Truck and Barter Where Sympathy and Hedonism Collide
Saturday, January 31, 2004
BY
Ian
Experiments in Risk Valuation: The Game of Infected Chicken
If you can't get ahead of an outbreak, I suppose another solution is to attempt to stop concerns about the outbreak itself. Avian flu looks like it might grow from a moderate to a prominent problem in China, as well as Vietnam and Indonesia.
The Prime Minister of Thailand has promised monetary compensation if their claim that the avian flu virus is killed by cooking chicken to at least 75 degrees centigrade proves, well, erroneous.
[Thai Prime Minister Thaksin Shinawatra] said some animal food companies had guaranteed that if any consumer dies after eating well-cooked chicken the companies would compensate 3 million baht (75,000 US dollars) every case.
First, of course, is the issue of Thailand having quickly decided that the value of a life is roughly 3 million baht. While we might expect that there were considerable non-use value, willingness-to-pay, and various other calculations used to devise this number, I'd guess it was done more along the lines of a car-part recall. The percentage of chickens that could possibly carry the virus, times the proportion of the population that eats chicken, times the probability of an infected person dying (not the chances of someone being infected -- payoff only occurs when someone dies), times the value of a possible lawsuit including a discount factor for the amount of time left in the average working person's life...and, well, you get the idea. Morbid, certainly, but it seems like the better way for Thailand to find an affordable value, quickly.
A rough sketch seems to place the economic value of a life at roughly US$5 million each in industrialized countries. (Though, this naturally begs a question about unindustrialized countries. Are the conditions such that people there are more risk-seeking and thus willing to be compensated with less for deadly risk?) Whether you agree with the number or not, perhaps you'll allow me the assumption that this is much, much, much higher (in absolute, but more importantly in purchasing power parity)than the offer from the Thai government. High enough, perhaps, to make the wager attractive to a much larger audience. At the extreme end, it could even be enough to incur more purchasing of chicken than was previously seen.
Believing, for the moment, that the potential chicken buyers are rational, the very presence of the payment should make chicken at least slightly more appealing. Under the threat of infection, every bite of chicken is essentially a lottery, with nature choosing the state of the world before the bite: infected or not infected. Then it's up to the eater: heated to 75 centigrade or not, and eat or not, all conditional, of course, on the eater never knowing which game she's playing: infected or virus-free. Then mother nature gets to play again, picking whether or not the eater is killed, sick, or unaffected (though, I'm not technically sure it's possible to consume the avian flu and experience no effect). Since the percentages of infected versus killed are a function of individual health status there is only a limited range in which to do anything to affect survival rate. However, if you can alter the payoff structure, you can possibly induce the more risk-neutral or -averse to take a shot at the lottery*.
Now the interesting part is what information the government has about infected chicken percentages. If they're sure it's low, a proposed payment of, say, 250 Million baht could be a decent deal, shoring up demand for chicken while exposing them to relatively low expected losses. But -- and admittedly this is still all thought-experiment conjecture -- the Thai government has chosen a number far lower. Is it the financial condition of the state or a lack of faith in the poultry? Regardless of the answer to that, should people view it as a lack of faith and thus assume they are far more likely to be facing the "infected chicken" game rather than "virus-free chicken"?
The Big Problem in all of this? The payoff isn't to the player. It's to the player's survivors. The only people for whom the compansation would alter their willingness to play are those other-regarding enough to get some value from survivors getting the 3 million baht. So, aside from being an odd policy, this could well create some odd incentives. What happens if you come home and your wife or husband suddenly decides that it's Chicken For Dinner month, but only for you?
The Deputy Prime Minister is on a nearby, but not adjacent, branch of thought:
Deputy Prime Minister Somkid Jatusripitak, who heads a committee tasked with handling the bird-flu crisis, repeated Friday after daily committee meeting that the situation was "not very worrying" because the disease was not transmitted between humans.
I'm sure that comes as a relief for those few people whose human-to-chicken dinner ratio is a positive number.
*Note that I'm implicitly assuming that death is simply a payoff of zero, instead of the negative of all future potential value. This is done in light of not using future valuation of earnings to determine the value of the monetary compensation. After all, it's more likely that people are valuing the utility of the money, instead of the money itself.
Economists at the New York Fed--including the straight-talking Dick Peach and Meg McConnell, with whom I worked for a year after undergraduate school--looked into what exactly homeowners were doing by refinancing and home equity loans (press accounts here and here). Their results are summarized in "After the Refinancing Boom: Will Consumers Scale Back Their Spending?" Their answer, no! Basically, they find that consumers have responded to low mortgage rates by substituting mortgage debt for high interest rate nonmortage debt (credit cards, etc.). Consumers are not historically overwhelmed by debt.
I quote their conclusion in full, but the entire paper is worth your time, if you're willing to think about the national accounts:
Many analysts have expressed concern that the recent surge of home equity withdrawal has put consumers in a precarious financial position that will hinder their ability to spend once the refinancing boom comes to an end. Our findings suggest just the opposite. Consumers have chosen to finance a moderate pace of spending with mortgage debt priced at historically low mortgage interest rates while at the same time increasing their acquisition of financial assets. As a result, household net worth is increasing at about the same rate as it was before the boom in home equity withdrawal while aggregate household debt service burdens are declining.
Interest rates will eventually rise and bring an end to the refinancing boom. But this uptick in rates will be the result of a pickup in the overall level of income in the economy; therefore, there will be other factors driving consumer spending. Thus, we do not expect a significant retrenchment in consumer spending once the refinancing boom comes to an end.
It's too bad I had to leave the NY Fed... I really like the research they do.
I just learned through this 2002 paper in the NEJM that there has been a long-standing supposition by medical care analysts that the higher the rate of procedures performed in a hospital, the lower the mortality rate of the patients. This suggests that the graphically inclined might be able to draw a learning curve for which the expected mortality (cost) of producing an additional unit decreases considerably with each additional unit (until it flattens out). That paper pointed to this book, published by the National Academy of Science, which insists, after examination of 88 volume-outome studies, that this learning curve is real. They reproduce one chart, also printed here, and note that:
for a wide variety of surgical procedures and medical conditions, higher volume (whether assessed by hospital or by physician) is associated with better outcomes. The uniformity with which the published research documents or confirms the existence of this association is compelling... volume may be most pertinent when a new technology is beginning to diffuse into general practice.
Volume per se does not lead to good outcomes in health care. It is a proxy measure for other factors that affect care.
To me, enacting government policies to efficiently take advantage of this relationship will be very difficult. First because "[a]vailable data suggest that significant numbers of patients do not use data on outcomes or volume where they exist to choose where to receive care." So it's left to suppliers and insurance companies to make medical procedures less deadly, even in the face of consumer-patients who are at best indifferent to the shift towards high-volume care, and might perhaps be hostile to it.
Last year, Saturn represented only about 6 percent of the GM vehicles sold in the United States, and it has made money in only one of the last 13 years.
Those interested should also see MotorTrend's take:
"Saturn hasn't done as well as we'd like. We're going to recreate it," Lutz [General Motors' vice chairman of product development] said....
"In hindsight, Saturn made a couple of mistakes," Lutz said. "It was formed as a separate car company built around one small car. That wasn't a good idea."
Saturn was the work of then-GM Chairman Roger Smith to beat the Japanese by selling 500,000 small cars annually. Saturn started with a subcompact sedan for the 1991 model year...
Saturn proved an initial success. About 70 percent of buyers owned imports and had never visited a GM store....
Though attracting new buyers, it didn't attract 500,000.
First-year sales totaled 75,000. Best year was 1994 with 286,000 sales. In '03 Saturn sold 271,000, down from 280,000 in '02. Profits were counted in coins.
Even more available at Dave Leggett's just-auto.com blog.
Anyway, a wag who used to work for just-auto came up with 'Beam me up GM' as a caption for an article we had about Saturn once. But it looks like troubled Saturn really is being beamed up, slowly but surely, to the GM mothership now as GM looks to cut costs.
The New York Times' Josh Barbanel reports that in the boroughs outside of Manhattan, tremendous increases in housing prices have led private real estate developers to build multiple-family apartment buildings and condos where single-family homes or vacant lots once stood--even in communities previously considered blighted.
But buried at the end we find out this won't last very long, as entreched interests, relatively unconcerned about the welfare of new immigrants, fight back:
At the same time, unlike many suburban communities, New York City has a large reserve of unused building rights, since, under a 1961 zoning resolution, many neighborhoods outside Manhattan are zoned for far denser development than the single-family homes already there.
But as developers take advantage of these zoning rights, tearing down homes to build bigger or taller buildings, they face growing opposition. The city is studying proposals to limit the development of six- and seven-story buildings on low-rise streets in Bensonhurst, and has recently restricted building rights in most residential neighborhoods on Staten Island.
