Last week Russ Roberts interviewed Ed Learner about econometrics. They noted, quite correctly, that any given econometric study has a lot of arbitrariness of it. the author of any work can jiggle the model until s/he gets the desired results. This is a problem and every economist knows it. And because we know it, it takes a lot of studies saying the same thing to be convinced of anything. A brick is too small to build up a house, so we get a lot of bricks. A single study is too precarious to hang a major conclusion on, so you get a lot of studies.
This is crucial because Roberts often points out that whenever he asks another economist to point to an econometric study which changed their opinion on economics, he doesn't get an answer. Of course he doesn't get an answer; no study is good enough! It's like asking which brick of a house holds its roof up. All of them do. But unless you've specialized in the field, you can't remember all of the studies. You probably haven't read them all (hence it appears that studies just confirm people's belief).
Which is why Roberts' question is a bit of a red herring. Intellectual houses are built over decades--it takes that long to get enough studies done. That's why the process of adoption is so slow and why it looks like it doesn't convince anyone. Yesterday's studies convince tomorrow's economist.
Sunday, May 16, 2010
Thursday, May 13, 2010
There Ought To Be a Law
I'm not too fond of new laws but new CBO estimates for the health care bill tack on an additional $115 billion (silly them; they forgot to consider administration costs and other spending). Each new bill (or bill for which the CBO makes estimates for), should include a clause that if it turns out the bill is much more expensive than originally estimated, it should be automatically repealed and put to a re-vote. A lot of people defended this bill because it would help with the deficit; now those costs undo most of that (and you can be sure these costs will only go up). Those supporters have been duped and a re-vote seems to be the only fair way to fix the wildly inaccurate estimation.
But I guess Congress is too busy blaming banks for misleading customers.
Update: Most of that increase is the continuation of existing programs and isn't really part of the bill. Still, there ought to be a law.
But I guess Congress is too busy blaming banks for misleading customers.
Update: Most of that increase is the continuation of existing programs and isn't really part of the bill. Still, there ought to be a law.
Tuesday, May 11, 2010
Flying the Quiet Skies
Christopher Elliot has a nice piece on loud children on planes, suggesting planes ban parents who have proven to let their children scream. Elliot admits that after his first plane trip with his three kids, he realized he couldn't control them and grounded his family. That's a wonderful sentiment and I wished more families were as concerned about their externalized costs as Elliot is. But it's just not a practical solution. Suppose a family emergency necessitated speedy travel: would he still refuse to fly? I doubt it. Therefore, the optimal solution isn't a corner solution.
Instead, we could use a Coasean solution (well, Coase-like since transaction costs are too high for full bargaining and we're not focusing on the least cost avoider). Airlines would amend the agreement when you buy the ticket (which already includes clauses about when you can cancel the reservation, etc) to include a provision that if the stewardesses feel your child is too loud (perhaps in part based on customer complaints), they charge some additional price based on the length of the flight. To prevent the company from saying anything is too loud and to compensate those suffering from the screaming child, the airline then reallocates that money to those in the seats nearest the screaming child.
This system punishes those parents who don't control their child (generating the incentive for them to be better parents or avoiding flying altogether) while still allowing them to fly if they feel circumstances warrant it. The costs to the airline would be small since so much passenger information, including credit card numbers, is in their database anyway. But it's not zero, so there's an incentive to not report every little scream as a violation.
Instead, we could use a Coasean solution (well, Coase-like since transaction costs are too high for full bargaining and we're not focusing on the least cost avoider). Airlines would amend the agreement when you buy the ticket (which already includes clauses about when you can cancel the reservation, etc) to include a provision that if the stewardesses feel your child is too loud (perhaps in part based on customer complaints), they charge some additional price based on the length of the flight. To prevent the company from saying anything is too loud and to compensate those suffering from the screaming child, the airline then reallocates that money to those in the seats nearest the screaming child.
