Drug Legalization and the Urban Poor

Gary Becker calls for better schools and better teachers, writing

The best longer-term solution to the [income] inequality problem is to reduce the fraction of Americans who dropout of high school...This drop out fraction has been stagnant for the past several decades at about 30% for males, and a somewhat lower but still high percent for females. This is almost surely the highest fraction of high school dropouts among rich countries, and is heavily concentrated among children from African-Americans and Hispanic families. In large cities, often less than half of all the children enrolled in public schools end up graduating.

No doubt better teachers (and better incentives for teachers) would reduce drop-out rates. But let's not ignore a much simpler and (economically) cheaper way to reduce the number of drop-outs: legalize narcotics. This isn't merely about the money saved from enforcement, imprisonment, and judiciary costs. It's primarily about the choices kids face.

Kids drop out for lots of different reasons. But since the problem is so common in poor neighborhoods, where jobs and education are scarce, of course the few financially successful people in those neighborhoods are going to have a big impact. And those individuals are drug lords, people who have made a handsome profit off the black market. It's easy to look up to them and admire them. And it's easy to learn the trade since all drug lords need a large company--er, gang--to support the enterprise so they have a financial incentive to teach them well (or by fear or force). And I guarantee you, they don't require a high school education. One should not be surprised that, in a world where the choice is between learning from a poorly trained teacher with no obvious financial rewards and learning from a gangster who's involved in your daily life and will pay you for "on-the-job" training, more than a few students take the latter. Yeah, there's danger of getting arrested (though from what I gather that's more of a badge of honor) and being killed, but the payoffs are some of the best the kids can choose from and that means a lot when money is so scarce.

Following the Money

Mark Thoma has a cool chart about where your tax dollars go. When people want to fix the federal budget, they generally cite foreign aid or pork barrel spending or government wages or corporate welfare to cut. But these are all very small parts of the budget (they are in the "other" part of the graph...a total of 4%).



Suppose you're a congressman. You want to cut the budget? You might want to start with Medicare, Medicaid, or CHIPS which are health insurance for the elderly, poor, and children respectively. That will upset a lot of your constituents and I'm sure you're hear about it in the next election when your opponent tells the district you hate some of America's most vulnerable citizens. OK so you can cut Social Security instead, but that will only upset a smaller group of people with even greater fervor. Maybe you could cut the safety net expenses, but that won't be politically smart during a recession. Military's high, but a lot of this is concentrated in major contracts and military bases: a mighty large group of people to upset and has the public sympathy of defending the nation.

In other words, there's no easy way to cut the budget. The reason why these are the big areas of the budget is because they concern people with a lot of public sympathy, sympathy they were able to transform into payments. And it's that sympathy which secure those payments now. If they didn't have that public support (such as from Reagan's famed stories of "welfare queens" which promoted welfare reform), then things would be different. The best way to cut the budget is if hundreds of thousands of elderly people were using their social security checks to fund terrorism.

Should We Tax Happiness?

A new study suggests that a good part of income (for cricket players) comes from luck. Home field advantage matters a lot in cricket (apparently), scout show up randomly, and a good debut has a lasting impact on your career. If you happen to be on your home turf when the scout shows up, you're be in a better long-term position than your opponents. (The study was able to separate out performance from the field and performance from skill.) Matthew Yglesias argues that this is evidence for "Progressive taxes and more and better public services."

This leads to an intriguing question: should we tax happiness? The goal of public services (in this context) to the help the worst off and we use progressive taxes to fund those services, ethically justified because the wealthy didn't "earn" 100% of what they made. And because taxing someone because they got something by luck is justified in the area of salary, then taxing someone because got something else by luck must be equally justified.

Before I go further, two points. One is that this is not a serious policy proposal. Measuring happiness is very hard to do, made even more so since you'll be taxing people based on information that's completely subjective. I have no idea how you would do it nor do I care to figure it out. It's just a discussion to check for consistency. Second, yes generic happiness and wealth are functionally the same thing. Yes, the happiness research disagrees with me on this, partly because of issues with happiness research and the difficulty of measurement. All I'm saying is that when you take money away from people, you make them less happy and when you give them money they are more happy. The two are, on the margin, interchangeable (so no comments about how taxing income takes away what people didn't earn but taxing happiness doesn't collect "happiness" for the government to consume).

With that out the way, consider your own happiness. Most notable in my happiness is my relationship with my girlfriend, Tanya. I love her a great deal and she's by far the most serious relationship I've had. We met somewhat by chance, via match.com. (I call this is by chance because I was thinking about leaving the site having gone on so many dead-end dates and she had recently joined it.) According to Yglesias, this is grounds for a tax on my happiness. Most happiness that comes from social interaction is very similar to the cricket story: if you happen on a good opening conversation (performance) with the right person (scout), it can scale into something truly astounding. The question becomes, is this a stupid idea because it's impractical or because the whole notion of taxing happiness inequalities is silly? My vote is the latter as, I wager, it would be for most people.

The Political Incentives of Being a Jerk

For as long as I can remember, Republicans act like dicks and Democrats act like wusses and for my more partisan friends, those qualities are endemic to their ideological opponents. Republicans are heartless: they hate poor people, gays, atheists, blacks, Jews, Muslims, and the suffering masses. It's no wonder they don't compromise and spread fear and misinformation to the electorate. And Democrats are bleeding hearts: they want subsidies for nice-sounding idea that comes across their desk and throw away the realities of the world for a fantasy worker's paradise. It's no wonder they have no backbone.

But when you add some economics, it's a strange story. Why is there no one willing to break the mold: a Republican who wishes to act even a little dovish to attract some swing support or a Democrat who's just a bit quicker to be hawkish? Such is only the stuff of fiction. The two parties must be locked in this equilibrium for some reason.

Via Matthew Yglesias, I've found strong evidence that the Democrats are a much bigger tent party than Republicans. Because Democrats have to please a larger variety of voters, they have to be more willing to compromise and just don't have that much wiggle room when it comes to policy. Knowing this, Republicans have a strong incentive to be political bullies. This isn't a value judgement; it's a law of nature. If you know your opponents don't have a lot of flexibility, you make demands (especially since there's more than a little overlap between the two parties). Thus even with majorities in both chambers of Congress and a Democratic president, Republicans can hamper or even dislodge major policy changes. It's still a bit of a miracle that health care reformed passed but it's not surprising it took as long as it did.

The True Cost of the Soda Tax

Monica Potts argues that a soda tax isn't regressive even though lower income families spend more of their money (as a percent) on groceries compared to higher income families:

But that assumes lower-income families won't substitute something else, or just stop buying soda...If lower-income families are drinking a lot of soda, it's only because it's disproportionately cheap compared with healthier foods and drinks.

I really doubt that last statement's true since water's far cheaper and healthier than soda.

People buy soda for the same reason they buy anything else: it's the best value given the price. Yes, I'm sure if you increase the price people will buy less of it but they will shift to options that, when you consider costs and benefits, are less desirable. Even if they end up spending the same amount of money on groceries they are worse off than before the tax, by definition. They can only be made equally happy if they spend more.

This point deserves stress. The standard cannot be "if people are spending the same amount as before, then they are largely unaffected." That's a nonsense comparison. You must weigh the costs (including not just money but time, risk, etc) and the total benefits. Or, if you can, hold everything else equal.

Mankiw on Taxes

Greg Mankiw proposes we re-think measuring tax burdens. We generally measure them by calculating taxes, adjusted for GDP.

Looking at taxes as a percentage of GDP may mislead us into thinking we can increase tax revenue more than we actually can. For some purposes, a better statistic may be taxes per person, which we can compute using this piece of advanced mathematics:

Taxes/GDP x GDP/Person = Taxes/Person

Here are the results for some of the largest developed nations:

France: .461 x 33,744 = 15,556.
Germany: .406 x 34,219 = 13,893.
UK: .390 x 35,165 = 13,714.
US: .282 x 46,443 = 13,097.
Canada: .334 x 38,290 = 12,789.
Italy: .426 x 29,290 = 12,478.
Spain: .373 x 29,527 = 11,014.
Japan: .274 x 32,817 = 8,992

The bottom line: The United States is indeed a low-tax country as judged by taxes as a percentage of GDP, but as judged by taxes per person, the United States is in the middle of the pack.