One result of that zoning change, which took effect in December, can be seen in the building permit data. In both October and November, according to Building Department data, twice as many permits were issued as in September, as some developers rushed to begin construction before the change took effect.
Rob over at BusinessPundit makes a very interesting comment about what it takes to be an entrepreneur these days, making an analogy between being a paranoid and being entrepreneurial. He starts from Andy Groves' "Only the Paranoid Survive" and says:
"[...]...I assume when he (Grove) speaks of paranoia he is implying that you shouldn't let your guard down. Most paranoid people I know who are in business (as opposed to the ones who are locked up - just kidding) constantly think something bad is about to happen. They think their competitors are conspiring to spring something new on them, customers or employees are planning to suddenly leave, the economy is about to tank, or something similarly bad is going to happen. My paranoia stems from a different place. Like Grove and others, I am paranoid that I will be wrong about the outcome of a certain decision or the direction of a trend. But my paranoia comes one layer before theirs. I am paranoid about my perceptions."
As such, an entrepreneur has to be a "paranoid" in the sense of challenging all the steps from the thinking process along the strategy formation and implementation. As an entrepreneur myself, I think that besides the good practices Rob talks about, one has to be patient, stubborn and perseverent. Of course you will have to be agile and flexible in terms of admitting and correcting your errors quick, but also be patient about seeing the fruits of your strategy, and perseverent in pursuing your goals/targets. An entrepreneur has tough decisions to make, and not only has to decide but also to execute well. Basically, most of the time it is an exercise of making decisions throughout all challenges and opportunities. It can be very rewarding - you create value, but also very risky - especially in the beginning, when the resource management is critical, and very enjoyable - you are in the position of seeding the organizational culture and choosing the guys you work with. Piece of advice: choose from the best, even though it might be more expensive, the returns are definitely higher.
Finally, one will have to know himself/herself very well before starting a venture. Perhaps it is an ongoing process but I guess a good way of starting doing that is answering the following questions mentioned in Startup Journal (via Emergic):
Have you figured out your priorities in life? How much time do you save for yourself, your family and your community responsibilities?
Do you understand the stress that your choice to be an entrepreneur and a CEO creates for your family and loved ones?
Do you take "time out" to reflect on your business failures and edge experiences?
What have your business failures and edge experiences taught you about yourself, your behaviors, your strengths and weaknesses? Have you taken the time to learn from those experiences?
When you succeed, do you remember all the people who helped you succeed -- and help them be successful?
Sam Brown, T&B's only connection to Oxford, recently posted a humorous summary of his new thesis topic--the consequences of Trust within a firm. He invites economists, bloggers, and former presidential candidates to rip it to shreds. Please help the man out. UPDATE: See also the second post right above the first, written by Sam's coblogger Simon.
And Some Thought Butterfly-Ballots Were Problematic...
Since the voting post turned out pretty well before, let's get back to the subject for a moment, shall we? Specifically, the issue of "e-voting", or electronic voting through the use of electronic terminals, the internet, etc.
With the primaries underway the spectre of 2000 is coming up once again. In the face of the possibility of razor-thin margins and questionable tallying procedures, a better, more efficient system would seem to be a natural desire. No questions about intent could come up, since the electronic system would be clear and unmistakeable. Totals could be counted faster, producing better turnaround time for election results (get to bed before 1am on election night!). And perhaps most importantly, there would be no ability to manipulate the count process depending on regional preferences for over/undervotes.
Sounds pretty good, eh? And recently, companies have been pioneering the software to achieve this, while also attempting to assuage fears about the spectre of electronic manipulation. For a good list of references to pages about e-voting, companies making products and more, try this page. This, for instance, is a proposal for a distributed network that doesn't rely on persistant connections.
On the "con" side of the argument are a number of issues about tampering with computers, the lack of hard evidence (while there were debates about what consitituted a clear vote, at least Florida had the voter cards to check and re-check), and more. Here's a fascinating paper that lays out in great detail a series of major problems with e-voting systems. The authors conclude that there are considerable risks both from outside (voter tampering) as well as inside (systems engineers, coders, voting officials).
I side with the folks saying "nay" to e-voting. Why? Monopolies, that's why.
With an increase in the scope of provision of a good or service, that is, the bigger the market share of the individual company or agency, the larger the impacts are when it fails. Consider, for example, publicly provided water. If the city of Chicago, in my case, were to exerience a failure of water systems, the problem isn't limited to a few customers. The '03 power outages in New York are a good example as well. When problems arise with a monopoly, there isn't much recourse other than either waiting for the problem to be fixed, or to stop purchasing whatever the good or service was. The first depends on the timeline of a company that need not be as responsive to the agitated market as a company would be that faced competition, and the second is often impossible when the good or service is a necessity, like electricity. Putting it bluntly, when big companies fail, they fail big. And I feel one has to consider the cost and chance of failure when deciding to centralize control and power.
No, voting isn't a monopoly. But the the question of failure is analagous. As the potential scope of an electronic voting system increases, so increase the problems associated with its failure. Cryptography protecting the voting software need not be beaten by supercomputers chugging away for days to find the right algorithms when a few minutes in an unwatched desk, a conversation with a ticked off employee, or a lazy voter official can all be targeted by a cunning ne'er-do-well looking to get insight for possible passwords.
While the height of a wall might be positively correlated with the sensitivity of the material it protects, there is no guarantee that it can't be scaled no matter the height. Or, to use another axiom, the past is often a poor predictor of the future. The US was never attacked through the use of airplanes-as-bombs. What bet would you have taken on 9/10 that the next day would be like the previous one in that regard? The problem is, even if the chances are small that something may go wrong, the cost of failure is so dreadfully high for e-voting. Sure, a race for County Treasurer can be done again, or the county could haul out it's old punch-card system to try another round, but what happens in the race for mayor of a city the size of Chicago? Or for governor? Should it get so far as presidential elections, I shudder to think of the consequences.
With the centralization of such power -- either to provide a good or service or holding the answer to a question that affects everyone who participates -- comes a much larger impact with problems. This isn't to say the current system isn't manipulable in numerous ways; it is. But redundancies with a decentralized capacity to verify votes (humans) are, to my mind, far more reliable than redundancies (servers, in this case) at the whim of a single very smart, very determined, criminal.
Paul Craig Roberts
continues his debate at the Mises Blog with a comprehensive response to all of the feedback he continues to receive from his recent alliance with Senator Schumer. I have given Mr. Roberts the benefit of doubt, reading carefully what he has had to say, including an earlier article relating to this subject. Mr. Roberts' concern may be sincere, however, his arguments are circular. George Reisman's essay along with others, remain a formidable response to Roberts (though it seems as if they are, philosophically, speaking different languages). One question has been troubling me since this entire debate began - Is this an intellectually valid debate? Two small items to consider:
Mr. Roberts makes the assertion that this is a new problem. Was there not whole-lot-of-free-trading and capital exports (including factors of production) occurring in the nineteenth-century? US wages will rapidly fall to Asian levels - says Roberts. Not possible. US wages may fall - Asian wages may rise - parity may someday occur - but this is different than what Roberts claims will happen. He has the distinguished education to assist him in knowing this.
The only recourse Roberts, Schumer and Company have, is coercion. He is right to fear the political instability that may occur, but the only hope is for people like PCR to go back into the ivory tower (forget about looking out the window into the real world...yet) and indeed, study economic theory.
Hello all! I have taken up Kevin's offer to blog with T&B. I am a law student at Benjamin N. Cardozo School of Law in Manhattan and I live on Wall St. (yes, really) I had my own blog here, but with the new semester starting up I figured I would not have time to post regularly.
I'm really looking forward to contributing, and hope to get something in at least once, maybe twice a week. And don't worry! I'll proof-read my work from now on, promise! You can follow the link to see some of my old posts(please forgive the spelling and grammar). I think they will introduce me as well as anything I can say here - and won't waste T&B's front-page time...
Here is an interesting survey from Deloitte about some COO's perspective on the economic outlook, both on national and international levels. The surveyed COOs were from North America (USA and Canada), Europe (UK and Germany) and Asia Pacific (Japan and Australia). The survey was made last summer and released in October last year; apart from the Deloitte's comments, I think it is also worth mentioning (i)the American optimism about the 2004 US economic improvement (79%) as opposed to the Japanese one about their own (95% think it will be worse or the same); (ii)the German concern about the development of the national political environment as a strong influencer on their business (60%); and (iii)the relative overall optimism about the company performance improvement (above 60%) with revenue growth and cost reduction as being equally important on average. (big surprise, heh?) However it is interesting that the US COOs place more emphasis on revenue growth by considering a better penetration of existing customers (77%) and expanding current markets with current products (72%) while German COOs view developing new products as a more important revenue growth. This doesn't stop the Europe’s brain drain whereas the best scientific minds are leaving for droves to USA.
