We weren't angels by any means, but we stayed out of major trouble, did well in school, etc.

So when I wonder if most families are functional--perhaps little a better, perhaps a little worse than mine--I naturally think back to my childhood and conclude my childhood was typical. This is, of course, a poor way to draw a general conclusion. You can tell because when I would ask my friends who come from dysfunctional families, they would make the opposite conclusions: "we're not unusual, David, you are." They are, in all likelihood, making the same mistake I am.

So I might say "But we had many family friends who are also functional families." Of course, functional families like to hang out with other functional families so that's not very good. It leads to dysfunctional families drawing one of two conclusions:

(a) They were somewhat dysfunctional, which means they would be friends with other somewhat dysfunctional families (functional families won't have them and the somewhat dysfunctional won't hang out with the really dysfunctional one). Thus they cite the other families they know and use that as more evidence of how common people like them are.

(b) They were really dysfunctional, which means, based on this rough model, that they will have few to none family friends. So they would probably say "look, my family was really bad; it seems reasonable that something somewhat better than what I experienced would be the norm."

(This says nothing about the families that are functional to a level that's annoying. As this episode of South Park suggests, such families would have trouble finding outside friends as well.)

So how common are functional families? I have no idea and unless someone did a random sample and came up with a good measure of functionality (good luck), then I'd say no one really knows. But what learning about others' families have taught me is that while the average is hard to figure, the standard deviation is huge.

Quote of the Day

Mental retardation caused by early childhood malnutrition disqualifies about a quarter of potential military conscripts in North Korea...

From Escape from Camp 14.

Actually Justice, This Is How Insurance Works

From the SC hearing today:

JUSTICE ALITO: But isn't that a very small part of what the mandate is doing? You can correct me if these figures are wrong, but it appears to me that the CBO has estimated that the average premium for a single insurance policy in the non-group market would be roughly $5,800 in -- in 2016. Respondents -- the economists have supported -- the Respondents estimate that a young, healthy individual targeted by the mandate on average consumes about $854 in health services each year. So the mandate is forcing these people to provide a huge subsidy to the insurance companies for other purposes that the act wishes to serve, but isn't -- if those figures are right, isn't it the case that what this mandate is really doing is not requiring the people who are subject to it to pay for the services that they are going to consume? It is requiring them to subsidize services that will be received by somebody else.
GENERAL VERRILLI: No, I think that -- I do think that's what the Respondents argue. It's just not right. I think it -- it really gets to a fundamental problem with their argument.
JUSTICE GINSBURG: If you're going to have insurance, that's how insurance works.

That is close enough to being right that it's a forgivable mistake under most circumstances. But in this context that small distance between right and wrong make all the difference.

While you need healthy people to subsidize sick people, you don't need a group of systematically healthy people to do the subsidizing. If an illness which affects 1% of people costs $10,000 to treat, then you need everyone paying $100 for insurance to cover expected medical payments. Yes, at year's end the healthy will be subsidizing the sick but at year's beginning, you have an equal likelihood of being sick as everyone else.

But that's not what Ginsburg was talking about. To see her version, imagine some people have a 1% chance and others have a 10%. You don't need the 1%ers to subsidize the 10%ers. The 10%ers could just pay more (specifically, $1,000). In other words, you don't need an ex ante difference in expected health costs for health insurance to work. You just need to be able to tell people apart (which is why you have to fill out all those forms).

Granted, this seems mean. You can't completely control if you're a 1%er, a 10%er, a 50%er, a 0.1%er, etc. But you also have some control. Your risk is based on three factors:

D, factors that are dependent on your actions such as diet, level of exercise, how sun exposure, etc.
I, factors that are independent of your actions such as genetics, upbringing, etc.
M, factors that are mixed, such as income which comes from both luck and hard work.

p = p(D,I,M), where p is the probability of getting sick.

Forget Obamacare: ideally the government would give people enough money to buy health care, if they choose. The amount of money would be proportional to somewhere between a person's I and their I+M. Born with diabetes? That increases your expected yearly costs by $1,500 so here's $1,500. Ate poorly and became diabetic? You get nothing. Yes, this is too expensive to do perfectly, but a second-best solution would be to use existing medical records and run them through a computer to determine a subsidy. That gets us really close and is quite feasible. Plus, I'd not require people to actually use the money to buy health care. Want to spend it on ice skating clowns? Fine, but make sure they stay off my lawn.