Brad Delong and Matthew Yglesias says this implies that North Korea is a wonderful tax haven and Slovakia could stand much higher tax rates.

There's a reason why Mankiw focused on the countries he did: institutions. Japan, Italy, US, and the UK have similar economic systems (similar compared to the rest of the world). Mindlessly treating North Korea as the same as South Korea makes the same mistakes economists made decades ago when we wondered why all countries weren't converging to the same GDP. But the Solow model's predictions only work when countries are institutionally similar: "conditional convergence." Comparing Solvakia and Spain about tax revenue misses the point.

Logic 101

Menzie Chinn comments on Robert Samuelson's concerns about the true budget impact of PPACA:

Here is where Mr. Samuelson dismisses the entire budgeting process in Washington:

But the CBO estimate is misleading, because it must embody the law's many unrealistic assumptions and gimmicks. Benefits are phased in "so that the first 10 years of [higher] revenue would be used to pay for only six years of spending" increases, a former CBO director, Douglas Holtz-Eakin, wrote in the New York Times on March 20. Holtz-Eakin also noted the $70 billion of premiums for a new program of long-term care that reduce present deficits but will be paid out in benefits later. Then there's the "doc fix" -- higher Medicare reimbursements under separate legislation that would cost about $200 billion over a decade.

The logical implication based upon this argument: Might as well close up CBO.

Actually the logical implication is that the CBO scoring for the health care bill is nonsense and you shouldn't make graphs like this one (JGTRRA is the second Bush tax cut and EGTRRA is the first).


The bottom line is that the CBO scoring system, like most systems, can be gamed.

Priorities on GW

Robert Stavins wonders who killed cap-and-trade and argues that

U.S. public support on this issue has decreased significantly, as has been validated by a number of reliable polls, including from the Gallup Organization. Indeed, in January of this year, a Pew Research Center poll found that “dealing with global warming” was ranked 21st among 21 possible priorities for the President and Congress.

A quick glance confirms this--global warming is not a top priority--but that's not a perfect measure. It could be a somewhat high priority on everyone's list which would mean it's still pretty damn important. Scroll down on the Pew link and you'll find that GW has never been that high as a top priority (topping 38% in 2007, when they started asking about it). It looks like GW was just edged out due to recent events; people haven't stopped caring. I wouldn't call it dead yet.

Krugman on Reform

Paul Krugman has a smart insight about financial (or any) reform. Straightforward reform only needs mediocre regulators. Highly specialized and nuanced reform requires smart regulators to implement right. Get the so-so regulators with complex reform and you'll get something far worse than no reform at all.

That doesn’t make financial reform useless. But it is a worry, since you can’t count on always having smart, well-intentioned people doing the regulating.

Always? How about ever?

Obamacare and Entrepreneurship

With legislation as sweeping as the recent health care reform, lots of interesting questions boil to the surface. For one, will the reform be good for entrepreneurship or bad for it? Two commentators at Megan McArdle give conflicting reports, one arguing that it's good and the other that it's bad.

On one hand, entrepreneurs tend to be younger people and younger people tend not to buy health insurance even if they can afford it. The reform makes people buy insurance (though the penalty for not doing so is somewhat low) and will subsidize those who make little enough to purchase it. Thus there are those who have to buy it but make enough so they will get little or no government help. A forced expense will take money away from the all-important start-up capital.

On the other hand, those with a pre-existing condition (since you can't deny someone based on if they have a pre-existing condition) can now leave their employer's health plan and strike out on their own, confident they can get the health insurance they need. Untethered, we could see more entrepreneurship.

Which effect is more powerful depends on various questions: How important is a few to several hundred dollars a month for a new business? How common are people with pre-existing conditions? Are people with pre-existing conditions more or less likely to start a business (unlikely but if it's true it would probably be the most important variable)? I don't know the answer to any of these, but I suspect the bad outweighs the good.

Bryan Caplan, however, points out another possible confounding issue:

If preliminary summaries of Obamacare are true, it looks like individual health insurance will soon be a better deal than employer-provided health insurance. In the individual market, you can now wait until you're really sick to buy insurance: "Heads I win, tails I break even." Firms won't have that gimme - and it seems more valuable than premiums' tax deductibility. Admittedly, Obamacare imposes a small penalty on individuals who don't buy insurance, and a moderate penalty on firms that don't provide it. But it still seems like it will be in the financial self-interest of many firms and their workers to get rid of insurance, and split the (cash savings minus penalties).

This could push it to being good for entrepreneurship as companies can pay the fine and neither has health insurance until the employee gets sick (in which case they might get a subsidy).

It's not an easy thing to sort out.

Health Care Profitability

Everyone's talking about how profitable health insurance companies are (notably on tonight's Daily Show) but the secret is they're not that profitable compared to other industries. The large numbers shot around about increased profits are absolute dollars, not relative to their revenue, and tell us nothing about how profitable an industry actually is. Profit margin (which adjusts for revenue) is a much better measure. And health insurance performs quite bad compared other industries. I got the data from Yahoo Finance; here's the most recent quarter.

Note, REIT is healthcare facilities, not health insurance nor hospitals. According to Yahoo, these companies are in finance...basically real estate for health-related services. Healthcare plans (including Aetna, Wellpoint, Universal Americacore, etc) is number 88. Home health care was 55. Hospitals rank 100 (out of 215).

Rank	Industry	Profit Margin
1	Closed-End Fund - Foreign	38.3
2	REIT - Healthcare Facilities	25.2
3	Drug Manufacturers - Major	22.2
4	Publishing - Periodicals	21.8
5	Cooper	20.9
6	Application Software	20.6
7	Cigarettes	19.2
8	Internet Information Providers	18.7
9	Healthcare Information Providers	16.8
10	REIT - Industrial	16.6
11	Agricultural Chemicals	16.4
12	Long Distance Carriers	15.1
13	Networking & Communication Devices	14.4
14	Beverages - Brewers	13.8
15	Personal Products	13.4
16	Oil & Gas Drilling & Exploration	12.8
17	Information & Delivery Services	12.6
18	Beverages - Wineries & Distillers	12.3
19	Air Services, Other	12.3
20	Railroads	12.2
21	Diversified Investments	11.8
22	Gold	11.6
23	Drug Manufacturers - Other	11.1
24	Technical & System Software	10.9
25	Biotechnology	10.7
26	Shipping	10.5
27	Education & Training Services	10.3
28	Medical Instruments & Supplies	10.2
29	Beverages - Soft Drinks	10.1
30	Wireless Communications	9.9
31	Industrial Metals & Minerals	9.9
32	Telecom Services - Domestic	9.6
33	Steel & Iron	9.5
34	REIT - Residential	9.3
35	Processed & Packaged Goods	9.2
36	Electric Utilities	9.2
37	Business Software & Services	9.2
38	Foreign Regional Banks	8.9
39	Personal Services	8.7
40	Semiconductor - Specialized	8.6
41	CATV Systems	8.6
42	Restaurants	8.5
43	Diversified Computer Systems	8.5
44	Regional - Southwest Banks	8.3
45	Diversified Utilities	8.2
46	Cleaning Products	8.1
47	Medical Laboratories & Research	7.9
48	General Entertainment	7.7
49	Gas Utilities	7.7
50	Publishing - Books	7.6
51	Personal Computers	7.6
52	Oil & Gas Equipment & Services	7.4
53	Investment Brokerage - Regional	7.4
54	Toys & Games	7.3
55	Home Health Care	7.2
56	Textile - Apperel Footwear & Accessories	7.0
57	Waste Management	6.9
58	Conglomerates	6.7
59	Accident & Health Insurance	6.7
60	Aerospace/Defence Products & Services	6.6
61	Major Integrated Oil & Gas	6.5
62	Telecom Services - Foreign	6.4
63	Oil & Gas Piplines	6.4
64	Food - Major Diversified	6.4
65	Business Services	6.4
66	Auto Parts Stores	6.2
67	Sporting Activities	5.8
68	Medical Appliances & Equipment	5.8
69	Entertainment - Diversified	5.8
70	Photographic Equipment & Supplies	5.7
71	REIT - Retail	5.6
72	Drug Delivery	5.6
73	Tobacco Products, Other	5.5
74	Diversified Communication Services	5.4
75	Specialty Eateries	5.3
76	Industrial Electrical Equipment	5.3
77	Small Tools & Accessories	5.1
78	Semiconductor - Broad Line	5.1
79	REIT - Office	5.1
80	Pollution & Treatment Controls	5.1
81	Drugs - Generic	5.1
82	Insurance Brokers	5.0
83	Management Services	4.9
84	Research Services	4.7
85	Consumer Services	4.7
86	Confectioners	4.7
87	Information Technology Services	4.4
88	Health Care Plans	4.4
89	Auto Parts Wholesale	4.3
90	Packaging & Containers	4.1
91	Security & Protection Services	3.9
92	Cement	3.9
93	Chemicals - Major Diversified	3.8
94	Industrial Equipment Wholesale	3.7
95	Industrial Equipment & Components	3.7
96	Home Improvement Stores	3.7
97	General Contractors	3.5
98	Aerospace/Defense - Major Diversified	3.5
99	Housewares & Accessories	3.4
100	Hospitals	3.4

I thank Mark Perry who did a table for August of 2009. (Insurance companies dropped by two ranks since then.)