Greetings from the West Coast of America. I appreciate Kevin's invitation to contribute to the Truck & Barter Blog. I must begin with the disclaimer that I do not posses the scholarly learning of the other bloggers on T & B - My education has been a self-taught affair - and is very much a work in-progress.
As an introduction to why economics is important to me , may I begin by making the proposition that I am passionate about economics fore it encompasses everything in the material world - whether one is aware of it or not. Mises liked to make a statement on the lines of - when discussing the advantages of the unhampered market to socialism - that if one prefers health and prosperity to sickness and death, than one chooses the former to the latter. The same could be applied to understanding and respect for economic laws and the ignorance and disregard thereof.
Some laws that should be self-evident - are not, in today's age. Presidential Candidate Howard Dean, in a town hall meeting in Claremont New Hampshire made the statement on Thursday that the way to get the economy going again was to give more money to the "little guy" - who then goes down to main street and spends the extra money - and good times are here again (and of course, he received a standing ovation for these words of wisdom). The disturbing element is not that a candidate would make such an assertion; it's that so few question this absurdity - and so many agree with it.
One of the "little guys" that Dean is concerned about happens to be the janitors in Vermont Capitol. He boasted that he un-privatized the janitorial workers - thus allowing them to garnish health benefits from the state. If he was sincerely concerned for their well being, Dean should have convinced them that being a janitor is not in their financial best interest. He should have relayed to them a fundamental law - that you must first produce more - if you care to consume more. Economic progress occurs when productive activity increases - is this so difficult to comprehend?
If fundamental economic laws become increasingly overlooked - than all great economic statistical studies will be for naught. Civilization depends upon the division of labor and economic progress. Readers of Truck and Barter no more about this than I do. But if more individuals fail to learn this - than they may learn the hard way that that which they call the economy (i.e., Civilization), is not indestructible.
The amazing thing about newspaper reporters is their ability to find statistics that support their theories. In this case the theory is that healthcare costs may not decline when people "control their own care" (i.e. pay the marginal costs of their decisions). Michelle Andrews notes that no statistics exist to support or deny this theory, yet she proceeds to quote selective statistics anyway:
There is no question that employees are already paying more. In 2003, on average, they paid 58 percent of the premium for family coverage in preferred-provider organization plans, up from 53 percent the year before, and 57 percent of premiums for health maintenance organization plans, compared with 50 percent in 2002, according to survey results released last month by Mercer Human Resource Consulting. The median out-of-pocket maximum for P.P.O. care within the network climbed to $2,000 from $1,500, according to the survey, and a third of employers required a co-payment of $20 or more for H.M.O. office visits, up from just 22 percent the year before. [Emphasis Added]
Excuse me, but there is a "question" whether employees are paying a greater share of health insurance premia, although there is "no question" that both employees and employers are paying more (and the latter getting more care). It is not true, which is implied but not stated, that since employees are paying more, employers are paying less.
In fact, there is a solid basis to question the validity most of the numbers in Michelle Andrew's story. As I reported on September 10 of last year, the Kaiser Family Foundation's 2003 Employer Health Benefits Survey found that the employee share of premia is steady for family coverage at 27% and steady for single coverage at 16%. (This survey has consistent results going back to 1988). This is a far cry from the 57% for HMO premia and 56% for PPO premia reported by Mercer. See section 6 of the KFF report for all the data I'm talking about. (Note: I welcome comments from anybody who can figure out how the Mercer and Kaiser data can be reconciled.)
But let's say Ms. Andrews data are right, and mine wrong. (I cannot confirm or refute her data, because they are from Mercer HR Consulting's Consumerism group, and must be purchased for $1,000 , which I refuse to do for a blog post). Mercer's data would still indicate that healthcare spending (i.e. price*quantity) has increased so much that employers are paying more too. However, they're shifting more of the burden of such increases onto employee-consumers than onto themselves. To the employer, health insurance cost increases are no different that a raise in the employee's salary. Worries that lower income employees might be receiving (or might choose to receive) inferior care have let to some counterintuitive corporate policies:
Rockwell Automation, an industrial automation company based in Milwaukee, has 17,000 employees in the United States, from factory workers to senior executives. An employee earning $35,000 a year with family coverage who signs up for the company's consumer-driven health plan has a $1,700 deductible and a maximum annual out-of-pocket cost of $2,500. Someone who earns $85,000 and buys the same family coverage, however, faces a $3,100 deductible and a $5,000 out-of-pocket maximum.
"Initially, you do get some pushback from higher-paid employees when you implement this," said Roger Freitag, the company's director of global benefits.
If I were a high-paid employee, I'd push back. Basically this company increased health benefits for lower-wage employees and decreased them for higher-wage employees. No mention is made of any salary adjustments that have been or will be made. Is it just possible that after enacting this plan, lower-wage employees will receive lower salary increases and higher-wage employees will receive higher salary increases? If so, are lower-wage employees really better off?
While the early data are probably underestimates, as a number of the 283 categories, like Sound Engineering, Vending Machines, Physics, Baseball, and a lot of others weren't reported until 1992. However, the recent decline--the number of magazines was 23.5% lower in 2003 than in 2001--are not the result of falling response rates of statistical glitches; instead they represent a real trend downward in the thickness of certain markets. But this does not mean that all magazine producers are fairing worse--just most. Only 18 categories had net gains in the number of magazines since 2001:
Survival & Weapons*
Baking*
Florist
Laundry, Cleaning & Dyeing*
Bride*
Home Economics
Optical
Produce*
Mobile Homes
Newspaper Magazine Supps.
Dental
Health*
Senior Citizens
Mathematics
Trucking
Real Estate
Guns & Firearms*
Golf
However, the variance in the number of magazines published annually in each cateogry is fairly large. For only 8 categories (marked with asterisks) was 2003 their best year ever. Paint magazines tied for their best year.
I console myself by saying only the marginal magazines folded, that more pulp is not always better pulp, and I suppose that the shift from offline to online content might be able to explain much of this slump in aggregate magazine supply.
No real commentary about this, but I wanted to toss up a link to a fascinating paper on health care purchasing. You can find it at NBER with this link. I was going to put it in a comment, but then realized, hey, more people should read it than might look at the comments...
It's called "What Do People Buy When They Don't Buy Health Insurance And What Does that Say about Why They are Uninsured?" I won't spoil the ending by giving a short answer to the question here.
Thought it might be of interest to those reading Kevin's piece below. Health Care is a topic I'm interested in (well, I'm also interested in general good health, but it's also interesting as a subject to study...), but have little exposure to so far, so I'm reserving comment for the below until I read a bit more.
NB: It's authored in part by Helen Levy, my favorite econ professor from here at Chicago. Not sure what that has to do with the price of hot-stone massages in San Luis Obispo, but I figure more disclosure is better than too little.
I am also new around and I am glad Kevin accepted my offer to write for T&B. My interests lie within strategy and technology, and I will try to offer a different perspective considering that I will be blogging mostly from Eastern Europe (Bucharest, Romania), where things are definitely approached with different twists and turns. Will get back soon.
If you or someone you know wants to blog about economics--even part-time or occasionally--please send me an email.
Don't not let your reluctance get the best of you. Everyone who applies will be accepted. There is no interview or review process. You don't need experience in blogging or commenting. You don't need an advanced education in economics, or even a formal education in anything. But you do need to write seriously about economics or related subjects.
Last June, I wrote my favorite post--The Quantity and Quality of Healthcare. I still defend my basic assertion--that the quantity and quality of healthcare produced and consumed by Americans has dramatically increased over the past several generations, and continues to increase. The remarkable continually-increasing effectiveness of modern healthcare is the primary driver of our ever-higher spending on healthcare.
To put this assertion differently: as the total cost of healthcare has gone up, its real price has gone down.
The problem with making this case is that the official data (the Bureau of Economic Analysis detailed NIPA statistics), seem to contradict it in several important ways. After all, if we look at the official aggregate data over the past 40 years, we see that not only is the growth rate of total spending on healthcare enormous, but that its decomposition into price dwarfs its decomposition into quantity:
Accounting for population increases, the conventional measures show that in 2003, Americans purchased a hell of lot more medical care per person than in 1960--over 4 times as much medical care per person. However, the price of that medical care has risen 11 times as high as in 1960. (These are derived from the numbers on the chart, but not on the chart themselves).
The data seem to lead to the conclusion that we're buying much more healthcare, but at sky-high prices. However, economists who know what they're talking about (i.e. not me), doubt the validity and applicability of the offical data--primarily because it does not appropriately adjust for quality. Our poor data does not provide an adequate picture of the diverse composite of services we call "healthcare" or "medical care", and policymakers should be weary of cost-combating healthcare reforms until somebody understands better the actual consequences of reform efforts.