This system punishes those parents who don't control their child (generating the incentive for them to be better parents or avoiding flying altogether) while still allowing them to fly if they feel circumstances warrant it. The costs to the airline would be small since so much passenger information, including credit card numbers, is in their database anyway. But it's not zero, so there's an incentive to not report every little scream as a violation.
Monday, May 03, 2010
The Housing "Crisis" Was in the Past
On the housing crisis John Stossel asks of real estate lobbyists "why is the price drop a crisis? Sellers are hurt, but buyers benefit." True enough, if oil prices fell as fast as housing prices, the only ones who would call that a crisis are environmentalists. So why are falling prices a crisis? They're not. They are a sign we were in a crisis. It only seems like a problem because the cure is more painful than the disease even though it is less fatal.
Falling prices mean we over-invested in housing. That was a mistake in the past; had there been less investment in home building, there would have been more investment elsewhere and, since housing prices fell so much, we can confidently say that the "elsewhere" would have been much more productive.
Falling prices means people were over-dependent on the value of their homes when they used it to back a loan. This is particularly bad for banks who collect these homes when people defaulted. If housing prices were lower (as they should have been), banks would have demanded more collateral, which would have reduced today's defaults and today's cost of defaults. There's an element of the financial problems in this as well and certainly the housing mis-allocation contributed to it.
The inflated housing prices in the past is like a bad relationship. The break up might be messy, but the problems were in the past.
Falling prices mean we over-invested in housing. That was a mistake in the past; had there been less investment in home building, there would have been more investment elsewhere and, since housing prices fell so much, we can confidently say that the "elsewhere" would have been much more productive.
Falling prices means people were over-dependent on the value of their homes when they used it to back a loan. This is particularly bad for banks who collect these homes when people defaulted. If housing prices were lower (as they should have been), banks would have demanded more collateral, which would have reduced today's defaults and today's cost of defaults. There's an element of the financial problems in this as well and certainly the housing mis-allocation contributed to it.
The inflated housing prices in the past is like a bad relationship. The break up might be messy, but the problems were in the past.
Saturday, May 01, 2010
The Apartment that Simon Built
It was Julian Simon who wrote in the Ultimate Resource 2 (p12):
The narrator calls the house "a technological marvel" but there's nothing in inherent the idea which prevents it from being implemented 10, 20, or 50 years ago (and to lesser degrees, such an idea has been used before). What's important is that all this amazing apartment took was hard work and some creativity, effort that might not have been worth the time if Hong Kong had fewer people in it.
Greater consumption due to increase in population and growth of income heightens scarcity and induces price run-ups. A higher price represents an opportunity that leads inventors and businesspeople to seek new ways to satisfy the shortages. Some fail, at cost to themselves. A few succeed, and the final result is that we end up better off than if the original shortage problems had never arisen.In Hong Kong, population density means space is at a premium. Responding to high rents and tight quarters, architect Gary Chang found a way to fit 24 rooms into one.
The narrator calls the house "a technological marvel" but there's nothing in inherent the idea which prevents it from being implemented 10, 20, or 50 years ago (and to lesser degrees, such an idea has been used before). What's important is that all this amazing apartment took was hard work and some creativity, effort that might not have been worth the time if Hong Kong had fewer people in it.
Tuesday, April 27, 2010
Matthew Yglesias Is Hoarding the Internet
Matthew Yglesias, in a two (or more?) part series (I here; II here) calls high salaries inherently immoral:
It’s greedy, absurd, and morally indefensible for talented people born in favorable circumstances to be dedicating their lives to accumulating huge sums of money in order to engage in lavish consumption....While I was writing this post, I took a break from waxing indignant about multi-millionaires buying their third houses to donate some money to UNICEF.If, like me, you're a regular reader of Yglesias's blog, you might know he posts more often than the prolific Tyler Cowen, often scooping people who could have posted on items he already posted on. Just as the wealthy hoard money, Yglesias is hoarding blog posts. With so many struggling blogs out there, he should take his own advice e-mail their bloggers with his latest discoveries so they have a chance to be well read as well. To paraphrase Yglesias, becoming obscenely knowledgeable in the Internet world and then hoarding your information is, itself, morally wrong.