Peltzman on Germs

Slate columnist Darshak Sanghavi blames hand sanitizers' fundamental approach for their lack of effect on flu prevention.

To begin, the influenza virus mostly spreads via tiny droplets in the air (for example, from sneezes)—not by dirty hands or surfaces—which limits the role of Purell. It probably wouldn't matter even if flu transferred though hand contact, which is how most cold viruses spread...The average child touches his or her mouth and nose every three minutes, and both adults and children come in contact with as many as 30 different objects every minute. Even hospitals can't get staff to use Purell before seeing patients; it's impossible for day care staff, parents, or teachers to wash a child's hands 20 times each hour.

But what about adults? For that, I immediately thought of the Peltzman Effect.

Sam Peltzman discovered that increased safety standards on cars don't reduce accident fatalities. Because cars are safer, people feel safer and drive more recklessly. Similarly, hand sanitizer makes people feel braver and expose themselves to more germs. On net, there's no change, but it's not Purell's fault.

Tattletales and Signaling Theory

You learn lots of important things in kindergarten. Don't lie. Don't cut in line. Always say "please" and "thank you." Share your toys. Don't tattle. These are all good lessons, but the last one doesn't really make sense. Tattletales inform proper authorities of people who broke the rules. If the rules are just, exposing violators of those rules should also be just. If it's not good to point out that little Suzy cut in line, how can one say it's bad to cut in line? And yet, if you're hosting a party and a guest came to you to rat out another guest because she jumped in front of everyone at the buffet table, you'll probably have a lower opinion of the informant, not the accused.

It gets even more confusing because it's not a hard fast rule. "Tattling" on a murderer or a thief is generally considered an act of bravery. Same thing goes with exposing corrupt politicians or companies doing unethical accounting or illegal polluting. We call them whistle blowers and put them on the cover of Time Magazine. Context matters a lot: during the 2009 snow storm I, like so many others, were stranded at the Dulles Airport. A woman cut in line for rebooking (a line I was waiting in for two hours). It took us a while to figure out she was cutting and not asking a humdrum question and while no one protested, we wish we had. (Why we didn't is another story entirely.)

My best guess to explain this asymmetry is signaling theory. Signaling is economics speak for "actions speak louder than words." It's about using demonstrative actions to show people you have some quality. Saying you're a trustworthy person doesn't mean much. But if you fess up to something you did wrong, you can signal you're a trustworthy person and people are more likely to believe you. Tattletales interfere with that signaling system.

Suppose I cut in line at a buffet to get the last Swedish meatball. If I sneak away to devour my ill-gotten gains in peace, those who witnessed it will look down on me for my selfishness and rudeness. But suppose I admit to everyone that I cut in line and apologize. I've put myself out there, subjecting myself to the will of the mob. By admitting dishonesty, everyone would look down on me. Someone might lay claim to my meatball. But it's also possible that everyone would laugh it off and they'll go away thinking "that David fellow is an honest guy; he didn't have to admit to such a minor offense but he did and that says a lot."

Now I'm not saying that a good way to gain people's trust is to swipe something and then fess up. The whole point is you're putting yourself at risk to be worse off than if you said nothing and it certainly doesn't work if you follow up every heart-felt apology with another act of rudeness. But it shows that there's value in not exposing a violator because doing so denies them the opportunity to signal honesty. If a third party tells everyone I cut in line, then me stepping up to admit it doesn't mean anything. Thus, we discourage tattletales because they mess up our signaling system.

This signaling system doesn't always work. When the expected costs of signaling are unconditionally greater than the expected benefits, we don't expect anyone to signal so we tolerate, no, celebrate, tattlers. From murderers to emergency situation line jumpers, whistle blowers end up just getting rid of the creeps.

Six Percent and the Secrets of Real Estate

Several years back, Alex Tabarrok pointed out the mystery of real estate commission. No matter where you go, or what's being sold, real estate agents take 6% of the home's selling price (typically, 3% goes to them and 3% goes to the the agency they work for). This is bizarre: why would agents in Montana be charged the same percent as agents in California, where homes are much more expensive? Is the increase in work to sell a home really so perfectly proportional to its price? Seems unlikely.

I ran into a real estate agent on the train while traveling to New Haven, CT on Thursday and asked her about it. She insists it's not true. Even before the crash, commission's negotiable: she's done 4% or 5% for some buys and she's charged 7% for major sales (such as if selling the home requires that she rents a helicopter and takes aerial photographs). If she's selling a home and finds a buyer willing to be represented by her, she takes a smaller commission on each (though she gets more overall; 4% twice is more than 6% once). "Everything's negotiable," she says. That's reassuring.

While she's been in the business since the mid 1990s, this is just one data point. Still, with so much freedom of entry and variation across real estate markets, I'm more likely to believe that this 6% level is more urban legend than industry practice.

Pictures From Snowmageddon

I normally don't do personal stuff here but the pictures from the twin blizzards are pretty interesting (and should be convincing to those knowledgeable of Midwestern winters that if I complain about the snow, it's not because I've gone soft).

The first shots are from the first blizzard. In this shot, I've already dug out the back area (which took about an hour). Yes, I actually had to do some digging to confirm the car was mine (the snow was originally hiding the plate and my IHS bumper sticker).







There is, of course, some economics in this post. For one, I note a similar mystery that Bryan Caplan pointed out. For example, here's the milk section at the local supermarket I visited today (note the soy milk, way at the end, is pretty well stocked).



Bryan thinks it's strange that the brand name stuff is grabbed more than the off brand. As staple products, if people like them five times as much, why isn't there five times as many of it? Several days into the storms, I still found other strange juxtapositions.







Some of this might have been due to constant restocking but based on Caplan's observations (and others that went out right before the storm concur), it's equally possible that this is not the case.

It also highlights the problem of inflexible prices, especially during a crisis. It's probably due to price-gouging laws, which exist is most, if not all, states. Luckily when I went today, I was able to get everything I needed (but only because the nearby Wal-Mart just restocked its milk).

Ryanair: Cheap, Reliable, and Safe

Ryanair ranks in the bottom 10 of 581 companies on ethics (based on social responsibility, environmental awareness, etc), compiled by Geneva-based Covalence. Henry at Crooked Timber notes that Ryanair is unique among its low ranked brethren: it seems to covet its slimly image.

The company prides itself not only on being perceived as having no social conscience, but as having a reputation for screwing its customers as systematically and mercilessly as possible. Which other airline’s CEO would announce that he wanted to charge passengers to use the toilet as a publicity stunt? Clearly, Ryanair thinks that this reputation is a money spinner for them (it is quite deliberately cultivated), and they have indeed made quite a lot of money. But why (if they are right) would a reputation for shafting your customers be a commercial asset for a consumer-oriented business in a relatively competitive sector? The standard economic account doesn’t seem to provide much insight. Help me out here.