Being a healthcare economics greenhorn when I wrote the original post (I'm still green), I had no idea just how much I was merely restating previously published research. For instance, Robert F. Graboyes, in his 1994 paper "Medical Care Price Indexes." demonstrates just how difficult it is to create a medical care price index that adjusts for quality change. In the paper, he presents a very simple example of a quality change that would not be seen by official data:
Say an advance in a medical procedure increases the percent of patients who survive it from 10% to 30%. This induces the number of patients who undergo the procedure annually to increase from 1000 to 2000, even though the price of the medical procedure increases from $500 to $600. The official statistics will see a $100 (20%) increase in price of the medical procedure, but the average price of one life saved drops from $5,000 to $2,000 (-60%). This example assumes that not dying from a procedure should count as a quality increase, which I think more appropriate than the status-quo assumption that not dying shouldn't count as a quality increase.
Such quality increases are sometimes but rarely included in the official data, although attempts to analyze specific procedures are ongoing. Many of these attempts are amassed in the 1999 Brookings volume "Measuring the Prices of Medical Treatments". The introductory essay by Jack Triplett and Ernst Berndt reaffirms my view that much caution should be taken by healthcare reformists of all parties:
Contrary to the usual presumption of runaway medical inflation, some very recent research, reported in this volume, suggests that prices for at least some medical care interventions are not rising rapidly and may even be falling.
Understanding medical care inflation is important for topics such as policy towards medical care cost containment. If medical care inflation is not the driving force behind the run-up in medical care costs, as the studies included in this volume suggest, then medical care costs are being driven by real changes in the quantity of care. This finding, if confirmed by studies on other medical procedures, suggests that health care cost containment may have social costs--curtailment of health care that has real impacts on health--that are even more severe than generally recognized.
Part of the reason [for increasing expenditure] is that the standards of care have increasingly included very expensive treatment. Thirty years ago we simply sent victims of heart attacks home to convalesce. Now we perform expensive diagnostic and therapeutic procedures including transthorasic echocardiography, intracardiac catheterization and transluminal angioplasty, and possibly surgical cardiac bypass grafting and then they go home on aspirin, beta-blockers, ACE inhibitors, and cholesterol lowering medications for the rest of their lives.
But the real reasons for such continuing increases in health care costs are simple enough. Americans have become very used to such expensive health care.
Now that healthcare "costs" are again a popular topic of conversation, totaling 15% of GDP, and rising at shocking or extraordinary rates (9.3% being the latest zinger), I find it necessary to criticize the notion that rising expenditures are undesirable and wasteful. Why is 15% of GDP inefficient? Is any other share of national output better? Perhaps 6%, 8%, or 10% as occurs in other developed countries? Except in clear cases of fraud or wasteful procedures, I have seen no proof that the resources spent providing healthcare in the United States would be better employed elsewhere in the economy.
I don't believe that American cardiologists would suggest that all the extra care now provided to heart attack patients should be stopped, either because the Europeans use fewer resources and have similar outcomes, or because the resources are better used on say, cancer patients.
I have ignored and will continue to ignore the payment systems--government and private--that change the way medical care costs are perceived: by making it worthwhile for producers provide too much care (or the wrong type of care) to consumers who demand more (or rarely refuse it), and do not have to pay for it.
It may be that our big social "problem"--spending too much on healthcare--derives mostly from the very measures and structures that policymakers would like to strengthen. But before attacking these structures, I'd prefer that the professionals understand which services Americans are consuming more of, and distinguish them from the parts undergoing large quality-adjusted price inflation.
UPDATE: Read this piece by Don Peck in the Atlantic online. He defines "the problem" better than I could. Also, he advocates a system of lower quality growth in a tradeoff for more equality of care--a massive intervention that I cannot endorse:
The problem, of course, is that since 1960 health-care spending has grown significantly faster than the economy, meaning that we're spending an ever larger portion of our incomes on medical care. In 1960 health care constituted 5.1 percent of the U.S. economy; in 1980 it constituted 8.8 percent; today it constitutes 13.3 percent....
[t]he largest driver of growth in health-care spending is not waste or price gouging or the slow aging of the population but, rather, the cost of technological innovation. Even when technological improvements make some treatments less expensive and more effective, overall spending often rises....
Yet the fact is that the system already rations; we just don't acknowledge it openly.... [P]eople who have health insurance receive about twice as much medical care as those who lack it....
By refusing even to countenance sensible limits on the health care citizens have a right to demand, we make universal health-care coverage—a worthy goal that we are long overdue in attaining—nearly impossible.
I can't imagine the folks over at Philip Morris are happy about having to announce that they're "willing to chat" about regulation of marketing. After all, it's accepting restrictions on their future abilities.
Of course, regulatory capture isn't exactly a new phenomenon. Just a continually fascinating one (to me, anyway). In this case, PM is attempting to help set the agenda and process by which regulation will be made on their own industry. Such a conflict of interest, if I want to be as cynical as PM is accused of being, happens in staggering amounts. Consider, of course, any lobbying effort that includes the creation of a law governing what the lobbyist's client can and cannot do. "Sure, sure. I'll accept your control, but here's a better way to do it..."
Of course, this also appears to mean that PM publically and loudly declared "WE DEFECT to the rest of the tobacco industry. (Assuming, of course, that the rest of the industry has been part of the massive anti-regulation lobby. Not a particularly restrictive assumption, I don't think.) Rather than stay hand-in-hand in a cooperative process against the government, it looks as though PM has decided to try sleeping with the enemy. The enemy, it should be noted, is having none of it.
Of course, this doesn't mean Philip Morris' financial support to the Tobacco Lobby will dry up. It's the relationship with the other members of "Big Tobacco" that will suffer. I'm not informed enough about the tobacco industry to understand if they're competeing largely by Bertrand or Cournot precepts, but either way, someone may have just yanked the equilibrium's chair out from under it.
At issue are the payoffs. For some reason, PM has decided that attempting to control the regulation it will eventually have to accept (and it does admit this, else they would not spend time trying to work with the regulators) results in a better outcome than continuing with the current fight. This could make sense if the costs of compliance are better forecasted and prepared for if you can be part of the group that decides on them. Meanwhile, it looks like there is growing threat to current profits from smaller tobacco-product companies.
Looking at profit loss and cost increase, I'm not entirely surprised Philip Morris looked at the game nested in their earlier conflict and opted for trying to cozy up with the FDA.
Political Econoblogging: There's Something About Borda
NB: This might be a slight drift from the core of Truck and Barter, but I'll try to keep it close to home.
In case you weren't aware, the Iowa Caucuses are underway (and pretty well close to done by the time you read this). What better time then to think a bit about the issues confronting the process of social choice of leaders.
The process used in the Iowa Caucuses (Hawkeye Cauci, in cute parlance) are strikingly similar to the Borda Count method of assigning preference to a list of alternatives. The trouble with Borda is that it often violates the Independence of Irrelevant Alternatives requirement from Arrow's Theorem. Since Borda eliminates low scoring options and retallies based on the new choice set, it's entirely possible (and often probable) that a choice that was at most second-best when ALL options were available, becomes the preferred choice in the restricted set.
That is, the guy in second place in one count could move into first when the counting starts again. Or a policy not most preferred earlier suddenly becomes the first-ranked option. Additionally, the results only indicate ordinality, not cardinality. Those people who, by Iowa Caucus rules, have to reselect because their previous choice has failed the "viability" rule, are possibly choosing someone they only weakly prefer to the remainder of the options. A margin of votes of X percent doesn't indicate that voters prefer, say, Kerry by any factor related to the distance between his share and the share of nearest candidate. So, an option may win out that was socially less preferable before, and there is no way to tell magnitude of preferences in the new results.
Steve Verdon, in the earliest of the posts linked to above, mentions that this is one of the reasons government is so poor at allocating resources. This isn't because they're simply bad at their jobs (though there is a lot of that); such problems arise because, in the multitude of allocational choices the government must make, looking at the preferences of the electorate (through such intrusments as the platforms of those representatives elected to run the government) means they will be looking at results influenced by the problems of collective choice mechanisms.
To get a bit murkier, I think McKelvey's Theorem has to be considered to see just how problematic this can get. Not just because I like the results, but because it's entirely feasible to see such results in a voting process the size of Iowa and elsewhere. Essentially, the person setting up the process of delegate selection in each caucus has massive power in deciding the outcomes we see in the news. Quickly, Mckelvey-Schofield have shown that, using pair-wise comparison and majority-rule voting, an agenda can be created to reach just about any policy/candidate/choice (B) from a previously majority-preferred initial point (A), despite the fact that A would be preferred to B when these two items are compared side-by-side.
Due to aspects of their very basic structure, most notably agenda control, some voting systems can obtain a result that is preferred only to the choice before it; saying nothing about how it compares to a point earlier than that. Bills, then, can come up for vote that have oddities in them because the current form of bill was preferred to the earlier version, which was preferred to the one before that, etc., all the while the orginal form of the bill could be preferred to its current incarnation, if only the agenda allowed them to be compared.