Why Am I Thanking My Students?

When you buy something you might encounter an awkward exchange: you say "thank you" to the cashier and the cashier says "thank you" back. While strange at first, its evidence that trade is mutually beneficial. I got something I want (say, carrots), and the store got something it wanted (money). So we thank each other.\

A student just dropped off her homework assignment. I thanked her and she thanked me back. Does this mean that homework is mutually beneficial as well? That seems strange. Homework for me is more stuff to grade. How do I benefit? How does she benefit?

Why am I thanking her?
1. Perhaps it's a habitual reaction for when anyone hands me anything. But I doubt that if someone handed me a meaningless set of forms to fill out, I'd thank them.
2. I have a professional obligation to grade this homework. By turning it in, she is enabling me to fulfill my obligations. But that obligation only occurs if she turns it in.
3. By turning it on time, she is making my life easier. But I would probably thank people if they turned it in late.

Why is she thanking me?
1. She is appreciative in advance that I will grade it, but I have a professional obligation to grade it. Still, maybe she is appreciative that I am being professional.
2. She is appreciative that I have accepted it to grade, but it was on time so of course I will accept it.
3. She is thankful that she now longer has to work on it, perhaps thanking me that it wasn't longer/harder than it was. This might be true--I get less thank yous for harder assignments--but it doesn't pass the smell test.

A fourth possibility exists for each: mutual thank yous is an acknowledge of a passing of responsibility. She is pointing out she is turning in her assignment and that she has finished it to her satisfaction. I am acknowledging that I am accepting her assignment and it is my responsibility now to grade it.

If this fourth possibility is true, then it calls into question why we have mutual thank yous at stores. Perhaps it is a social convention left over from before receipts: the owner is acknowledging I can leave the store with the item and I am acknowledging that he can take my money. David Graeber points out that the first form of money was debt (as in a series of favors). "Thank you" is an acknowledgement that a favor is now owed.

I find (1) from each side to be most probable but (4) to be most interesting.

The Peltzman Effect and Valets

Should valets withhold keys from drunk drivers? Boston city official Rob Consalvo thinks so. NPR this morning:

He says it only makes sense that valet workers withhold keys from drivers who appear drunk. "They are literally our last line of defense," Consalvo says. "If not them, who?..."

I was feeling a bit tired this morning, but this got me out of bed as I yelled "You! You, you idiot, you!" over and over again The driver is the last line of defense against drunk driving, not some teenager. WTF?

The piece hit on some of the reasons this is a bad idea. Teenagers don't have much experience with alcohol so their ability to recognize impairment is limited. They don't have the social clout to deny an adult stranger his keys (especially if he's an angry drunk). They would be faced with tremendous legal assaults. The cost of training would make parking (including non-valet parking since many would shift away from valet parking to non-valet) even more expensive. And, as Dave Andelman of the Restaurant and Business Alliance said, "You are sending a message to the individual, 'We'll take care of you like a baby,' not, 'You're an adult, and act like an adult,'"

But the Peltzman effect teaches us another reason. If you start making valets police drunks, then drunks will police themselves less. "I'm not sure if I'm too drunk to drive, but the valet will stop me if I am so I might as well try." Of course, valets make mistakes and the Peltzman effect predicts even if we swallow these costs, nothing will change.

How a Progressive Consumption Tax Works

Yesterday Gary Becker proposed switching to a consumption tax, one which could be made progressive. Since a progressive tax has higher rates for higher incomes, it's a bit hard to think how this is possible. If I buy milk, how will the government (or the store for that matter) know how much I make?

A progressive sales tax is progressive in an indirect way. We know that wealthy people tend to buy certain goods (superior good), middle-class people buy certain goods (normal goods), and poor people buy certain goods (inferior goods). Note in this case, an inferior good is not a good of poor quality. It's just one where people buy more of it when their income falls. College is an example (few wealthy people go to college).

Under progressive consumption taxes, restaurant food should be at a high tax rate, fast food at a moderate level, and little-to-no tax on food bought in a grocery store. Concerts should have a high tax and board games a low rate. The internet should be moderately taxed or not taxed at all.