There are many sloppy explanations, but three good ones stand out.
Ryanair is trying to attract well-informed consumers who will see the add-on charges beforehand and adjust for it; they end up with a very cheap airfare (it's apparently an inexpensive way to travel) and no surprises. Ill-informed consumers end up footing the bill. This is a nifty argument but I don't see it holding in equilibrium, especially when you're issuing press releases about charging for using the bathroom. Something like that is likely to get out to even the poorly informed consumer.

Ryanair is signalling safety. Since they are inexpensive, the company is showing where they get revenue from thus customers aren't afraid that they got a deal because the firm skimped on safety checks. But it seems that the safety regulations which govern air travel would put customers' mind at ease. At the same time, you could argue the fear is that they cut corners in other ways, such as paying their flight attendants very little which would result in rude service.

Ryanair is signally honesty and reliability. When you travel, there's a lot of stress so when you discover some small fee it seems like a much bigger problem than it is. By outlining all their add-on costs before you pack your bags, they're cutting out uncertainty (and the fear of uncertainty). Yeah, you have to pay to use the bathroom, but since you knew about it ahead of time, it doesn't seem as bad as if you discovered it after drinking six glasses of water. Since everyone knows companies spin the truth in commercials, blatantly not spinning it sends a strong signal that "this is all you will have to deal with."

What I like about this last argument is that it bears a striking resemblance to Domino's "sorry we had horrible pizza but now it's good" campaign. Some commentators laugh at it, replaying old commercials touting the flavor of Domino's "cardboard." But no one really cares; every pizza chain says their pizza is great. But Domino's admitting a lot of people didn't like and now we're fixing it speaks volumes. Down right honesty is often an under appreciated business practice.

The Myth of Magic Medicare

Insurance companies are greedy. Everything its CEOs work for is to make as much profit as possible. They are hesitant to do anything that increases their revenues, and anxious to adopt anything which decreases their costs. Until today, I didn't think anyone would disagree with this until tonight, when Congressman Anthony Weiner went on The Daily Show.

Congressman Weiner argues that Medicare should be expanded to all citizens, citing its very low administration costs (about 3% of its total payouts) as a way to save money. Insurance companies, by contrast, have about 12% overhead.

What magic has Medicare mastered to keep its overhead so low, magic that continues to allude our greedy insurance companies? It's not economies of scale. Medicare has about 45 million customers, while AIG covers 74 million. Even if you adjust for the fact that AIG covers people worldwide while Medicare only works within the US, such a massive difference in overhead is hard to explain with just economies of scale. After you measure your customers in the millions, those efficiency gains from volume tend to disappear. Otherwise we'd have far fewer insurance companies (I counted 31 health insurance companies in the US from this Wikipedia list with 27 confirmed as currently active). It's hard to think of another argument which could possibly justify this vast difference in overhead between the public and private sectors. I wonder how Rep. Weiner explains it; perhaps insurance companies don't care as much about profits as we thought. Or government is far more cut throat than anyone possibly imagined. Or maybe the folks at Medicare has some sort of genie/manager.

Now you could argue that Medicare doesn't have to worry about paying for advertisers nor state taxes. That's a lot better but 9 percentage points for TV commercials and taxes is hard to believe. There are two other explanations which justify this difference and neither of them help Weiner's argument.

First, Medicare covers only those over 65. Since the elderly, on average, need more medical assistance than the rest of us, the payouts in relation to administration costs drastically increase. It's not that Medicare has some secret which keeps overhead low; its payouts are just biased upward.

Second, Medicare spends very little money investigating the claims it accepts. And medical insurance fraud is a big problem. Just because you're spending less money, doesn't mean it's actually saving money.

How the Middleman Can Save You Money

Tonight's Daily Show featured Austan Goolsbee of the Council of Economic Advisers to the President. He argued in favor of the government taking over lending to students and cutting the middleman (various financial intermediaries) to save money. Cutting the middleman is a time-honored way to try to boost efficiency but it doesn't always work. Middlemen exist for a reason. In this case, they provide specialized knowledge and an incentive for efficiency since they keep the profits and suffer the losses (most of the time anyway).

This isn't simply a matter of buying your mattress directly from the factory (though, even there the middleman probably has better customer relations). Lending money is hard because because you have to avoid the twin pitfalls of those who can't pay you back and those who won't pay you back (aka adverse selection and moral hazard). People still default on loans despite various inventive mechanisms banks developed over the years to avoid these pitfalls; mistakes are easy to commit.

But it's even easier when you're not fighting for your life. No matter how well trained a government employee is, they are much less likely to get fired for approving a lot of loans which later default than for an employee at a for-profit company.

It still might be cheaper for the government to provide this service directly (though I'm skeptical). But it's not simply a matter of pocketing the middleman's cut.

The Meaning of Wealth

While defending China's long term prospects, Robert Fogel paints a bleak picture for Europe.

In another way, Europe's culture confounds economists. Citizens of Europe's wealthy countries are not working longer hours to make higher salaries and accumulate more goods. Rather, European culture continues to prize long vacations, early retirements, and shorter work weeks over acquiring more stuff, at least in comparison to many other developed countries, such as the United States...A promenade in the Jardin du Luxembourg, as opposed to a trip to Walmart for a flat-screen TV, won't help the European Union's GDP growth.

No doubt that the laws requiring long vacations and strong job security has had unintended consequences for the countries' economy and employment rates. But stuff (GDP) is not wealth. It is a source of wealth, but it is not wealth. The closest thing to wealth is happiness (a notoriously difficult thing to measure). Its people's priority over non-pecuniary benefits is not confounding at all.

GDP is a useful proxy for wealth but its dangerous to forget it's just a proxy. This idea stretches all the way to Adam Smith (as so many great ideas do). He noted that all jobs are relativity equal if take the large picture (including educational requirements, work hours, effort, stress, independence, and of course pay). Natural differences in the nature of work will be balanced by the size of the salary. (Later called compensating wage differentials.) Professors have great freedom and jobs, but don't get paid that much given their educational background. CEOs get paid a lot but have to work long hours. Some people prefer the salary and become management; some prefer flexibility in their time and become professors.

Like GDP, we use salary as a rough estimate of how successful we are. But, when pressed, we know it's more than that. Not all of us wish to work the 80-100 hour weeks of a CEO, stock broker, or high-powered lawyer. Nor do all of us wish to go to school for years and years, only to have all that work result in less than six figures a year (save rare exceptions).

On the macro scale, you can say it's different. More spending means more jobs and no matter how bohemian you enjoy your lifestyle, you still need to eat. If the people prefer time, rather than stuff, then their economy is in a bad position; you can't sell time. But you can; by making life easier for your customers, you effectively sell time. This is what the services industry is all about. While I agree that Europe's shrinking population is a problem, the preferences of its people is not.

Not Quite a Wage Control

The Heritage Foundation issued this summary of what the Senate Health Care bill will change when. Some of these summaries looks suspiciously harsh (such as the one claiming the bill won't allow insurance companies to revoke the insurance from someone who committed fraud). Another, less obviously exaggerated, one caught my eye: In 2012, "Health insurance company employees may not be paid more than $500,000 per year."

I was curious to see how this was worded so I checked the Senate bill where it's listed under Section 9014. The section is strangely worded (of course), making references to deductions and the Section 162 of the 1986 tax code. After consulting that, I got an idea what this clause was actually about.

For one, the change doesn't occur until 2013, not 2012, but that's a minor point. Moreover, the "payment cap" isn't really a cap. It just means that if you make more than half a million a year and work for health insurance provider, you can't take any deductions relating to trade or business expenses (as allowed by the 1986 reform). I don't know how big of an impact this will have on health insurance employees making more than $500,000 a year as I have no idea what their business deductions are, but it's not a wage control.

Public Domain Day

It's Public Domain Day, the day when hundreds of authors' works enter the public domain. Here's a complete list. Some highlights:

-William Butler Yeats, who won the Nobel Prize in literature in 1923
-Sigmund Freud, famed psychologist
-Zane Grey, a prolific Old West novelist
-Luis Philip Senarens, one of the most prolific dime novelists of his day
-Henry Salt, credited as the first writer who argued that animals should have rights
-Zona Gale, Pulitzer Prize-winning playwright
-Siney Howard, a playwright and screen writer who won a posthumous Academy Award for the screenplay of Gone With the Wind

Another Reason to Buy a House

Megan McArdle points out some reasons to buy a home--such as avoiding costs to moving and having the freedom to customize your space--but she forget a key issue: avoiding horrible landlords. While buying a house comes with the risk of getting a lemon, landlords can be the same way. They can be behind on repairs, rude, or lax on the law (which can cause many problems for you later). In one place I lived, a surprise investigation revealed that one of the rooms was not legally occupied since it lacked the proper amount of window space. A huge headache followed, eventually resulting in the occupant leaving the house.