For example: I prefer a medicare bill that promises X. An amendment is offered that attaches prescriptions drugs. A majority prefers that one. But then an amendment is attached that limits prescription drug benefit elligibility; something I prefer to the earlier bill with one amendment because I prefer something close to having no prescription drugs benefits. I vote for the new one as part of a winning majority, because it's the best we can get in the current agenda, despite the fact that it is now, by my view (and by those who preferred the initial bill), a suboptimal outcome. The government is then tied into policies (and thus resource allocation) that are less efficient (as measured by possibly satisfying the most people, or maybe on the rubric of greatest social welfare, and so on) than a previous option.
In Iowa, this gets played out in the move from local choice of candidates to allocation of delegates. Through the elimation of certain alternatives, a person has to choose someone they prefer only in relation to the rest of the field. Delegates are thus allocated over a range of outcomes that are suboptimal (well, according to Arrow and collective choice theory, I believe).
This isn't to say the market is a better allocator of resources because it's better at social preference aggregation. A market doesn't engage in selection based on collective choice. It does not attempt to assess social preference ordering of available choices and pick accordingly. It doesn't have to.
Just a quick note to say a public thanks to Kevin for accepting my note in response to his "Open Invitation".
By way of introduction, I'm finishing up my MPP program with the Harris School at the University of Chicago. Which is to say that my economics training is a bit less...extensive than Kevin's. This does not, of course, keep me from being an enthusiastic commenter, sound ideas or no. Hopefully I'll have something to add to the T&B endeavour, though I do welcome comment and correction when I've strayed. I'm well used to it by now.
Unfortunately, I've started here just on the cusp of heading out of town to a special, mysterious place of vast areas without always-on internet connectivity: Wisconsin.
Before that, though, I wanted to contribute at least something; so here's a question I've been going back and forth on. A friend of mine recently returned from a trip to see family in India. While there, he was once again amazed by the prevelence of bargaining for nearly all forms of goods. He's amazed because, from his viewpoint, it's massively inefficient. He leans this argument on, among other things, the fact that the bargaining often stops when the merchant is faced with a non-Indian. Additionally, a number of places simply post signs saying that all prices are fixed.
After repeated exposure to the market places, my friend asks, wouldn't the Indian population have a better idea of the approximate value of a good, making bargaining a waste of time on the part of both buyer and seller? Above that, the time is wasted no matter who you bargain with. It's a general waste of time that ends up in a price (according to my friend again; I, alas, have never been to India) somewhere near the price you'd expect to pay if they were fixed in the first place. Foreigners are the ones who have far less information about the value or quality of an item, and so would seem a better target for overcharging.
My response, and I'm starting to think it's a weakening argument, is that the time spent haggling isn't necessarily time lost on other sales. There usually aren't lines of people waiting to bargain with the merchant, so the lopportunity costs are pretty low, since it's not clear that sales go lost with each minute spent in discussion. Additionally, I would hazard a guess that the merchant is attempting to maximize her price for every sale, since the number of sales is always questionable. As opposed to a merchant with a more formal system of bookkeeping, a marketplace seller often doesn't have a good sense of sales as distributed over seasons, weeks, weather, etc. Since there is a concern that "today might be a slow day", each sale is a chance to squeeze out the highest possible margin.
The other side, of course, is simply that, in a marketplace where the item most likely has good substitutes, and where the price is largely predictable, there is just no good reason to bargain (aside from the fun of battling negotiation skills) since so little strictly monetary return is gained from it. So, is India just collectively highly irrational, given that handwritten signs saying "Prices Fixed" is all that's needed to get out of the problem, or is there a sense of rationality for each individual attempting to maximize returns, given a limited amount of information about the costs incurred by doing so? Answers or better arguments either way welcome.
And, best of luck to Kevin on the Law and Economics exam.
Still inspired by Greg Easterbrook's outrage (see the post below), and spurred the availability of microdata, I here graph the December 1997, 1999, 2001, and 2003 Current Population Survey wage data for full-time workers and, separately, for part-time workers.
What I want to look at is the impact of a constant nominal minimum wage ($5.15) on the distribution of real wages. So I used the BLS CPI-U to deflate 1999, 2001, and 2003 by the appropriate amounts, giving me 1999, 2001, and 2003 wages in 1997 dollars (i.e. it made those wages smaller numbers). Let's take a look:
&
Click for full-size images
For both full-time and part-time workers, inflation has caused a decrease in the real minimum wage, from $5.15 in 1997 to $4.94 (1999) to $4.70 (2001) to $4.51 (2003) in 1997 dollars. Yet median real wages, for those who make up to $10 per hour (1997 dollars), have steadily increased since 1997. In every succeeding year, we see a spreading of both distributions toward the lower real minimum wage. But this trend downward is outmatched by another trend upward--a shift in the entire distribution towards a higher median real wage.
NOTE: No more posts today, nor will I be responding to email or comments. I must focus on studying for the Law and Economics preliminary exam, which is being administered tomorrow at 9am.
It remains a national scandal that the federal minimum wage is worth nearly a third less in real-dollar terms that it was in the 1960s. (In 1963, the federal minimum wage was $7.25 an hour in current dollars; the 2004 federal minimum wage is $5.15.) It remains a national scandal that a person can work 40 hours a week at the current federal minimum wage and be impoverished by the poverty-line definition. (The 2003 Census Bureau poverty line for a childless couple was $12,120; 40 hours for 50 weeks at the current federal minimum wage brings home $10,300, minus taxes.)
Unfortunately, Mr. Easterbook has not given any information about the extent of the problem of too-low wages. The minimum wage may or may not be a national scandal (I have no desire at this point to discuss the impacts of increasing the minimum wage), but I wanted to point out that not only it is necessary to look at the level of the minimum wage, it is necessary to look at the number of people or the percent of the population that actually earn the minimum wage (or less, if they're off the books). Only with such information will I know how relevant the minimum wage is to the economy. Unfortunately, such information is really hard to obtain, so I'll do my best to illuminate the issue with what I have at my disposal.
What do the data say?
First, to Mr. Easterbrook's concern: Data from the Economic Policy Institute on the value of the real minimum wage show a decrease similar to the one he points out:
The "national scandal" is plain to see. The minimum wage has been moving around the same real average of $5 since 1987, after being around $6.50 for a very long time. Compare that to the chart of real wages for production workers as a whole.
This implies that a minimum-wage worker of today is, in both an absolute and relative sense, worse off than a minimum wage-worker was in 1963. I'll let that stand, although I think this really ignores the real-cost reductions in many goods consumed by the poor, and the explosion of low-cost consumer options.
But the question remains, what is the distribution of actual hourly wages today compared to Mr. Easterbrook's favorite 1963? The data of how many people earned which hourly wages in 1963 is not readily available to me, but I can show the distribution for December 2003. According to Current Population Survey microdata (obtained via Ferrett), the distribution of hourly wages, for those who worked part-time or full-time in December 2003, regardless of other circumstances, is as follows:
Vertical markers are at $5 and $7, horizontal at 5% and 10%. I cut off wages at $50 per hour, and made all those with more than $50 just equal $50. According to this graph, about 1.2% of full-timers earned less than or equal to $5.15 per hour, 3.4% of full-timers earn less than $6 per hour and 12% of full-timers made less than $7.50 per hour; however, about 6.3% of part-timers made less than or equal to the minimum wage, 20% of part-timers earn less than $6 per hour, and 44% of part-time workers make less than $7.50 per hour. In other words, a lot of workers are very distant from the minimum wage, some are within striking distance, and much fewer are held up by the price floor--for both part-time and full-time employment. What are these numbers for 1963? Are more people closer to the minimum wage, or are less? When I find them, I'll add them to the post.
But since I do not yet have the older distribution, let me show some other data instead. The maximum real wage of the lowest 10%, 20% and 30% back till 1973 is courtesy of the Economic Policy Institute. It seems we're back in 1973, but that those real minimum wage drops haven't affected the lowest 10% of income earners nearly as much as Mr. Easterbrook might think, because even the bottom 10% earns above the minimum:
NOTE: I haven't tried to adjust for inflation between 2000 and 2003, which will change the numbers slightly. Also, a previous version of this post was mistakenly published without proofreading and other important changes. Apologies from T&B.
Have you ever considered blogging about economics? If you have, and want to give it a shot, you should know that I'm opening up shop for newcomers.
Anybody who wants to econoblog--even if I don't know you--is welcome to join T&B. Just email me, and I'll set you up.
I have no idea if T&B readers who don't already blog are at all interested in writing, but this seems like a pretty good means of finding out.
Perhaps nobody will answer my call because everybody who wants to blog can already do so costlessly (a Chicago-style argument). But perhaps supply is limited because of high start-up or maintenance costs, fear of failure, or risk aversion.