Tuesday, April 20, 2010
Show Me the Broccoli (Ads)!
Matthew Yglesias asks, "Where are the Broccoli Ads?"
Couldn't all fruits and vegetables have packaging? In theory, sure, but such foods spoil more easily (they are often sprayed with water to keep them crisp, something packaging would prevent). Note that Express salad mix is a mix, not just a head of lettuce in bag so there's good reason to give up a bit of freshness for the convenience (their ads also underline how fresh their mix is). Many customers like to investigate such foods before buying them. If you package your food, that makes it harder to inspect and customers might think you're hiding something.
So why don't we see ads brought to us by broccoli farmers? I've seen ads for why natural gas is so great and high fructose corn syrup isn't as bad as we think it is. Surely there's a national association of broccoli growers out there to wanting to get people off the sugar stuff.
And there is (unfortunately I couldn't embed the video).
Why is it that nobody’s marketing broccoli and bananas? This stuff is sold in stores, in exchange for money. Presumably there are for-profit enterprises out there with a vested interest in selling more.In contrast to candy bars and potato chips, most fruits and vegetables have no packaging and thus no easily identifiable brand name. An ad for Bob's Broccoli will probably help Betty's Broccoli sales since it's not clear which is which. Advertising for healthy foods becomes a public good and, thus, under-provided. Note that some vegetables do advertise--Express Salad Mixes keep popping up--but these vegetables have packaging.
Couldn't all fruits and vegetables have packaging? In theory, sure, but such foods spoil more easily (they are often sprayed with water to keep them crisp, something packaging would prevent). Note that Express salad mix is a mix, not just a head of lettuce in bag so there's good reason to give up a bit of freshness for the convenience (their ads also underline how fresh their mix is). Many customers like to investigate such foods before buying them. If you package your food, that makes it harder to inspect and customers might think you're hiding something.
So why don't we see ads brought to us by broccoli farmers? I've seen ads for why natural gas is so great and high fructose corn syrup isn't as bad as we think it is. Surely there's a national association of broccoli growers out there to wanting to get people off the sugar stuff.
And there is (unfortunately I couldn't embed the video).
Sunday, April 18, 2010
Drug Legalization and the Urban Poor
Gary Becker calls for better schools and better teachers, writing
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.
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.
Thursday, April 15, 2010
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.
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.
Tuesday, April 06, 2010
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.
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.
Sunday, April 04, 2010
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.
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.
Saturday, April 03, 2010
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:
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.
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.
Wednesday, March 31, 2010
Mankiw on Taxes
Greg Mankiw proposes we re-think measuring tax burdens. We generally measure them by calculating taxes, adjusted for GDP.
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.
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:Brad Delong and Matthew Yglesias says this implies that North Korea is a wonderful tax haven and Slovakia could stand much higher tax rates.
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.
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.
Tuesday, March 30, 2010
Logic 101
Menzie Chinn comments on Robert Samuelson's concerns about the true budget impact of PPACA:
The bottom line is that the CBO scoring system, like most systems, can be gamed.
Here is where Mr. Samuelson dismisses the entire budgeting process in Washington: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).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.
The bottom line is that the CBO scoring system, like most systems, can be gamed.
Sunday, March 28, 2010
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.
Saturday, March 27, 2010
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?
Wednesday, March 24, 2010
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:
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.
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.
Monday, March 15, 2010
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).
I thank Mark Perry who did a table for August of 2009. (Insurance companies dropped by two ranks since then.)
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.)
Monday, March 08, 2010
Peltzman on Germs
Slate columnist Darshak Sanghavi blames hand sanitizers' fundamental approach for their lack of effect on flu prevention.
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.
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.
Sunday, March 07, 2010
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.
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.
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