There's something to be said for removing another person from the upkeep equation. While you lose the chance of professional specialization, you also remove the possibility of negligence which often accompanies a new (or even experienced) landlord. Many of these problems go away when you own your own home (sure, the plumbing still needs fixed, but now you're depending on the plumber instead of depending on the landlord who's depending on the plumber).

Santa the Slaver

In countless Christmas movies, we get the impression that the elves of Santa's workshop are happy, joyful people who do all their work for fun. It's part of the myth: who would want toys from a man who forces elfin creatures to do his bidding only to then give away all of their hard work to strangers and force them to start all over? The more you think about Santa, the more I realize those elves are his slaves.

(1) Santa has no income. Maybe all those fake Santas which crowd the malls bump up part of their paycheck to the big man (think of it like a franchise), but that wouldn't be enough to cover the cost of materials, let alone labor.

(2) There's no way that the North Pole is the elves' natural habitat. They don't have the fur needed comfortable survive there. Typically elves live in the forest. Now, obviously, Santa wants to be isolated from the humans which is why he lives in the North Pole. But there are plenty of other places he could be, places more hospitable for his elves (here's a map of the world based on how long it takes to get to a major city). The Amazon is quite isolated, as is the Sahara Desert. The Himalayas are warmer than the North Pole if you don't go too high. All are viable candidates. But Santa picked one of the most inhospitable places on the planet for one reason: to keep the elves indoors. If he was in the Amazon, in a place they were comfortable in, they might run outside instead of working. Not only did Santa kidnap them, he's trapped them in a work camp.

(3) But if they like to work, then it's ok, right? Well, if they like to work, why do they need Santa? Why not just stay in their natural habitat and send toys out into the world? Hauling cargo is work, too. Yes, they won't have Santa's magical powers to deliver them all on Christmas Eve, but so what? Unless you're talking about something that could spoil or die (which accounts for a tiny fraction of presents), they can be delivered weeks or even months in advance. It's more likely that after Santa kidnapped them, he lied, claiming the presents had to come out on the 24th and only the 24th, thus "justifying" the kidnapping.

(4) But what about all the shots from movies and television with the happy elves? For one, that's fantasy and you're mistaking what's fake for what's real. (Grow up, seriously.) Besides, Santa's an all powerful being (which brings up the question of why he doesn't make the toys himself): he brain-washes them.

An Item From Santa's Lap

Paul Krugman applauds the Senate health care bill for, among other things, forcing insurance companies to cover patients with pre-existing conditions. This has been a long standing point of reform: why should a family be forced to cover the expenses of a medical problem when they had no role to play in the development of the condition. It's not as if they're smokers suffering from lung cancer. And many families can't afford the very expensive treatments that come with such conditions. But insurance companies can and so, the argument goes, they should pay.

For one, I'm not sure they can, but there's a deeper point. A pre-existing condition is tragic, doubly so if burdened on a family who cannot afford to properly address the issue. But that does not translate into forcing someone else to shoulder the burden, whether the target is insurance companies, hospitals, or the U.S. government (though the last is most justified since, in theory, it works for all of us). Some believe that doesn't matter; covering such individuals is the right thing to do. But that misses the larger picture. Even if they could afford it and even if they could continue to afford it for the foreseeable future, it would be ethically wrong to force one group to shoulder the problems of another group. Yes, I know we do this a lot already, but that's hardly grounds to keep doing it.

Here's an analogy. Some people are born ugly, or stupid, or socially awkward. Such people have difficulty getting dates or maintaining friendship. While befriending a person with such a pre-existing condition just to be nice would be seen as an admirable act of kindness, no one would agree to a policy which forces people to befriend or date such individuals. It would be seen as unethical, even if the individual is not able to "afford" such loneliness (i.e. they are suicidal).

It's all well an good to ask for things but you have to think about where they come from.

Patent Number 5,547,091

When I shop for toothpaste, I prefer the caps with the flip top so I don't have to remove the cap when I brush my teeth. I usually forget to look since I tend to forgot to buy it in the first place but today I remembered. In my search for the flip-top cap, I discovered only one brand, Colgate, has them. Moments after I thought that was strange, I suspected the answer. A search at the PTO website confirmed my suspicions. It's patent number is 5,547,091. Here's the abstract:

A closure for a container having a dispensing nozzle include a central aperture to receive the nozzle. In one embodiment, the nozzle extends through the aperture and projects upwardly from the base cap. The base cap further includes a top wall inclined with respect to the central axis of the base cap to assist in dispensing of the contents of the container. A cap lid is hinged to the base cap by a snap hinge assembly.

The patent was issued on August 20, 1996. Thus, on 2016, the "who didn't replace the cap on the toothpaste" arguments will evolve into "who didn't shut the toothpaste" arguments. And we'll all be happier for it.

Darwin Zero

I found this post via Megan McArdle concerning the data surrounding climate change in the wake of "climategate." It's an interesting post but it's long. It's a case study on a temperature record station, Darwin Zero, and how climatologists adjust the raw data to something that is consistent across the past century. There's good reason to have adjustments (changes in station location, instruments, time of temperature recording, etc) but the adjustments to Darwin Zero are very...strange.


From the author:

Yikes again, double yikes! What on earth justifies that adjustment? How can they do that? We have five different records covering Darwin from 1941 on. They all agree almost exactly. Why adjust them at all? They’ve just added a huge artificial totally imaginary trend to the last half of the raw data! Now it looks like the IPCC diagram in Figure 1, all right … but a six degree per century trend? And in the shape of a regular stepped pyramid climbing to heaven? What’s up with that?

This doesn't mean that all adjustments are suspect or that climatologists are lying or even that these are falsifications (though you can bet I'd like to know the reasoning behind those adjustments). And over the years, I've become more sympathetic of climatologists' claims (decentralized researchers all saying about the same thing is a good litmus test for truth). But it does highlight the need for publicly available raw data and comprehensive explanations for all the adjustments. If the scientists really want to convince people, transparency is key.

Ten Red Balloons

DARPA's awarding $40,000 to the first person or team to find ten red balloons which were spread all over the country on December 5th. The goal is to learn how people organized in large teams use computers to socially network. What software will we see? Will there be spying? Attempts to misinform other teams? I'm not clear how they will measure all they want to measure, but the prospects look very interesting.

December 5th was the 40th anniversary of Arpanet, the Internet's precursor.

HT: Alex Tabarrok

Update: Here are the results.

The Paradox of Happiness

Disciplines are always most interesting when they cross with other disciplines and the economics of happiness is no exception. Talking to some of my friends the other day (one versed in anthropology and another in psychology), we noted how much people value a sense of genuine accomplishment and is probably why, in some cases, wealthy people aren't as happy as less wealthy people. (Setting aside the lower mortality rates in poorer societies.)

For example, the people of the indigenous tribe that must work every day to get a meal are going to be happier (assuming they are successful) than the middle management who, while isn't concerned about getting his next meal, has no sense of accomplishment and feels as though his life is wasted. (This, by the way, is how many mid-life crises take root.) Indeed, people who have the option to leave their tribe in favor of modern life tend not to take it (I know this is very common among the Amish, and I'm sure a similar story can be told for other groups).

However, I argue that the wealthier, accomplished person will be happier than the less wealthy accomplished person ("accomplished" being defined as the standard of the society...for example, getting a book published in the wealthier society versus bringing home a kill in the less wealthy one). Some expressed doubt to the claim, so here's my reasoning.

First definitions: p (probability of achieving an accomplishment); S (happiness from achieving survival); s (happiness from surviving); A (happiness from achieving something else); and a (happiness from that something else). This draws the distinction, for example, between the sense of achievement from a book published and the royalties received from getting a book published. Note I'm also assuming it's equally likely to achieve something in a rich society and in a poorer society. This is primarily to make the math easier.