Also, I want to point out the newly created Wealth & Power econoblog by Shane Trimble. "a 33 year old student, pursuing a B.A. in Economics at Carleton University." There's not much econ content up there yet, but he's in Canada, and "What else can you when it's 20 below outside but blog?" Good luck, Shane, and keep warm.
The cost of establishing a moon base and going to Mars is debatable. But what is the Return on Investment for establishing a moon base? How are we to judge this government program from an efficiency perspective?
Arguably, government should be pursuing programs with a really high positive ROI that the private sector, for various reasons, will not produce. If time permits, I should have some thoughts later...
Most economists recognize that for any economic prediction, some average of forecasts exists that is consistently more accurate than any specific forecasting model. Although most American business reporters don't seem to understand this, the
Swiss are on the ball, and actually report multiple forecasts, and interview economists who doubt the accuracy of offical numbers. Yes, a rough confidence interval is a good idea:
Margin of error
Predictions differ because each institution adopts its own methodology for assessing potential growth, including market statistics, surveys and economic modelling.
“There are many sophisticated models for forecasting, but being too sophisticated isn’t of much use,” said Fernando Martins da Silva, head of strategy for the Vaud Cantonal Bank.
“These models do not take into account random elements.”
Da Silva said these included human factors like psychology, as well as unpredictable events such as fuel price hikes, movements in exchange rates or acts of terrorism.
Aurelio Mattei, an economics professor Lausanne University, has analysed the margin of error among forecasters over the last 20 years.
On average, the error is plus or minus one percentage point. This means that growth for 2004 could range between less than one per cent and as much as three.
“When economists are forecasting growth, they should give a spread of between one and two per cent, rather than try to work it out precisely,” Mattei told swissinfo.
This swissinfo article about security to protect the next World Economic Forum dicusses the enormous cost of protecting the economic elite:
Both houses of the Swiss parliament have agreed to provide army troops to guard the World Economic Forum (WEF) meeting in Davos next year [2004].
The vote paves the way for a maximum of 6,500 troops to be deployed...
Security at last year's WEF meeting in Davos cost SFr13 million ($10.3 million). It is thought that more than half of the SFr22 million budget for next year's conference will be eaten up by security.
Half the budget! Still this provides a new and interesting example for game theory:
Whether such a large security force will be required in Davos next year remains unclear.
Opponents of the event have called for “decentralised blockades” outside Davos, which should be carried out “responsibly”. The aim is to impede the arrival of WEF-participants in Davos.
This change of tack is seen as a response to the increased militarisation of the 2004 event.
Anti-globalisation protesters are also likely to demonstrate in Davos.
During the 2003 event, the Swiss mounted an unparalleled security operation that involved the use of fighter jets circling over the venue. Hundreds of German police officers were drafted in.
Some 1,800 troops were also used to guard the proceedings.
One of the problems with the major airlines -- and I think it's one of the reasons they are doing poorly -- is that their attitude toward customers tends to resemble that of airport pretzel venders. They are willing to compete for business, up to a point, but want to treat customers as captives after tickets are purchased.
Economists often make the point that racial discrimination by business firms requires them to use either more expensive or inferior quality labor--clearly hurting the bottom line. There are exceptions to this rule: for instance, when customers uniformly prefer a segregated atmosphere, their markets are "best served" by racist companies. (Think all-white Southern lunch counters).
But the pressure on public companies for maximium shareholder value, in an era where the ethnicity of most producers is either not seen by or irrelevant to consumers, means racism is usually shunned, leading to racial mixing that I found rather comforting:
Twenty rows back, between two young black women, sits a redhead named Mary Catherine Sneed, an Alabama native raised on the Beatles and the Rolling Stones.... Few in this crowd know how much this 52-year-old white woman's opinion matters: She controls what many of them hear when they turn on their radios.
As chief operating officer of Radio One Inc., a black-owned company based in suburban Prince George's County, Md., Sneed is one of the most powerful people in black radio. The company owns a fifth of the black stations in the country. Sneed, who likes to be called "M.C.," helps oversee the business side, supervising station managers, and the music side, supervising the program directors who decide what goes on the air. In most radio companies, those are separate jobs.
A couple of weeks ago I was interviewed by Christian Toto for this piece about student blogging in The Washington Times. I didn't know the article was going to feature me front and center.
Kevin Brancato is proud to say he writes like a blogger. The 26-year-old doctoral student at George Mason University says keeping up a "blog" — shorthand for a Web log — has only enhanced his writing skills.
What does it mean to write like a blogger? Being accurate, aggressive, honest, fair, and humble. The author made me sound clear and intelligible--which I wasn't during the interview. My preferred answers to Mr. Toto's questions were written to him in an email, but WaTimes policy is not to conduct interviews over email.
But being a blogger gives me the last word on the subject, so here were Mr. Toto's questions and my response:
1. Does keeping up a blog help with a student's writing skills?
It has certainly helped mine. In fact, "help" is too weak of a word; people tell me that I now write like a blogger. As a undergraduate math major, far more time was spent solving equations than writing clear convincing prose. I knew that if I wanted write well, I'd have to work hard at it. My demanding and sophisticated readers provide both a tremendous impulse and a large reward for churning out original and interesting material.
ability to interpret data?
Keeping up a blog has sharpened and quickened my data analyses, but more importantly, it has made me question how data are used by many professional journalists and policy wonks. I find that the most interesting questions don't have authoritative answers--especially in economics. For most issues, the story that needs to be told is usually far more complex than the one fed to us by big media.
or does blogging reinforce bad grammatical habits given the freedoms of the 'net'
When a student submits a finished essay, only a professor will read and criticize his work. But a blog post invites criticism from anybody. As with any poor habit, bad grammar can be reinforced by the lack of self-criticism or indifference to the criticism of others. But good grammar is essential if a blogger wants readers--and other bloggers--to take him seriously.
I have yet to see a serious blogger whose use and understanding of grammar has become worse over time.
Would you have a couple of minutes to share your thoughts on the topic and how blogging may have impacted your growth as a student?
Besides making writing easier, Truck and Barter greatly expanded the range of economic issues that I deal with. Since starting the blog, I've looked into and posted about hundreds of issues that otherwise I never would have examined in detail. Some of these are very political, like income inequality in the U.S.. Others were just fascinating, like the market for digital disposable cameras. Still others are largely ignored by a popular press focused on bad news, like the dramatic improvement in the quality of healthcare over the past 50 years. Econoblogging has forced me to observe how economies really work, which has made me question deeply the relevance and accuracy of standard economic theory.
Plus, T&B has enabled me to network with economists across the U.S. and the globe without leaving my desk.
"This is open to all children from all backgrounds and from all schools," university rector Peter Gomez told swissinfo, stressing that the university was not targeting over-achievers.
"We think that topics such as business, economics and law - our core disciplines - are hugely underestimated in schools. No one tells children how these work..."
The children may have been excited, but for economics professor Franz Jaeger the lecture was a terrifying prospect.
"In all my years as a lecturer, I’ve never had so much stage fright as today," Jaeger told swissinfo ahead of the event.
It was indeed a daunting sight, with a sea of children gazing down expectantly to the front of the auditorium, pencils poised.
Luckily, Jaeger soon won them over with the help of colourful illustrations projected onto a screen as he explained that money did not grow on trees, but had to be earned by mums and dads.
But the initial attentiveness began to wear off after Jaeger raced into the complexities of state funding, pensions and taxes.
Tomorrow I take my field exam in public choice; expect no blogging until then. Now I'm going home and getting a good night's rest--until the baby wakes me up, that is.
(The interested may test themselves with earlier versions of the Public Choice exam here). For bonus points, "Outline Tullock's 1980 model of efficient rent seeking" in the comments section.
Not a chance. But in this entry yesterday, he picked out the same sentence in a Howard Dean speech that T&B pointed out on December 19. That sentence, be it only targeted propaganda, deserves repeating for its lack of recognition of inidividuals:
It is time for us to spell out a new social contract a fundamental renegotiation of the rights and responsibilities of the critical actors in the American economy: families, corporations and government.
Foreigners are the enemy, and fully impoverishing the enemy is the most effective solution to our economic crisis.
Two recent hot topics of the econoblogosphere--immigration reform and free-trade--have solicited much radical enlightened opinion against foreigners. Why? It's clear that their economic advance means American economic decline. Foreigners who've illegally entered our country make us poorer by living in our homes, taking our jobs, and lowering our incomes. In their own countries, foreigners take our capital, our education, and our jobs, always giving us less back than we give them.
Since, left to our own self-interest, we foolishly allow illegals to live among as, and we persistently make trades that leave us worse off, we must use the government to prevent us from engaging the enemy. Contact with foreigners is a national prisoners dilemma; in the aggregate, we'd be better off if none of us had contact with foreigners, but given some Americans invariably do, the rest of us have an incentive to trade with, train, employ, and marry them. The government should cartelize contact with foreigners to prevent this free-rider problem.