The only issue with this kind of tax is its implementation. As you can guess, cataloging all these different goods would be incredibly time consuming. It's tempting to divide goods into large segments but selecting something as broad as "cars" becomes problematic. There are luxury cars and basic cars. In some places (e.g. NYC), many low income people don't have cars since public transportation is sufficient to meet their needs. In rural areas or in western states, this is less the case. It gets even more complicated considering some low income people need their car to operate a small business, regardless where they live.

Of course, we will have to accept some imperfections in a progressive consumption tax system. Imperfections are inevitable. But it's worth thinking about how it might work in practice.

Everyone Fires People. Every Day.

Mitt Romney's been under criticism for talking about his love of firing people:

At a breakfast event in Nashua, Romney told an audience that his health care plan would allow them to dismiss insurers and health care providers. "If you don't like what they do, you can fire them," he said. "I like being able to fire people who provide services to me."

Why is this so controversial? Because his critics use it to paint him as a Gatsby-like 1%er, firing his maid or butler just to watch them cry. But he's actually describing how average he is.

We fire people all the time. We do it so much, we don't even think about it. Today I went to Cakelove and had a cupcake. It cost over $3, but it was not worth $3, so I fired them: I won't go there again.

Then I fired the local AFI movie theater. I was going to go see Tinker, Tailor, Solider, Spy there but I kept reading reviews about how confusing it was if you haven't read the books. Not for me. I'll get it on Netflix so I can re-watch scenes, thank you very much.

For lunch I fired Einstein Bagels and Panera Bread. I usually grab something to eat at either of those places but I've grown tired of the limited number of things I like on their menu. Craving something new, I went to Baja Fresh. Will I fire them tomorrow? Probably; I'm thinking about making lunch in-house.

How many times have you fired someone today?

In Praise of AP Credit

Prof. Michael Mendillo doesn't like that high school AP classes can count to general requirements for college.

Lost to these nonscience students is an exposure to cutting-edge science and the methods of science taught by professors active on a daily basis in their exploration of nature. In how many AP classes in high school does the physics instructor say, "At the last American Physical Society meeting, one of my students presented a paper on this very topic"? Or, in an astronomy class, "My upcoming observations using the Hubble Space Telescope will address this dark-energy issue"? Identical scenarios exist, of course, for science and engineering students who miss out on university-level introductions to the humanities and social sciences taught by active scholars in those areas.

From what I remember of all of my introductory courses in college, there was very little "cutting edge" research discussed. And thank goodness for that! It's an introductory course. When I teaching introductory econ I rarely mention any new research and if I do, it is illustrative of some larger point (say an empirical paper on a price control). You don't want to overwhelm the students and, precisely because it's advanced, they probably won't understand it anyway. Imagine having a long discussion of the Higgs boson in Physics 101 when you're still trying to wrap your mind around Newton's Three Laws of Motion.

OK so you stick to offhanded references, not in depth discussions. Big deal. Admittedly, mentioning something cutting edge is cool to do and it can get your students interested in the introductory topic or illustrate where the puzzles in your discipline remain. Disallowing AP credit for college would generate these additional benefits but they are small. They come at a cost of the student not taking a course that's completely new or paying tuition for the semester that can no longer be avoided.

I had a student in introductory econ who didn't have to take my class: he had AP credit. He took it anyway since he'll be taking future courses from me, but I can't help but think that it was largely a waste of his time.

Fall 2010 Grade Distribution

Finally got around to do this. It's a distribution of all grades I handed out in the Fall of 2010, treating pluses and minuses as one category of the same grade. I'm 99% sure I removed all the students who dropped. N=64



Grades followed a rough normal distribution, but the low number of Bs is notable. I'm not yet sure what to make of this: could be random, could be that my assessment material is decisive, could be the ability of Bethany students is bimodal and that's reflected here. But the graph is interesting nontheless.

Quote of the Day

Alastair Smith on political tyranny:

But what if you really are trying to work for the common good? Is there no way of doing that?

None. If you’re working for the common good you didn’t come to power in the first place. If you’re not willing to cheat, steal, murder and bribe then you don’t come to power.

Read the whole thing; short and sweet.