A person would be indifferent between two societies if:

p(S+s) = p(A+a)+s,
where the right-handed side is the wealthier society (they get the benefits of survival without trying) and the left-handed side is the indigenous society. Simplifying reveals:

S-A = a+((1-p)/p)s
In other words, there must be a larger sense of accomplishment from surviving than from other accomplishments to make a person indifferent. To make a person prefer the less wealthy societies (which I strongly doubt), the premium (S-A) would have to be greater than a+((1-p)/p)s, which I doubt since both values are positive and a might well be quite large.

Now consider the scenario when p=1, or when you are comparing people in each society who have made achievements (either in survival or in something else). The equation becomes:

S-A = a
If we think of such individuals in each society as sharing common traits (intelligence, drive, etc), then this means that more capable people are less likely to prefer modern society compared to less capable people--it all depends on the additional satisfaction derived from achieving survival versus achieving something else. While I imagine this premium to be quite small, the fact that this (simple) model predicts "stronger" people are more likely to prefer an environment that is more dangerous seems to be quite the paradox.

The Value of the Original

The Original of Laura, the last novel of Vladimir Nabokov, was published last week. Normally, a new novel doesn't get a lot of media attention but this one's a little different: Nabokov didn't want it to be published. In fact, he wanted it burned.

It was in his last will and testament that all unfinished works of his should be destroyed. When Nabokov died in 1977, his family didn't carry out this wish. They were emotionally distraught and procrastinated the decision, putting the work in a bank vault. For thirty years, a battle of what The Times called "the demands of the literary world versus the posthumous rights of an author over his art" worn on. Eventually, the literary world won...sort of. The novel, apparently, isn't very good (at least in the state it's in).

According to the author's son, destroying the manuscript was something he never seriously considered. Such an attitude makes me nervous; not only did his son fail to follow an aspect of his last will and testament (as did his wife, who died in 1991), it has the potential to shrink the number of good novels.

Nabokov, like many writers, clearly didn't want works published that fail to live up their standards: even after death (the idea that you leave a part of yourself behind after you die is, I'm sure, a motivation for many writers). Suppose the standard attitude of posthumous publishing becomes "ignore last requests and publish anyway." I guarantee you, some aging authors will be less willing to even start a novel in fear that they won't be able to complete it before their death, even if it turns out they could. This can cost the literary world something very valuable. While suffering from tuberculosis, and certainly concerned he might die soon, Orwell worked on 1984, which was only published a year before his death. Mark Twain, Jane Austen, Charles Dickens, and Jules Verne (to name a few) also published several works near the end of their lives.

A Quick Logic Lesson

Earlier today, I published a post exploring the idea of America exiling its prisoners instead of incarcerating them (specifically to Madagascar). I don't seriously endorse the idea but given the burden our prison system is under, I thought it was interesting to explore. However, I decided that it needs to be thought about more carefully so I unpublished it and saved it for a later date.

In the brief time it was up, a commentator wrote (and I'm paraphrasing because I forgot to copy/paste) that Hitler wanted to send Jews to Madagascar (I think we chose the same island) and he/she hoped I wasn't planning something like that. That doesn't work.

The ethical problem with Hitler's plan was not that he wanted to exile a group from a country. It is that he wanted to treat a group of people differently from everyone else on immaterial grounds (ie, religion). Ignoring the nature of the crime for the moment, treating prisoners differently from non-prisoners is not unethical; we do it everyday when we send them to jail. The Hitler analogy is false.

Tea Party History

With the "Tea Party protests" so popular among some Americans as a way to defy big government, a history lesson from one of my favorite books seems appropriate.

Most believe that the original Boston Tea Party was a protest against taxes on tea. In reality, the Americans weren't drinking that much British tea; local merchants have been boycotting it for five years, relying on smuggled Dutch tea instead. So, the British decided to remove some of the taxes on British tea in an attempt to make it competitive with Dutch tea.

Loyal British merchants would be granted the right to sell this cheap tea, effectively running the American merchants out of business. That's what the tea party was all about and why those merchants threw their competition into the ocean. (Granted, this would grant a monopoly on British tea to Loyalists, but the problem with monopolies is they increase price and restrict outputs which wouldn't be an issue here, given it has to compete with Dutch tea.) The famed party wasn't a protest of tariffs, it was a protest for a lack of tariffs, as bootleggers supported Prohibition and drug dealers benefit from the DEA.

The Tea Party wasn't celebrated in the colonies, either. The systematic destruction of private property highlighted Massachusetts' reputation as a place for warmongers and Benjamin Franklin demanded that the protesters pay full restitution to the owners of the destroyed tea.

As much as I empathize with the concerns of the modern protesters, this probably isn't the thing you want to be referencing to get your point across.

Singles in DC

DC is apparently packed with single men and women, according to the Pew Research Center. With a national average of 52% (men) and 48% (women) married, the District sports a mere 28% (men) and 23% (women) married. The next lowest numbers are 47% (men) for Alaska and 43% (women) for Rhode Island. (These numbers are for the 15 and older crowd.)

One commentator believes this is due to the unique demographics of DC: very high black population (less likely to marry) and very high Democratic population (more likely to marry later). Another points to the 8.2% gay population as the culprit (along with the marry later point). These are certainly factors, but there's a much more obvious reason that I think carries the bulk of the explanation.

Married people tend to want to start families which generally means a bigger home and unless there's also a big raise, that means moving to the suburbs. In most states, moving to the suburbs can but not always means changing your state. But in DC, it always means leaving DC and heading to Maryland or Virgina (or West Virgina). So the states include both the city proper and the suburbs but DC includes only the city proper. Big difference.

The Economics of the Movie Ticket

A couple of days ago, Nicholas Tabarrok noted the strange economics of the film industry at MR. Movie theaters do not charge lower prices for movies that are unpopular. Similarly, highly anticipated movies have the same ticket price as movies that are proven flops. Why is that?

If the movie theater charged different prices for movies, it would need to hire individual ticket takers for multiple theater entrances at the multiplex--one for each theater that's seating at the time (otherwise people would just buy the cheapest ticket). This is a drastic increase in costs both in payment to the employees and to management, who must now organize a complex system of employees.

Instead, the theater simply adjusts how long a movie is being shown. Good movies are shown for a while, bad movies leave the theater quickly (making room for theaters showing the good movie). It's not as direct as individual pricing, but it's much more cost effective.

Information on the Margin

According to a study, New York City's new laws requiring calorie counts on fast food restaurants doesn't appearing to be having any net effect on food purchases. One would think this law would get people to steer clear of fast food, but it's easy to see why, in practice, this doesn't make any bit of difference.

Like smoking, the unhealthiness of fast food is common knowledge. Telling them exactly how many calories are in X, Y, and Z change anything because they're not seen as relevant (ignoring that a high calorie count isn't the same thing as being unhealthy). If you already know a Big Mac is bad for you, knowing it has 576, not 500, calories isn't going to change your decision.

It's too costly to calculate everything down to such fine nuance. Instead, people think in broad categories. Now, if estimated calorie count was off by a factor of 2 or 10, we'd see some real movement. But, on the margin, this information adds virtually nothing. People are good at estimating calories by themselves.

Not All Yale Students Are Hippies

Tanya and I are at some coffee shop in New Haven and I noticed on patron has a quote attributed to John Maynard Keynes on her laptop:

Capitalism is the extraordinary belief that the nastiest of men, for the nastiest of reasons, will somehow work for the benefit of all.

Apparently, this quote isn't from Keynes, but it's a good sentence nonetheless and reminds me of this quote from F.A. Hayek's The Fatal Conceit:

The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.

(It occurs to me this person might think the quote is sarcastic but I hope not. That would ruin my title.)

Incentives to Inquire

Students don't like asking questions. For a while, I thought it was simply because they are shy and need to be enticed out of their shell (I still believe this, but less so now) so I require participation for the grade. An undergraduate friend of mine told me of another reason:

We know the professor only has so much material planned for a lecture. If we get it all done before time is up, they have to let us out early. But whenever anyone asks a question or asks to elaborate, that pushes the time we get to leave, back.