This cartel "solution" many have posed requires us to throw out all the illegals (and keep them out), and put up barriers to capital and information movement. We must not have free trade in people, capital or ideas.
But isn't there a better solution? If Americans get poorer when foreigners get richer, shouldn't Americans get richer when foreigners get poorer? So why don't we try to make them as poor as possible? Won't that maximize our wealth?
I leave aside the actual microeconomic and macroeconomic policy programs necessary to do this, but I'm sure our politicians can figure out cost-effective means of regulating our behavior.
I hasten to note that the writing above is bad satire. I don't have any specific commenter in mind, and I won't mis-characterize anybody as holding these hateful and ignorant views, although I think they're logical conclusions of a lot of what I've read recently.
From a New York Times story indicating that US Airways will have to sell assets to stay competitive:
But last month, the chief executive of US Airways, David Siegel, said the airline would be forced to revise the business plan on which it based its emergence from bankruptcy last spring. Specifically, he cited a decision by Southwest Airlines to begin operations in May from Philadelphia, one of US Airways' hubs.
Mr. Siegel warned that Southwest's arrival would most likely prompt fares to drop 30 percent and said the airline had to cut its costs in advance so that it could lower its own ticket prices. In addition, US Airways must make debt payments in June to meet covenants of $900 million in federal loan guarantees, which it received when it emerged from bankruptcy.
I do not want to believe that the post 9-11, post-bankruptcy operating plan of US Airways assumed no increase in competition, but evidently it did not. Did those in charge of US Air think that their low-cost competitors would just go away? Maybe not, but Southwest might be thinking that US Airways might just go away:
But the chief executive of one airline, who spoke in the condition of anonymity, said last week that Mr. Siegel faced a difficult situation, not only because of Southwest's arrival in Philadelphia, but because low-fare competition is heating up all around US Airways.
Referring to Southwest's plans to begin service at Philadelphia, the executive said, "They're thinking, 'If US Airways goes out of business, we want to be there.' "
And why shouldn't Southwest? If Southwest sees US Airways--a legacy airline--as high-cost, high-priced, and barely meeting debt obligations, it should go for the jugular. Believe it or not, Southwest already dominates the Las Vegas market:
The king of the established low-cost airlines, Southwest, has the largest share of passenger traffic, 32.3 percent. Southwest's passenger traffic at Las Vegas is equal to the combined market shares of American, United, Delta, Continental and Northwest. In second place: another low-cost carrier, Phoenix-based America West.
Low-fare strategy is simple.
The weapon: Sharply lower costs.
The goal: Produce profits even during times of soft fares and weak demand.
Southwest and "the independents" are geared towards making money in competitive markets--with all types of fares and demand--, and are succeeding wildly:
Low-cost, highly aggressive
Low-cost airlines now operate 14 percent of the flights in the United States, according to OAG, a leading source for airline schedule information.
Those carriers are aggressively pursuing market share. About 29 percent of passengers now fly low-fare carriers, industry research firm Unisys said.
Another big market for independents is Fort Lauderdale, where an expanding number of small low-cost airlines are building a network of small cities that interconnect with the airport:
Fort Lauderdale, the nation's fastest-growing large airport, has been a prime locale for low-cost carriers. Among those already serving the airport are Southwest, Spirit and JetBlue....
plenty of cities still don't have direct or low-cost service to Fort Lauderdale, he said.
The latest addition is USA 3000, which claims to be low-cost and high-service:
''Our measure of success is really the service level that we offer,'' Sadler said.
Each flight serving Fort Lauderdale is nonstop and offers a meal, in-flight entertainment and audio channels. Name changes on tickets are permitted, for a $50 fee.
It also sells tickets on its website. Round-trip fares are not required, and the lowest one-way fare is $59, excluding fees.
Remember, non-price competition can be an efficient market outcome.
No more posting today. However, I've questioned the gallery at Steve Verdon's about the extent of the ability of governments to influence the economy, and our ability to figure out the consequences. I've also told the Chicago Boyz that currently the dollar may be weak, or it may be strong, but that I really don't know.
We are concerned that the United States may be entering a new economic era in which American workers will face direct global competition at almost every job level -- from the machinist to the software engineer to the Wall Street analyst. Any worker whose job does not require daily face-to-face interaction is now in jeopardy of being replaced by a lower-paid, equally skilled worker thousands of miles away. American jobs are being lost not to competition from foreign companies, but to multinational corporations, often with American roots, that are cutting costs by shifting operations to low-wage countries.
This excerpt is from an Op-Ed in today's New York Times by Senator Charles Schumer and Paul Craig Roberts. Since these men are not stupid, they use what I must conclude is an intentionally unclear analysis, to deny that benefits of free trade accrue to all, while calling for experts to "end the confusion between the free flow of goods and the free flow of factors of production."
My first response was emotional--"Sirs, we are not confused between outputs and inputs; you are." But that's unfair and wrong. Let's give it some serious thought.
Schumer and Roberts deny the applicability of the Ricardian theory of comparative advantage, which has long stipulated that free trade benefits all when everybody specializes in what they do best (given no capital or labor movement between nations and no information mobility except for prices).
Schumer and Roberts do not refute the Ricardian model. Instead they deny that the Ricardian model fits the world we live in. They insist that in the modern world, "capital, technology and ideas" mixed with labor--i.e. "jobs"--move from high-cost to low-cost regions. The assert that each time a job moves from a high-cost region to a low-cost region, the high-cost region loses out to the low-cost region. Our authors write, "In this situation, there are no longer shared gains -- some countries win and others lose."
But this is not quite correct. Entire regions don't win or lose, but individuals in those regions do, and in the aggregate, the entire world is more productive. If America is high-cost and developing nations low-cost, what happens is that American consumers are clearly better off, while some American producers are better off and some are worse off. And although Schumer and Roberts don't seem to care about foreigners, both foreign producers and foreign consumers are no worse off, and most likely better off. (Would they actively pursue a policy that made all foreigners worse off if it made all Americans better off?)
So what happens in the modern post-Ricardian world? Assume regions produce identical goods--just at different cost. Let's take the case of the MRI, given that Schumer and Roberts are worried about American radiologists facing stiff competition from abroad. Say an American Radiologist makes $150K a year, while a comparable foreign worker is willing to be paid $25K, or 1/6 the price, because his other opportunities earn so little, and education is cheap. The question remains why the foreign doctor is willing to accept so much less. For if the foreign radiologist can really compete almost costlessly with the American, why doesn't he charge $125K a year or $145K a year, still undercutting his high-cost competitor? He would raise his price, but a lot of others outside America also charge $25K, eventually leading to a plunge in the price of a year's worth of a doctor's radiological services to $25K a year. [I'll leave aside what happens if few foreigners compete with Americans, because then Schumer and Roberts don't care.]
First, let's talk about our American radiologist. Guess what, he's worse off. But nobody (i.e. no serious economist) denies that high-cost producers are worse off when they compete with low-cost producers. In fact, that warrants one big "duh!"
What happens to our American radiologist? Well, he probably won't be examining MRIs for long , unless he can focus his practice specializing sn MRIs that need immediate analysis and cannot be sent overseas. How much is he worse off? Well if he remains a radiologist, he'll earn $25K a year, so his $125K loss is the same as consumers' $125K gain. But he will not remain a radiologist working for $25K, or he will never become a radiologist in the first place. Instead he will need to switch to a career offering better opportunities. This is harder for experienced radiologists, but experienced radiologists will not have much competition from abroad, given the limited number of experienced radiologists abroad.
This involves a certain cost of retraining, yes. But there is a lot opportunity out there for former radiologists. In fact, there's more opporunity than without foreign competition. Why?
Because there is a huge savings for Americans who consume MRIs. Consumers are clearly better off. Having the same service performed at 1/6 the cost, means that 5/6 is free to be spent elsewhere. This 125K will be saved or spent on other goods and services--presumably provided by former or never-to-be radiologists.
By the way, although Schumer and Roberts don't write about it, nobody denies that our foreign doctor is better off. But what about the foreign consumer, now that all these foreign doctors are serving Americans? We'll, given that entry into radiology is competitive, foreign consumers are no worse off than they were before, as prices remain at still low opportunity costs. They might be better served by more expert radiologists. So low-cost nations are better off.
We've got a system that makes us richer partially by screwing with us, making our lives confusing and unpredictable, and forcing us to constantly react to maintain what we feel is socially essential. And that's just high school! It's nothing compared with capitalism, which is really tough.
Furthermore, to the extent that capital becomes more freely mobile, the opportunities to profitably reinvest it will be acted on and arbitraged away more rapidly. And one of the profitable opportunities might be in enhancing the productivity of less-skilled labor. (That is the secret behind Fordism, enabling people to produce automobiles without first having to develop armies of master craftsmen in sheet metal working, and it persists in enabling fast-food restaurants to employ illiterate people, provided they can correctly identify the picture of the item being purchased.)