This is a problem. Most students don't understand the first time around or will forget if they don't talk about the subject matter. And there's a lost life lesson in the importance of speaking up. The reality is doubly a problem for my style since I make the lecture notes available online before each class.

It's tempting to solve this issue by just over-booking each lecture, but it makes you look disorganized. It also creates the risk of having material constantly spilling over to the next lecture until you get backed up at the end of the semester and your homework and exam assignments get out of whack.

So my solution I will be trying out in the future is to create one or two five-minute "widgets" at the end of each lecture. Short extensions on the topic we covered, but small enough that if we don't cover them I don't feel a big loss. When the semester begins, I let them know the rules: if we finish before we get the widgets, then I assume they have mastered the nuances of this lecture and we can further their understanding with applications (which will be now be on the exam). If we don't get to them, they won't be tested over them. Therefore, students are incentivized to ask questions, filling in the time by furthering their understanding of the material in order to avoid a larger exam. Since I have the power to veto questions, I can't imagine I'll be bogged down with filler inquiries in an attempt to game the system. I hope there aren't any unintended consequences I haven't thought of.

On Racism and Income In America

During a heated discussion with my girlfriend the other day, I brought up the graph below from a post I saw on Marginal Revolution. It's summary data from an adoption study when primarily Korean children were adopted by American families of various incomes between 1970 and 1980. Now in their 20s and 30s, the graph summarizes their parents income (presumably at the time of adoption, hopefully adjusted for inflation) along the x-axis and the child's average income along the y-axis.


This, I said, is a very interesting study: adopted kids did about the same (on average) regardless of who brought them up. But when they are the natural kids of the parents, they do better on average. Since it's reasonable to say other effects are constant across incomes (such as how parents treat an adopted child), the data suggests that genetics play a critical role in determining income and that the wealthy are not wealthy simply because their parents were. (Note there is still a high level of income mobility in the data: 10K a year parents averaged almost 40K a year kids; 200K a year parents averaged only about 78K a year kids...though the latter point could be argued by wealthier kids opting for jobs with fewer financial awards and more non-pecuniary benefits.)

Tanya didn't agree on a few levels, for one arguing that it suggests low black incomes are low because blacks are stupid. But the study doesn't say that environmental factors don't influence future prospects (though I am admittedly surprised to see how uncorrelated adopted incomes were with their parents) nor was it a perfect study. Since adoption agencies are ethically bound to make sure the couple could provide for the child before adoption, the selection bias would overestimate the success at the lower levels of income.

Tanya was also concerned about effects embedded in the adoption. Since the kids were Korean, they were clearly adopted. Thus, she argues, issues of racism and the stigma of being adopted washed out and overshadowed any advantage wealthier kids had. Sure, this exists, but I'm not convinced these factors are so strong it would wash away all environmental advantages. Yes, the children grew up in the 70s and 80s, where racial tension was likely stronger compared to now, but such tension tends to lean toward the Afro-American and (to a lesser degree) Hispanic populations, not Southeast Asians.

Really, I have don't know how much racism is in America. Most people don't know. Of course, it still exists and minorities will have first hand experience with it. But that doesn't mean it's common. Similarly, most white people I know (myself included), are good people and most scared of a misunderstanding being mistaken for racism. That does not mean most white are not racists. And surveys done on the issue are going to have major credibility issues about the honesty of people's responses. I can say with confidence that black incomes are rising, interracial couples are more common, and companies are very concerned with being thought of as inclusive; at least things seem to be getting better.

The Burden of the Pre-existing Condition

If you were born with Asperger syndrome, should people be forced to date you? Most of you would probably say "no." It's a good answer: why should people be punished for something that isn't their fault? So why do so many believe health insurance companies should be required to accept applicants with pre-existing conditions? (Before you respond with "I don't want to date someone who doesn't want to date me," remember Asperger syndrome severely limits your ability to read social cues; you won't be able to tell they are with you only by force.)

It's not even that insurance companies won't cover pre-existing conditions. It's that they won't cover them at a particular price: a low price. In the end there are those randomly burdened with a condition that's expensive to care for and they don't want to pay for it (at least all of it). But that does not translate into forcing someone else to cover the costs.

And no, insurance companies are not sitting on lots of excess cash. Record profits are not the same thing as high profits (and even if they were, proposing a permanent change based on temporary conditions is very reckless way to make policy). Because they are barely profitable, forcing their costs up with such reforms will force prices up and making it too expensive for someone who could otherwise get it. Now we are forcing our neighbor to carry the burden of our condition. Where's the justice in that?

The Value of Life

Ask most people how much they value their life and they will inevitably say "an infinite amount." That's what my girlfriend told me the other day (generated from a conversation I've forgotten the origins of). "This cannot possibly be true," I said. "You take risks."

Mathematically, here's how it works. The expected cost of any activity under uncertainty is the likelihood of the event times the cost if the event occurred. A fifty percent chance of losing $200 means that the expected cost is $100. For any activity there is a probability you will die, or lose that life you value at an infinite amount. Thus, it's an infinite cost no matter what you multiply it by, no matter how risky the activity is. Since you have to do something to stay alive, you should always choose the least risky activity, no matter how much you might value the alternative because of the costs of that activity are infinite.

That people value their life only because they value what they can do with it doesn't change the math. In life, there are always options. You can watch TV or skydive: both are valuable to you and while the former might be more fun after 8 hours of TV a day, it is still too costly. But people still skydive.

They also show their finite value of their own life in other ways. People speed, jaywalk, ignore check engine lights, confront rude people (who might kill them out of anger), forget to check smoke detectors, travel to foreign countries, and eat unhealthy food. When we change our estimations of how dangerous (or safe) an activity is, we change our behavior. But if we valued our life infinitely, that shouldn't change anything (as the costs would come out the same regardless of the probability of death). Clearly, the costs to risking your life are lower than you might think.

Milk, Cheese, and the Myth of Retail Collusion

This week's Economist told the story of falling wholesale milk prices which are bringing EU farmers to call for lower milk production quotas. Some farmers blame supermarkets for the lower prices, noting that they sell milk at about the same price but buy it from farmers at a significantly reduced price.

Falling consumer demand (especially given the recession) isn't the explanation EU farmers give, and it certainly doesn't seem to explain the inconsistency at the supermarket. But the Economist linked them, though they didn't say how. The short version is: it's all about the cheese.

Cheese demand has fallen a lot, especially within the EU. Unlike milk, people buy a lot less cheese when their incomes fall. But cheese is made from milk and in the wholesale market, all cheese is milk (since cheese-makers are buying it to turn into cheese). In other words, grocers who want milk for milk compete with cheese-makers who want milk for cheese. But people want less cheese so there's less demand for wholesale milk.

Just as more cheese-makers bid up the price of milk (and a growing China bids up the price for gas down the street), fewer cheese-makers means there's downward pressure on prices. Grocers, then, are getting their milk on the cheap. But the market for milk-at-the-store changed very little. So we see grocers getting cheap milk, selling it at about the same price, and it's all thanks to consumer demand, not colluding grocers.

Collusion and Commons

I hope my micro students can answer the following:

How is collusion between firms like a tragedy of the commons? In answering this question, make sure to define tragedy of the commons, reference positive and negative externalities, and summarize the incentives of individual firms.

On the Economics of Sidewalks

Today on the Kojo Nnamdi Show, DC residents debated the pros and cons of adding sidewalks to northwest neighborhoods that still lack them. Well, it was mostly pros, from making walking easier to complying with Americans With Disabilities act. The cons were concerned with losing what country-feel they had in the metro area and that few people actually use sidewalks that are installed.

But no one mentioned another problem with adding sidewalks, not surprising because the pros are unlikely aware of it and the cons wouldn't want to admit it: adding sidewalks increase foot traffic and make life harder on those that live there. In economic jargon, sidewalk traffic externalizes costs on surrounding residents.

Sidewalks make walking cheaper and so, no doubt, you'll get more foot traffic. That means more dog walkers, and the increased risk of the dog walker not cleaning up after her animal when he does his business. That means more children running around, and the higher likelihood of noise and damage from particularly active kids. It means more people lingering in a driveway, trampling lawns or flowers, and risk seeing you while being intimate with loved ones (sometimes you forget to close the drapes).

It sounds so selfish, but why should local residents bear the cost of other's enjoyment? The common theme when people called in is that they moved to those areas because the lack of sidewalks made it feel more rural. They were looking for one thing: isolation.

Note: For the record, I'm in favor of the sidewalks only because, in my estimation, the costs externalized onto residents with the sidewalks are likely lower than the costs which must be suffered by people because there are no sidewalks to use.

The Good, the Bad, and Healthcare

Critics of government backed health care seem schizophrenic: on one hand, they argue government run health care will be really awful. On the other hand, they argue it will crowd out private health care if the two compete. How can it be so bad no one will want it but so good everyone will abandon all other options?

The two seem to be mutually exclusive and on some level they are. For example, the post office competes with FedEx all the time for package delivers. Sometimes people use one, sometimes the other. No doubt that the existence of competition improved the government system, though how much better is not obvious.

There is an area, though, where the government system is quite low quality but people still attend it: public schools. Ignore your personal experiences for the moment. People complain a lot more about public schools than they do about private ones. And while I seem to remember some data that, like FedEx, private schools improve their government counterpart, again the degree is difficult to pin down.

How is this possible? How are public schools so popular but so bad? There's lots of possible reasons but one reason sticks out: it's really cheap. In fact, baring fees and supplies, it's free. Those costs are then burdened onto everyone else and the public subsidizes a low quality service. There is some value to public schools, of course, which is why people still send their kids there. Everyone else, including private schools, indirectly pays for a product they either don't value that much or compete with. So is the nature of taxes.

Health care risks walking down the same path. In fact, it already has. Medicare and Medicaid, by law, buy hospital services at about 20% less than the cost to the hospital. It is one of the reasons why everyday objects, like Tylenol, run several dollars a pill. Hospitals have to make up the difference somewhere. Adopting this policy for everyone follows depressingly close to Bastiat's take on government: "Government is the great fiction through which everybody endeavors to live at the expense of everybody else." A great fiction indeed.

Fundamental Mistakes

Never before have I seen so many basic errors in such a short amount of time when Douglas Rushkoff went on the Colbert Report to promote his book, Life, Inc. The errors are too numerous to address each one, but two stand out as particularly sloppy.

First he claims that pursuing supposedly noneconomic avenues, such as having friends or taking walks, are drains on the GNP. "[Corporations] crowd out every kind of activity." Instead, people are forced to "support the economy with consumption we don't want or need." Most firm would love it if that were true. If they could control people's lives, they wouldn't have to work so hard to stay competitive. But trade, as my students recently learned, is mutually beneficial. What world does Rushkoff live in where people are forced to buy things they don't want?

In an attempt to criticize measuring wealth through spending, he argued that "if everyone got cancer tonight, that's good for the economy" because people would spend more money. But no one actually familiar with how economists measure wealth would make such a juvenile confusion. GDP and GNP are proxies, convenient estimations because capturing everything is impractical or impossible. We are fully aware that there is more to wealth than what we can count and changes like the one Rushkoff sarcastically propose are nothing more than playing voodoo with the numbers.

In Praise of Passive Investment

As regulators ponder making it harder for speculators to invest in oil, University of Maryland law professor Michael Greenberg backed such acts against "passive" investing on WTOP radio yesterday. He correctly identifies them as having "no interest in actively controlling these assets, just hoping to make a buck when their prices rise."

I wonder when Greenberg will take arms against other forms of passive investing:
-The university which offers financial aid to smarter or more driven students, betting that their attendance will yield more donations long after they graduate.
-The company which helps pay for its employee's education, hoping the employee will remain with the company even after a minimum staying period.
-The firm which gives its employees on-the-job-training, familiarizing them with a system they could apple elsewhere.
-The patron of the arts who supports a starving artist in the hopes they will be a success later.

In each case, the person hasn't actually become valuable yet, just like the oil that investors jump on (or off of). Speculators (who bet the price will rise) will buy oil now and cash out when it's more valuable. Passive investors in human capital do the same thing.

Voting Three Times A Day

Robert Kenner's new movie, Food, Inc., argues that food is too cheap and, thanks to health-related issues from diabetes, will end up being more expensive in the long run. While Kenner is lacking in his rationality (it's hard to make the argument that it's bad to give people more options in the form of cheaper food) he recognizes that consumers are the key to the problem. When he appeared on The Daily Show last week, he reminded Jon Stewart that the consumer "votes three times a day." If consumers want healthier food, they will demand it and producers will provide. They will have to if they want to stay in business. But most Americans aren't demanding these things, even those who know all the messy origins. At the end of the day, people vote for fat and that's their choice.

iPods Are Not Cylons

While cleverly defending copyright law, identifying those against it as having a "bias to the collective," Mark Helprin on this week's EconTalk falls victim to his own collectivist leanings. He argues that many people succumb to "perverse adaptation." People adapt to technology instead of technology adapting to them. Helprin invokes images of commuters staring at their blackberries and consumers demanding things faster and faster as examples.

Human beings require time for reflection...We require stillness and the ability to absorb things rather than just being hooked up to a machine and made into bundles of tropisms. [Emphasis added]

But those who don't are not dead. We do not require these things. We may require them to accomplish certain goals, goals Helprin places high value on, but we do not require them in the absolute sense. We choose to not do them. Technology does not leap in our lap and hook into us like a drone from the Matrix. Those people who Helprin paints as so grey are people who always wanted to move faster; technology simply allows them to do it. It's not that technology has enslaved us. Helprin simply believes that if people don't like the same things he does, there's something wrong with them. Such an attitude is the hallmark of the collective mindset.

Pay Grades in the Extralegal Sector

In Peter Leeson's new book, The Invisible Hook, Leeson notes the pay grade was quite flat (pirate captains were paid twice as much as the lowest member of the crew, compared to merchant captains of that same era which were paid five or six times as much). He argues it's to encourage solidarity, discouraging envy and encouraging unanimous approval to continue on their plundering ways (a skewed system would encourage those at the top to stop and those at the bottom to keep going, thus creating tension).

But the same could be said of drug dealers, who have a very skewed pay scale. As Steven Levitt and Stephen Dubner note, the top drug dealers earns about 100 times that of the lowest earner. But gangs of this sort don't show the lack of harmony or disloyalty that should be plagued by Leeson's explanation. So how do we reconcile these two different worlds?

The key difference between a pirate ship and a drug-dealing gang is the level of entanglement with their surroundings. A pirate ship is basically a floating island and because it's so isolated, it's relatively easy for anyone to see how the game is played. A gang, on the other hand, is entangled with the larger surroundings. There's a lot of activity members don't see and many critical relations with those outside the gang that most don't have. In other words, the lowly sailor is a closer substitute to his captain than a lowly drug dealer is to his top boss. While a rebellious sailor might be able to handle captaining competently, a rebellious drug dealer would likely not have the same level of success. This also explains why pirates elected their captain while dealers autocratically promote from below (thus why the higher ups are paid so much: to encourage lower ranks to work harder on the chance they can be promoted).

Franchise Laws of the Automaker Apocalypse

Imagine for a moment that television studios by law had to continue making shows they would normally cancel. Or fast food chains had to make menu items that few people buy. Imagine we still lived in a world of New Coke, Arch Deluxe, and Cavemen. Well wake up because when it comes to cars, that's the world we live in.

As Mike Munger and Russ Roberts discuss in the latest EconTalk, car franchises long ago lobbied local governments to pass laws handing dealers a string of advantages over the corporate office. In the vast majority of states, two dealers can't sell the same model within fifty miles of each other (stories that the franchises are too densely packed aren't true), corporate must make a strong effort to advertise each brand, only dealers can unilaterally terminate the dealership agreement (unless the dealer does a very poor job selling), and corporate must keep supplying the dealership with a minimum number of cars. Dealerships did this because each franchise is based around one model of car. But it also means that any model GM, Chrysler, or Ford make is a model they can never get rid of (though they can re-imagine it).

There's lots of problems the American automobile industry has (and the podcast goes into more detail) but I found these laws most shocking. They also explain a lot (such as why foreign makers focus on a few good brands). Paradoxically, it was the domestic dealers that brought down the Big Three; the only way out of these dead-end dealerships is bankruptcy.