Ricardian comparative advantage can exist within a country. It can exist with mobile factors of production.
UPDATE 4: Don Boudreaux (now at Mises Blog?!?) notes a pretty big factual error made by Schumer and Roberts:
Incidentally, contrary to Schumer's and Roberts's claim, Ricardo never used the term "factors of production" -- at least not in his Principles. (I learned this fact by doing an on-line search of the book at www.econlib.org, a site maintained by Liberty Fund.)
Ouch. Somebody needs to check his quotes. Note that Professor Roy J. Ruffin is not David Ricardo. Also, it is interesting to note that Mises Blog published a post from Paul Craig Robertson this very topic on August 8, 2003. (Dan Mahoney responded two weeks later).
You can follow the entire exchange here.
UPDATE 5: Kyle Markley (Cap'n Arbyte) notes Roberts is just repeating himself in a timely fashion:
This new article has absolutely no new content, it's just a restatement of the position he's held for some time... I have no sympathy for Roberts's example American software engineers making $150K/yr being replaced by Indian engineers making $20K/yr. What that example says to me is that the American engineers had been grossly overpaid.
In the near and intermediate future, I'll be posting about anything other than economics at Kikuchiyo News, hosted by Mr. Samuel Brown, a.k.a. Kikuchiyo. My first post at KN discusses Warren Brown, Washington DC, pork, and the new Volvo V50.
I might be posting at KN in the distant future, or maybe not. Although economists can predict accurately the long-run effects of economic policies, we can't actually tell you what will happen in the long-run. Note the difference.
Nicer Estates for the Rich or The Unintended Consequences of of Anti-Sprawl Laws
Lean Left notes a front-page Washington Post article about unprepared upper-middle class folks living in big estates in Loudoun county, Virginia. FYI, Loudoun has severe growth restrictions, meaning houses for rich people get built on large, or even massive estates, and houses for the poor don't get built at all.
In the comments, I wrote that I have no idea why this article is on the front page, but I do think it's important in that it notes the actual consequences of the slow-growth initiatives passed in Loudoun--which have been to provide huge incentives for builders to provide rich pampered folks some very nice estates, while building little for middle-class and poor folks.
Prices in the high-end DC metro market did not climb nearly as much as the markets for less luxurious accomodations. (In some areas, high-end prices were flat or seem to be declining. It's been the talk of the WaPO real estate pages for a while).
These people need no sympathy, and could benefit from a little common sense and lot of the hard life.
Don't these people know to that using a tractor or at least a quad with attachments will save them tons of time?
Why unfortunately ? Because it's a much better read than the EU constitution. The preamble is much better than I expected.
Highlights of sections dealing with economics:
Article Seven Ch. 1, Art. 7 - The state shall abide by the UN charter, international treaties, international conventions that Afghanistan has signed, and the Universal Declaration of Human Rights. The state prevents all types of terrorist activities , production and smuggling of narcotics.
Article Ten Ch. 1, Art. 10 - The State encourages and protects private capital investments and enterprises based on the market economy and guarantees their protection in accordance with the provisions of law.
Article Twelve Ch. 1, Art. 12 - De Afghanistan Bank is the central and independent bank of the state. Issuance of currency, and formulation and implementation of monetary policy of the country are the mandates of the central bank in accordance with law. Structure and operation of this bank shall be regulated by law.
Article Thirteen Ch. 1, Art. 13 - The state shall formulate and implement effective programs for development of industries, growth of production, increasing of public living standards, and support to craftsmanship.
Article Fourteen Ch. 1, Art. 14 - The state shall design and implement within its financial resources effective programs for development of agriculture and animal husbandry, improving the economic, social and living conditions of farmers, herders, settlement and living conditions of nomads. The state adopts necessary measures for housing and distribution of public estates to deserving citizens in accordance within its financial resources and the law.
Article Twenty-Six Ch.2. Art. 5 - Crime is a personal action. The prosecution, arrest, and detention of an accused and the execution of penalty can not affect another person.
Article Forty Ch. 2, Art. 19 - Property is immune from invasion. No person shall be forbidden from acquiring and making use of a property except within the limits of law. No body’s property shall be confiscated without the provisions of law and the order of an authorized court...
Article Forty-one Ch. 2, Art. 20 - Foreign individuals do not have the right to own immovable property in Afghanistan.
Lease of immovable property for the purpose of investment is permissible in accord with law...
Article Forty-Eight Ch. 2, Art. 26 - Work is the right of every Afghan. Working hours, paid holidays, right of employment and employee, and other related affairs are regulated by law. Choice of occupation and craft is free within the limits of law.
Tyler focuses on the human capital and opportunity costs of shopping, which are critical, but we must also examine the hidden personal benefits of shopping. I personally believe (through anecdotal evidence) that the main driver of gender inequality in shopping is the sheer pleasure and positive health effects that a lot of women get from the shopping experience. Don't get me wrong, some men I know also get such pleasure, but usually from car shopping and the like. As for me, I rather infrequently purchase an automobile as a gift. Unfortunately, disproving the "sheer pleasure" hypothesis is very difficult empirically. A social scientist would, in the end, have to make not only intrapersonal comparisons of "pleasure" before, during, and after shopping, but would also have to make interpersonal comparisons between men and women.
UPDATE: I think, but can't be sure, that Stanley Crouch would agree with me:
As American women will do, they had all talked with each other, looked at the fares, couldn't resist the bargain and booked the flights.
Even though I have never written about trucks, T&B is number 35 in Google when searching for truck, and even though I've only written once about barter, T&B is number 2 in Google when searching for barter.
The idea of health insurance, after all, is to prevent unexpected medical bills from bankrupting and devastating an individual. In this regard Wal-Mart’s coverage might be on the cutting edge. While it leaves individual workers responsible for routine expenses, Wal-Mart’s coverage steps in when things get serious and then covers everything, forever. Doesn’t sound so bad.
I've added some comments (here and here) to the discussions of "market failure" over at David Sucher's City Comforts Blog. What incited me to respond was this post:
"Market failure precedes regulation." Pithy way to put it by JM Roth. True? Seems likely to me and since it appears to be a matter of fact, it would a useful way to forward this discussion as it gives us something firm upon which to base our opinions....
In fact, by way of exception, can anyone think of a regulatory regime which has developed in the absenece of market failure.
To which I responded:
How about these:
1) Taxi-cab medallions
2) Cartelization of Airline Industry under CAB
3) ICC control of Trucking as common carriers
4) Blue laws
5) Sugar Price Supports (Almost the entire agricultural regulatory apparatus, actually)
6) Monopolization of the Postal Service
7) The breakup of Standard Oil (for the crime of charging continally lower prices while increasing output dramatically)
The discussion over Standard Oil, which I still believe was not your grandmother's monopoly, continues...
I want to pause here and talk about this notion of consensus, and the rise of what has been called consensus science. I regard consensus science as an extremely pernicious development that ought to be stopped cold in its tracks. Historically, the claim of consensus has been the first refuge of scoundrels; it is a way to avoid debate by claiming that the matter is already settled. Whenever you hear the consensus of scientists agrees on something or other, reach for your wallet, because you're being had.
Let's be clear: the work of science has nothing whatever to do with consensus. Consensus is the business of politics. Science, on the contrary, requires only one investigator who happens to be right, which means that he or she has results that are verifiable by reference to the real world. In science consensus is irrelevant. What is relevant is reproducible results. The greatest scientists in history are great precisely because they broke with the consensus.
There is no such thing as consensus science. If it's consensus, it isn't science. If it's science, it isn't consensus. Period.
I've contended for a long time that all types of economic forecasting may be fun, and relatively highly rewarded, but they're not scientific endeavors. Still, when you read a "consensus" prediction of future movements in economic aggregates, what you are usually seeing is not, in fact, a consensus--i.e. an agreement among the parties involved.
What you see with financial "consensus estimates" is a middle of a sample of forecasters--usually a median, sometimes an arithmetic mean. One definition goes like this:
Consensus estimates are aggregated forecasts from major analysts of certain indicators of a company’s activities and stock performance. Aggregated forecasts mean that we collect estimates from several brokers and "average" them to arrive at consensus, the figure on which most analysts tend to agree.
How good is this median estimate? Well, Francis Galton showed could, within one percentage point, guess the dressed weight of an ox. How does it do otherwise? Compiling those results would be a life's work--and it's not going to be my life.
Before refrigeration, plastic wrap, and preservatives existed, some of the greatest scientific minds were busy figuring out a way to keep your symmetrical Christmas cakes from becoming dry, beacuse "the ordinary method of cutting out a wedge is very faulty." Sir Francis Galton recommended cutting out hunks from the middle of the cake, and squishing it back together. With care and precision, "The cuts shown on the figures represent those made with the intention of letting the cake last for three days."
Economists at the New York Fed--including the straight-talking 
I just learned through 
